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 donтАЩt know because I wasnтАЩt there, but the mere fact that SVB didnтАЩt have a CRO tells me that they didnтАЩt take risk all that seriously.
Also, thereтАЩs 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 thereтАЩs got to be some mechanism that automatically triggers scrutiny of smaller banks.
I agree completely. The duration risk is the one they couldnтАЩt or wouldnтАЩt manage and the disparity rose as the fed increased the rates. Hedging would have helped a bit but they also couldnтАЩt have seen how MANY of their customers would need cash. Also, their portfolio wasnтАЩt particularly diversified.
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 donтАЩt know because I wasnтАЩt there, but the mere fact that SVB didnтАЩt have a CRO tells me that they didnтАЩt take risk all that seriously.
Also, thereтАЩs 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 thereтАЩs got to be some mechanism that automatically triggers scrutiny of smaller banks.
Agree.
See also Matt LevineтАЩs column today on exactly your point.
I agree completely. The duration risk is the one they couldnтАЩt or wouldnтАЩt manage and the disparity rose as the fed increased the rates. Hedging would have helped a bit but they also couldnтАЩt have seen how MANY of their customers would need cash. Also, their portfolio wasnтАЩt particularly diversified.