Many banks do put customer funds into T-Bills, or park it with the Fed at the fed funds rate. Both of which are 0 risk and effectively instantly redeemable. And this is still highly profitable right now, if you offer customers yields below fed funds rate (~5%), the money on the spread is risk free.
Pretty much every crypto adjacent firm has decided to take excessive risk with customer deposits to skim some off the top instead
Some are probably upset with it because they want Silvergate's liqudiation to be caused by crypto, and not super-safe US Treasurys. Turns out Silvergate's bitcoin loans are just fine, and it was the Treasurys that fucked them up.
Others are probably upset with it because Silvergate had the option to hold cash as cash, or cash as one-month T-bills, and if they had done that, they wouldn't have had to liquidate.
But instead they locked it up in much longer dated bonds to grab a little extra yield, and got burned when interest rates increased.
Yes, despite these being "safe" they effectively took on duration risk, and their bonds were "callable" by their customers. Not safe at all despite credit-risk being low
if you offer customers yields below fed funds rate (~5%), the money on the spread is risk free.
Absolutely insane how my local bank's money market account interest rate is something like 1.4%. Their CDs only hit 3%. Like come the fuck on. Ended up moving most of my money out of there.
This bank did put a ton of the money in T-Bills. The vast majority of the remainder was in boring stuff like longer-term bonds. A very small amount (relatively) was involved in bitcoin lending.
The problem is highly liquid and effectively instantly redeemable wasn't enough when the crypto world melted down and a huge percentage of their depositors needed money back right away. No bank can survive that. Wells Fargo just has customers from a wide enough crosssection that they won't all need their money back at once. But you can imagine it happening to a small local bank following a natural disaster as well.
Silvergate was solvent and has the assets to cover liabilities, just has liquidity issues.
If they could cover their liabilities with their assets then they would sell the assets to do so. Clearly the assets do not cover the liabilities. It's not a lengthy process to sell a bond on the open market
If you bought them at 2-3% yields then you lost a lot of money, which is probably the case here. If they bought below par they would get their money back at maturity, but that could be 20-30 years from now. Despite being "safe" from a credit perspective, munis are not safe from interest rate risk
Sorry, you're right that their assets are also down. I didn't mean to deny that. It just seems that it was more a liquidity crunch than a solvency crunch. But maybe they cannot pay all their debtors?
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Not sure why people are upset with this comment.
Many banks do put customer funds into T-Bills, or park it with the Fed at the fed funds rate. Both of which are 0 risk and effectively instantly redeemable. And this is still highly profitable right now, if you offer customers yields below fed funds rate (~5%), the money on the spread is risk free.
Pretty much every crypto adjacent firm has decided to take excessive risk with customer deposits to skim some off the top instead
Some are probably upset with it because they want Silvergate's liqudiation to be caused by crypto, and not super-safe US Treasurys. Turns out Silvergate's bitcoin loans are just fine, and it was the Treasurys that fucked them up.
Others are probably upset with it because Silvergate had the option to hold cash as cash, or cash as one-month T-bills, and if they had done that, they wouldn't have had to liquidate.
But instead they locked it up in much longer dated bonds to grab a little extra yield, and got burned when interest rates increased.
Its presumably not that market rates increased that fucked them up, it's that they couldn't hold to maturity due to short term redemptions?
Yes, despite these being "safe" they effectively took on duration risk, and their bonds were "callable" by their customers. Not safe at all despite credit-risk being low
Absolutely insane how my local bank's money market account interest rate is something like 1.4%. Their CDs only hit 3%. Like come the fuck on. Ended up moving most of my money out of there.
This bank did put a ton of the money in T-Bills. The vast majority of the remainder was in boring stuff like longer-term bonds. A very small amount (relatively) was involved in bitcoin lending.
The problem is highly liquid and effectively instantly redeemable wasn't enough when the crypto world melted down and a huge percentage of their depositors needed money back right away. No bank can survive that. Wells Fargo just has customers from a wide enough crosssection that they won't all need their money back at once. But you can imagine it happening to a small local bank following a natural disaster as well.
Silvergate was solvent and has the assets to cover liabilities, just has liquidity issues.
If they could cover their liabilities with their assets then they would sell the assets to do so. Clearly the assets do not cover the liabilities. It's not a lengthy process to sell a bond on the open market
A T-bill is very liquid. Municipal bond liquidity dried up during the pandemic and, AFAIK, hasn't fully recovered yet.
Obviously some assets they hold (mortgage backed securities) have declined in value.
Munis are liquid, I view (a slice of) the market every day. Volume is down, but not significantly: https://www.sifma.org/resources/research/us-municipal-bonds-...
If you bought them at 2-3% yields then you lost a lot of money, which is probably the case here. If they bought below par they would get their money back at maturity, but that could be 20-30 years from now. Despite being "safe" from a credit perspective, munis are not safe from interest rate risk
Sorry, you're right that their assets are also down. I didn't mean to deny that. It just seems that it was more a liquidity crunch than a solvency crunch. But maybe they cannot pay all their debtors?