By now, it is clear that SVB has collapsed. It is also clear WHY they collapsed. But it isn't clear to me to me what exactly they should have done with the deposits (at least there doesn't seem to be much discussion or consensus in discussions).
SVB deposits increased 3x since the start of the pandemic Where should they have deployed these deposits? I see the following options
- Cash – Deposited with the Fed. Seems the best option to me. They would have held their value and yields would have increased as the overnight rate increased. But wondering if this is just hindsight bias.
- Different types of debt securities – Shorter duration securities to minimize duration risk or more US Treasuries vs. MBS (as MBS fall in price much more when interest rates rise). Would have minimized the losses. If we control for hindsight bias, this seems like a good option
- Loans – Seems like the securities/loan ratio of SVB was very high compared to other banks. But also, the CEO (heh!) said they didn't make loans because they determined it was a pretty risky environment make loans to tech companies (TBF, he was right – we went through a tech bubble).
- Structural – Maybe the issue wasn't were they deployed their deposits but that they concentrated too much on a particular niche and did not diversify their customer base. In 2009, the discussion was about how when banks grew “too big too fail”, it created structural issues. Maybe today with Silvergate and SVB, we need to talk about how banks focusing on a particular niche also creates structural issues?
Interested in hearing your thoughts
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