Log in
Register
Search
Search titles only
By:
Search titles only
By:
Log in
Register
Search
Search titles only
By:
Search titles only
By:
More options
Toggle width
Share this page
Share this page
Share
Facebook
Twitter
Reddit
Pinterest
Tumblr
WhatsApp
Email
Share
Link
Menu
Install the app
Install
Forums
Law Firm Events
Law Firm Deadlines
TCLA TV
Members
Leaderboards
Premium Database
Premium Chat
Commercial Awareness
Future Trainee Advice
Forums
Aspiring Lawyers - Interviews & Vacation Schemes
Commercial Awareness Discussion
Sillicon Valley Bank collapse
JavaScript is disabled. For a better experience, please enable JavaScript in your browser before proceeding.
You are using an out of date browser. It may not display this or other websites correctly.
You should upgrade or use an
alternative browser
.
Reply to thread
Message
<blockquote data-quote="RANDOTRON" data-source="post: 140523" data-attributes="member: 16724"><p>To add on to what [USER=24021]@CorpLawyer00[/USER] referred to in the linked tweet is looking at why SVB invested in long-term securities. Matt Levine over at Bloomberg does a great explanation of this. Here's the excerpt from Matt:</p><p></p><p>"The weird problem with focusing exclusively on crypto or startups in 2021 is that they had too much money. If you were the Bank of Startups, the main service that you provided to startups is that equity investors would give them a truck full of cash and they’d deposit it at your bank. [...]</p><p>People kept flinging money at SVB’s customers, and they kept depositing it at SVB. Perfectly reasonable banking service. But the customers didn’t need loans, in part because equity investors kept giving them trucks full of cash and in part because young tech startups tend not to have the fixed assets or recurring cash flows that make for good corporate borrowers. Oh, there is <em>some </em>tech-industry-adjacent lending you can do. Tech founders want to buy houses, and you can give them mortgages. Venture capital and private equity funds want to manage liquidity and/or juice their reported return rates by paying for investments with borrowed money rather than drawing from their limited partners, so you can get into the capital-call-line-of-credit business. There are vineyards near Silicon Valley and you can develop an expertise in vineyard financing. And, sure, some of your tech-company customers <em>do </em>need to borrow money, and <em>are </em>creditworthy, and you lend them money and that works out. But there is a basic imbalance. Customer money keeps coming in, as deposits, but it doesn’t go out, as loans. So you have all this customer cash, and you need to do something with it. Keeping it in, like, Fed reserves, or Treasury bills, in 2021, was not a great choice; that stuff paid basically no interest, and you want to make money. So you’d buy longer-dated, but also very safe, securities, things like Treasury bonds and agency mortgage-backed securities. [...] And as of the end of 2022, Silicon Valley Bank, the actual Bank of Startups, had about $74 billion of loans and about $120 billion of investment securities. [...] to put it in different crude terms, in traditional banking, you make your money in part by taking credit risk: You get to know your customers, you try to get good at knowing which of them will be able to pay back loans, and then you make loans to those good customers. In the Bank of Startups, in 2021, you couldn’t really make money by taking credit risk: Your customers just didn’t need enough credit to give you the credit risk that you needed to make money on all those deposits. So you had to make your money by taking interest-rate risk: Instead of making loans to risky corporate borrowers, you bought long-term bonds backed by the US government. The result of this is that, as the Bank of Startups, you were unusually exposed to interest-rate risk. Most banks, when interest rates go up, have to pay more interest on deposits, but get paid more interest on their loans, and end up profiting from rising interest rates. But you, as the Bank of Startups, own a lot of long-duration bonds, and their market value goes down as rates go up. Every bank has some mix of this — every bank borrows short to lend long; that’s what banking is — but many banks end up a bit more balanced than the Bank of Startups."</p></blockquote><p></p>
[QUOTE="RANDOTRON, post: 140523, member: 16724"] To add on to what [USER=24021]@CorpLawyer00[/USER] referred to in the linked tweet is looking at why SVB invested in long-term securities. Matt Levine over at Bloomberg does a great explanation of this. Here's the excerpt from Matt: "The weird problem with focusing exclusively on crypto or startups in 2021 is that they had too much money. If you were the Bank of Startups, the main service that you provided to startups is that equity investors would give them a truck full of cash and they’d deposit it at your bank. [...] People kept flinging money at SVB’s customers, and they kept depositing it at SVB. Perfectly reasonable banking service. But the customers didn’t need loans, in part because equity investors kept giving them trucks full of cash and in part because young tech startups tend not to have the fixed assets or recurring cash flows that make for good corporate borrowers. Oh, there is [I]some [/I]tech-industry-adjacent lending you can do. Tech founders want to buy houses, and you can give them mortgages. Venture capital and private equity funds want to manage liquidity and/or juice their reported return rates by paying for investments with borrowed money rather than drawing from their limited partners, so you can get into the capital-call-line-of-credit business. There are vineyards near Silicon Valley and you can develop an expertise in vineyard financing. And, sure, some of your tech-company customers [I]do [/I]need to borrow money, and [I]are [/I]creditworthy, and you lend them money and that works out. But there is a basic imbalance. Customer money keeps coming in, as deposits, but it doesn’t go out, as loans. So you have all this customer cash, and you need to do something with it. Keeping it in, like, Fed reserves, or Treasury bills, in 2021, was not a great choice; that stuff paid basically no interest, and you want to make money. So you’d buy longer-dated, but also very safe, securities, things like Treasury bonds and agency mortgage-backed securities. [...] And as of the end of 2022, Silicon Valley Bank, the actual Bank of Startups, had about $74 billion of loans and about $120 billion of investment securities. [...] to put it in different crude terms, in traditional banking, you make your money in part by taking credit risk: You get to know your customers, you try to get good at knowing which of them will be able to pay back loans, and then you make loans to those good customers. In the Bank of Startups, in 2021, you couldn’t really make money by taking credit risk: Your customers just didn’t need enough credit to give you the credit risk that you needed to make money on all those deposits. So you had to make your money by taking interest-rate risk: Instead of making loans to risky corporate borrowers, you bought long-term bonds backed by the US government. The result of this is that, as the Bank of Startups, you were unusually exposed to interest-rate risk. Most banks, when interest rates go up, have to pay more interest on deposits, but get paid more interest on their loans, and end up profiting from rising interest rates. But you, as the Bank of Startups, own a lot of long-duration bonds, and their market value goes down as rates go up. Every bank has some mix of this — every bank borrows short to lend long; that’s what banking is — but many banks end up a bit more balanced than the Bank of Startups." [/QUOTE]
Insert quotes…
Verification
Our company is called, "The Corporate ___ Academy". What is the missing word here?
Post reply
Forums
Aspiring Lawyers - Interviews & Vacation Schemes
Commercial Awareness Discussion
Sillicon Valley Bank collapse
Top
Bottom
This site uses cookies to help personalise content, tailor your experience and to keep you logged in if you register.
By continuing to use this site, you are consenting to our use of cookies.
Accept
Learn more…