Bitcoiner on Nostr: Silicon Valley Bank unit economics clarify what happened. And frame likely deposit ...
Silicon Valley Bank unit economics clarify what happened.
And frame likely deposit recoveries.
6 points:
1) Basic bank math
Banks take deposits and use them to make loans.
The delta between interest on loans and interest paid to depositors is the 'net interest margin' ("NIM") - the core metric of bank profitability.
And the delta between assets and liabilities is the bank's equity - the core metric of bank safety.
To generate positive NIM, banks make long-term loans at higher rates than they pay on deposits.
2) Bank math at SVB
Before the issues, SVB held $212B of assets against $200B of liabilities - a paper equity cushion of $12B (5.6% of assets).
The assets fall into 3 buckets:
#1: Mortgage backed securities: $82B (83% residential)
#2: Direct loans: $74B (55% short term loans to VCs & PE)
#3: Liquid assets: $55B
The liabilities fall into 2 buckets:
#1: Deposits: $174B (~11% FDIC insured)
#2: Other debt & pref: $25B
3) What happened?
The Fed raised rates, making all long-term debt decline in value.
Including SVB's assets.
But accounting rules let SVB book mortgage securities as "held-to-maturity" (HTM), avoiding a hit to book equity.
In a December footnote, however, it disclosed the HTM book had $15B of "unrealized" (i.e. off-book) losses.
So even at that point, losses had wiped out the $12B equity cushion.
4) What catalyzed the run?
The wipeout of the bank's tangible equity cushion was concerning.
But the losses were visible to anyone watching SVB closely.
So what changed?
SVB announced Wednesday it had sold $21B of liquid assets (from bucket #3) at a 9% loss and would raise money to cover the loss.
That concerned investors a bit - greater losses than expected and a poor NIM outlook.
But, more significantly, it spooked depositors (and their VC investors).
5) Bank run
The next day (Thursday), depositors attempted to withdraw $42B from the bank, of which math implies ~$16B succeeded.
Leaving the bank with negative ~$1B of cash when the FDIC took over Friday.
6) Simplistic recovery math
The balance sheet is pretty clear now given how rapid the event was.
The starting point is ~$10B of paper equity ($12B minus the $2B recognized AFS loss).
The range of HTM & other book loss is $20-40B based on the unrealized loss at Dec, the loss on the sale of the AFS book, and market moves.
On net, that impairs assets by $10-30B against a deposit & debt base of ~$162B (deposits of $168B minus the $16B deposit outflow and ~$10B of FDIC insured deposits, plus ~$20B of other debt).
Add in liquidation cost and that implies in the 5-20% loss range on remaining deposits.
Investors will spend time putting a finer point on this.
As always though, the key is to watch headlines, but do math.
Without a solid grounding in the numbers, you're at the whim of someone else's narrative.
That's all for now.
And frame likely deposit recoveries.
6 points:
1) Basic bank math
Banks take deposits and use them to make loans.
The delta between interest on loans and interest paid to depositors is the 'net interest margin' ("NIM") - the core metric of bank profitability.
And the delta between assets and liabilities is the bank's equity - the core metric of bank safety.
To generate positive NIM, banks make long-term loans at higher rates than they pay on deposits.
2) Bank math at SVB
Before the issues, SVB held $212B of assets against $200B of liabilities - a paper equity cushion of $12B (5.6% of assets).
The assets fall into 3 buckets:
#1: Mortgage backed securities: $82B (83% residential)
#2: Direct loans: $74B (55% short term loans to VCs & PE)
#3: Liquid assets: $55B
The liabilities fall into 2 buckets:
#1: Deposits: $174B (~11% FDIC insured)
#2: Other debt & pref: $25B
3) What happened?
The Fed raised rates, making all long-term debt decline in value.
Including SVB's assets.
But accounting rules let SVB book mortgage securities as "held-to-maturity" (HTM), avoiding a hit to book equity.
In a December footnote, however, it disclosed the HTM book had $15B of "unrealized" (i.e. off-book) losses.
So even at that point, losses had wiped out the $12B equity cushion.
4) What catalyzed the run?
The wipeout of the bank's tangible equity cushion was concerning.
But the losses were visible to anyone watching SVB closely.
So what changed?
SVB announced Wednesday it had sold $21B of liquid assets (from bucket #3) at a 9% loss and would raise money to cover the loss.
That concerned investors a bit - greater losses than expected and a poor NIM outlook.
But, more significantly, it spooked depositors (and their VC investors).
5) Bank run
The next day (Thursday), depositors attempted to withdraw $42B from the bank, of which math implies ~$16B succeeded.
Leaving the bank with negative ~$1B of cash when the FDIC took over Friday.
6) Simplistic recovery math
The balance sheet is pretty clear now given how rapid the event was.
The starting point is ~$10B of paper equity ($12B minus the $2B recognized AFS loss).
The range of HTM & other book loss is $20-40B based on the unrealized loss at Dec, the loss on the sale of the AFS book, and market moves.
On net, that impairs assets by $10-30B against a deposit & debt base of ~$162B (deposits of $168B minus the $16B deposit outflow and ~$10B of FDIC insured deposits, plus ~$20B of other debt).
Add in liquidation cost and that implies in the 5-20% loss range on remaining deposits.
Investors will spend time putting a finer point on this.
As always though, the key is to watch headlines, but do math.
Without a solid grounding in the numbers, you're at the whim of someone else's narrative.
That's all for now.