It worries me that people assume SVB must have taken crazy risks on startups or crypto, when the actual mistakes were locking up so much money in long-term mortgage and Treasury bonds, and having clients who talk to each other.
If your lenders are all from one especially volatile and incestuous industry, you put yourself at especially high risk of experiencing a run and defaulting. You need to manage risk and investments accordingly.
They took a high-risk position with eyes wide open and have collapsed as a result.
But then how could they offer above market rate yields on their checking accounts, right?
Clearly they were not giving sufficient attention to the core business for one reason or another.
It seems that the institution that is most susceptible to this will be an institution in a field where most people are parrots and fast parrots too.
SVB did the "right" or safest thing by buying Treasury (the next safest will be to hold $200bn in cash). Treasury is the real money. Most people think of $1 in their account as $1 but it is not. Buying shorter-term treasury might have saved them or not.
These collapses will continue until the Fed thinks that enough liquidity have been removed from the market and inflation is stabilized again.
The bank bought long-dated treasuries for the 2% yield (as opposed to short-term treasuries yielding next to nothing). The moment rates went up they were going to start losing a lot of money mark-to-market. This could be tolerated, except they also had an undiversified deposit base withdrawing money and forcing them to take the losses, and so they blew up.
Of course, hindsight is an completely other thing and everyone has it once the events unfold.
The thing is, they did make risky investments. Going heavy long-term treasuries is risky, because you lose money if you have to sell them early. Banks get some privileges when holding them on balance, but they are still assuming a lot of interest rate risk when they buy them. Shorter term treasuries would definitely have saved them, but also ruined their profit margins (at least in 2020~2022), so it's neither here nor there.
The Fed (meaning, the authority in broad) will continue to remove liquidity and as a consequence kill businesses. This is not an unintended result. This is, in fact, the wanted result and what they are aiming for.
Long-term debt is more sensitive to interest rates. It’s also less liquid than the gold standard for liquidity, on-the-run Treasuries.
Any entry-level CFO/CRO knows they should've done either of:
- <=2y treasuries
- some kind of money market account at a larger institution
- or at the very least get a rate swap to cover for rate hikes
Like I don’t want to defend the execs too much as they are the responsible people. But the gov and Fed did this. Erratic economic policy did this. It’s sad so many people think it’s a greedy bank. Being named Silicon Valley Bank doesn’t help.
Classic libertarian chant assigning the success to the private individual and blame to the government. Everyone is dealing with the same macroeconomic environment. SVB execs don't get a pass for poor risk management and not understanding their customer base.
Something like 50% of mortgages were written between 2020 and 2022. So many of these are about to be underwater due to the whipsaw.
There’s going to be a lot of failures in the coming months.
Long-term fixed-income investments lose a LOT of value when rates go up and gain a lot when rates go down, and the relationship is nonlinear and kind of hard to model since it's so dependent on people.
The irony is, eventually they will be vindicated, when the Fed is forced to start QE all over again.
Ie. they got greedy.
The fed could have done a better job giving long term guidance and honestly should set up a facility to exchange debt when the interest rate risk couldn’t have been reasonably know.
"Getting unlucky" in banking is making a few risky loans, getting defaulted on, and coming below projected growth for the quarter. The bank's revenue gets a hit, the shareholders takes a haircut, all part of the playbook, happens every now and then. What "getting unlucky" is not is not understanding interest rate risk so much that you blow your entire bank up. It's like calling someone who drove drunk and killed 16 pedestrian "little unlucky while turning a corner", absolutely not in the same ballpark.
SBN isn’t the only bank in this position. I read a NYT article from 2021 describing this situation and like every bank is in this position.
Interest rates whipsawed from record lows to 20 year highs in 12 months. No one was ready for that. This is all because of gov and fed policy.
We will see a lot of banks failing in the coming weeks and months.
Easy, buy treasury bills. What? They don't pay interest through the nose? Guess SVB is not getting double digit revenue growth this year, and you're not getting that big bonus. So sad. Anyway.
> SBN isn’t the only bank in this position. I read a NYT article from 2021 describing this situation and like every bank is in this position.
Link? Also I am quite sure most other banks had the good sense to understand that they need to hedge against interest rate risk.
> Interest rates whipsawed from record lows to 20 year highs in 12 months. No one was ready for that. This is all because of gov and fed policy.
Yes, and gov and fed policy was there to address acts of God (aka COVID) and Putin (aka the Russia-Ukraine war). Should we send a list of demands to them?
2. It’s literally impossible that other banks did a better job as the asset class for treasury and MBS is the same for every bank. The difference is that SVBs customers were more negatively affected by rising rates after also being more positively affected by low rates than other banks. So I don’t expect a systemic problem here but SVB was structurally unlucky.
3. The fed could have acted sooner to raise rates, that would have allowed a more gradual process. They could also have set up an exchange program as they are doing now. Plenty of banks bought long term treasuries that are underwater now but will recover in the long run. So if a member bank is facing liquidity problems it should be able to access the discount window or some similar facility to smooth the timing risk.
Let’s all remember it’s in everyone’s interest to have safe banks and a functioning financial system. When macro policy has unintended consequence there is nothing wrong with supporting the system.
the fed can't give long term guidance, because they can't possibly predict shocks that would happen that require them to change the interest rate.
It's like asking mother earth to give a warning before an earthquake.
The odds of any given crisis being caused by government are good enough to justify it being the base-case assumption before any real evidence comes to light. Although in this case, the long stretch of time at near 0% interest rates and a culture of bailouts encouraging reckless financial decisions are probably going to turn out to be major factors.
the Feds did what they had to.
The outcome of this fiasco is not a reason to conclude that ZIRP is wrong.
claims they didn't have a Chief Risk Officer for most of 2022 however, so if true, might that have contributed to not seeing the approaching difficulty as mortgages became stressed?
If the answer is nothing, then you now know why.