Review of the Fed’s Supervision of SVB; Managing A US Debt Default; BoJ Financial Stability Report; Revised FSOC Framework; CAT Rates Increasing; Deriving ERP From Options; Factor Information; Munchie
Excellent post mortem, as usual. Just one missing piece. The elephant in the room here is that the examiners failed to identify the bank’s direct & indirect exposures to the crypto markets despite the large implosions in the sector throughout 2022.
So when the regulatory climate towards crypto intermediation tightened in January/February, SVB was very exposed. It was a sitting duck when Silvergate went down. The rampant risk management & management failures catalogued in this report compounded the problem.
The Fed’s self-exam is silent on the crypto nexus both on the bank side and in the FRB examiner side, which is disappointing to say the least.
I complete agree that the post mortem fails to address the “bank run at the speed of light”. But the VC community that banked at SVB is also the primary funder of the legitimate side of crypto.
These guys came up with the idea of “proof of stake” to validate crypto models. At its core, this approach is just a fancy way of saying the entrepreneur/blockchain genius has a fortress balance sheet behind him. High interests rates meant this community was squeezed and unable to exit other companies during 2022. Banking regulators started the year (Jan. 3) declaring that intermediation services for crypto were presumed to be an “unsafe & unsound banking practice.” They reiterated the message in February.
SVB is not an innocent victim here. But when Silvergate (a crypto firm) went down on the Wednesday, SVB was a sitting duck. We were tracking & writing about this from the beginning of the year at https://chainreg.substack.com, see Episodes 1, 8, and 9 for the early warnings.
Other details that have been swept under the rug:
--SVB was not actually run by bankers. They had no one with banning experience on their risk Committee. It was run with a VC mentality that prioritizes and exit and it was backed by people with the capacity to cut and run. The Fed did not understand this or they drank the Kool Aid in Silicon Valley and thought that credit risk and market risk did not apply to them.
--This was a DEPOSITOR bailout...of the wealthiest people on the planet. People forget that Janet Yellen was President if the SF Fed. She knew these people when they were merely successful. The PR was all about the scrappy start up but the reality is that the VCs that fund the crypto community were made while while the industry and its intermediaries are left out to dry.
--To this day, the crypto related deposits are STILL at the FDIC. Which is ironic since this community is already paranoid about the central government. But the technical point is that the purchase & assumption transactions for SVB and Signature never included the crypto assets. It is unclear from publicly available information if they could not offload them or whether they were even offered up for sale.
I agree on the depositor bailout. And the fact that Signature was done the same day would lead one to believe there was a crypto nexus, despite official denial. I am not in a position to have a firm opinion.
Check out footnote 216: https://www.sec.gov/rules/final/2023/ia-6297.pdf It was posted yesterday. Would not likely have found this without my company's patented tech...My guess is that you will see the nexus instantly. Unless something dramatic happens tomorrow, this is likely to be the Quote of the Week in our ChainReg podcast.
Really insightful analysis Brian
Thank you
Excellent post mortem, as usual. Just one missing piece. The elephant in the room here is that the examiners failed to identify the bank’s direct & indirect exposures to the crypto markets despite the large implosions in the sector throughout 2022.
So when the regulatory climate towards crypto intermediation tightened in January/February, SVB was very exposed. It was a sitting duck when Silvergate went down. The rampant risk management & management failures catalogued in this report compounded the problem.
The Fed’s self-exam is silent on the crypto nexus both on the bank side and in the FRB examiner side, which is disappointing to say the least.
That is more of a Signature Bank story. SVB was much more about VC firms telling their sponsored firms to pull money.
To me, the elephant is how to adapt regulation to a world where $42 billion can be pulled from a bank in a single day.
I complete agree that the post mortem fails to address the “bank run at the speed of light”. But the VC community that banked at SVB is also the primary funder of the legitimate side of crypto.
These guys came up with the idea of “proof of stake” to validate crypto models. At its core, this approach is just a fancy way of saying the entrepreneur/blockchain genius has a fortress balance sheet behind him. High interests rates meant this community was squeezed and unable to exit other companies during 2022. Banking regulators started the year (Jan. 3) declaring that intermediation services for crypto were presumed to be an “unsafe & unsound banking practice.” They reiterated the message in February.
SVB is not an innocent victim here. But when Silvergate (a crypto firm) went down on the Wednesday, SVB was a sitting duck. We were tracking & writing about this from the beginning of the year at https://chainreg.substack.com, see Episodes 1, 8, and 9 for the early warnings.
Other details that have been swept under the rug:
--SVB was not actually run by bankers. They had no one with banning experience on their risk Committee. It was run with a VC mentality that prioritizes and exit and it was backed by people with the capacity to cut and run. The Fed did not understand this or they drank the Kool Aid in Silicon Valley and thought that credit risk and market risk did not apply to them.
--This was a DEPOSITOR bailout...of the wealthiest people on the planet. People forget that Janet Yellen was President if the SF Fed. She knew these people when they were merely successful. The PR was all about the scrappy start up but the reality is that the VCs that fund the crypto community were made while while the industry and its intermediaries are left out to dry.
--To this day, the crypto related deposits are STILL at the FDIC. Which is ironic since this community is already paranoid about the central government. But the technical point is that the purchase & assumption transactions for SVB and Signature never included the crypto assets. It is unclear from publicly available information if they could not offload them or whether they were even offered up for sale.
I agree on the depositor bailout. And the fact that Signature was done the same day would lead one to believe there was a crypto nexus, despite official denial. I am not in a position to have a firm opinion.
Check out footnote 216: https://www.sec.gov/rules/final/2023/ia-6297.pdf It was posted yesterday. Would not likely have found this without my company's patented tech...My guess is that you will see the nexus instantly. Unless something dramatic happens tomorrow, this is likely to be the Quote of the Week in our ChainReg podcast.