Tellingly, SVB went nearly eight months without a Chief Risk Officer. A good part of my career was spent at a bank that took risk seriously--risk management was an essential part of its culture. Plainly, that wasn’t the case at SVB. It’s an incredibly complicated endeavor that requires resources, stamina, and commitment from the Board on down.
Tellingly, SVB went nearly eight months without a Chief Risk Officer. A good part of my career was spent at a bank that took risk seriously--risk management was an essential part of its culture. Plainly, that wasn’t the case at SVB. It’s an incredibly complicated endeavor that requires resources, stamina, and commitment from the Board on down.
It was impossible. Rewind back to 2021, rates were at 0%. Trillions and trillions of dollars had been printed and given directly to people (stimmies, PPP loans, etc). Banks had a massive influx in deposits. Because deposits are liabilities, they have to be invested in something. The fed was paying 5 bps (basically zero). Govt debt and MBS were really the only game in town that ironically were deemed "safe" (not like loans which need loss provisions). Now buying sub-2% treasuries and MBS filled with 3% mortgage rates carry a tremendous duration risk (value goes down when interest rates go up). Which is of course exactly what happened.
This stuff is on every bank's balance sheet. Any barely competent bank would hedge their risks via swaps. That's the part that should be (but probably isn't) criminal. Obviously some banks managed this risk much better than others, and that's the frustrating part for me: because the FDIC has stepped in and allowed any bank to get money at-par for their underwater assets, it rewards the banks who didn't de-risk properly and penalizes the banks who earned less money because they properly hedged.
I spent a good portion of my career in banking and finance. A bank with significant concentration risk should never be caught with its pants down by interest rate hikes that were telegraphed. I don’t know because I wasn’t there, but the mere fact that SVB didn’t have a CRO tells me that they didn’t take risk all that seriously.
Also, there’s the issue of oversight. The Fed oversees 750+ banks with--like every organization and institution--finite resources. They focus the resources dedicated to compliance on banks with systemic risk. I get that. But there’s got to be some mechanism that automatically triggers scrutiny of smaller banks.
I agree completely. The duration risk is the one they couldn’t or wouldn’t manage and the disparity rose as the fed increased the rates. Hedging would have helped a bit but they also couldn’t have seen how MANY of their customers would need cash. Also, their portfolio wasn’t particularly diversified.
Tellingly, SVB went nearly eight months without a Chief Risk Officer. A good part of my career was spent at a bank that took risk seriously--risk management was an essential part of its culture. Plainly, that wasn’t the case at SVB. It’s an incredibly complicated endeavor that requires resources, stamina, and commitment from the Board on down.
Right. Rule #1. At least try to match assets and liabilities.
It was impossible. Rewind back to 2021, rates were at 0%. Trillions and trillions of dollars had been printed and given directly to people (stimmies, PPP loans, etc). Banks had a massive influx in deposits. Because deposits are liabilities, they have to be invested in something. The fed was paying 5 bps (basically zero). Govt debt and MBS were really the only game in town that ironically were deemed "safe" (not like loans which need loss provisions). Now buying sub-2% treasuries and MBS filled with 3% mortgage rates carry a tremendous duration risk (value goes down when interest rates go up). Which is of course exactly what happened.
This stuff is on every bank's balance sheet. Any barely competent bank would hedge their risks via swaps. That's the part that should be (but probably isn't) criminal. Obviously some banks managed this risk much better than others, and that's the frustrating part for me: because the FDIC has stepped in and allowed any bank to get money at-par for their underwater assets, it rewards the banks who didn't de-risk properly and penalizes the banks who earned less money because they properly hedged.
I spent a good portion of my career in banking and finance. A bank with significant concentration risk should never be caught with its pants down by interest rate hikes that were telegraphed. I don’t know because I wasn’t there, but the mere fact that SVB didn’t have a CRO tells me that they didn’t take risk all that seriously.
Also, there’s the issue of oversight. The Fed oversees 750+ banks with--like every organization and institution--finite resources. They focus the resources dedicated to compliance on banks with systemic risk. I get that. But there’s got to be some mechanism that automatically triggers scrutiny of smaller banks.
Agree.
See also Matt Levine’s column today on exactly your point.
I agree completely. The duration risk is the one they couldn’t or wouldn’t manage and the disparity rose as the fed increased the rates. Hedging would have helped a bit but they also couldn’t have seen how MANY of their customers would need cash. Also, their portfolio wasn’t particularly diversified.