SVB lobbied the government to relax some Dodd-Frank provisions

And if they have to value it appropriately every quarter, the issue likely would have been seen earlier and maybe they could have changed their positions as the rates were rising instead of being in a hole and trying to do it all at once.

At least I think that’s how the regulations might have worked here.

Edit: this FT opine summarize the sillyness: https://www.ft.com/content/c95e7708-b903-405d-a017-963844eb3... (paywall bypass: http://archive.today/2023.03.11-083455/https://www.ft.com/co...)

> Calculating the amount of a highly liquid asset. In calculating the amount of a highly liquid asset included in the liquidity buffer, the bank holding company must discount the fair market value of the asset to reflect any credit risk and market price volatility of the asset.

1. Financial analysts were not devoting much time to analyzing the risks from rapid rate increases, as rapid rate increases were deemed very unlikely (in part because the Federal Reserve itself had offered guidance that it was unlikely!). Furthermore, the time that was spent on analysis of this low-probability event was spread very thin (interest rate increases affect pretty much everything), and the perception of “zero risk” in T bonds would have bumped them to the end of the list for analysis, meaning even less analysis time for this outcome. Just now on Twitter I’ve seen two financial analyses praised for their prescience in this event - one from the FDIC, one from Byrne Hobart. Both of them only picked this up after the rate increases came into effect.

2. Even if there was full awareness of this risk, and plenty of forewarning that the rapid rate increase was definitely coming, the regulations as written would still permit these investments. The bank itself would probably have made smarter decisions and wouldn’t have collapsed, but that would be orthogonal to the regulations under discussion in the OP. (In my initial comment I even sketched out the argument that the regulations would have been mildly opposed to the smarter decisions.)

In practical terms, the reason SVB held MBSes was the same reason they held Treasury bonds (low risk because of Government guarantee), Treasury bonds and MBSes react to Federal Reserve rate increases in much the same way, and the ways that MBSes and Treasury bonds differ are largely walled off by the Government guarantee and thus immaterial to SVB (if the housing market does some wild stuff then MBSes might pay out differently to Treasury bonds, but this didn’t happen here).

That is not why they are less sensitive to interest rates. They are less sensitive to interest rates because the value of a bond (assuming no coupon) is (whatever you get paid at maturity)^((1+rate)^(-time to maturity)). The sensitivity to rates increases exponentially with the time!

If you buy 30-year bonds, hold them to maturity then roll them over, and don’t mark to market, you are just taking the graph of your returns and heavily smoothing it. And the smoothing obscures a fascinating thing about bonds: they’re sensitive to rates both ways. When rates go up, existing bonds lose present value immediately, but they start to gain present value at the new higher rate forever, or at least until the next rate change or until you sell them or let them mature without rolling them over.

If you want to do an honest HTM forecast of SVB’s position, you need to project everything out to the same future time, say 10 years. So you’re looking at SVB’s portfolio, with a reasonable expectation (with error bars or confidence intervals) of returns over 10 years, in 2033 dollars. In this model, the value of SVB’s 10-year bonds didn’t change, but the value of its liabilities exploded: it needs to pay a lot more interest on its interest-bearing deposits, and customers (I assume) are a lot more likely to demand interest when rates are high.

The 2021 Report https://www.federalreserve.gov/publications/files/2021-dfast... took the baseline scenario to 1.9% in 2024 for 10yr Treasury returns, while the adverse scenario went to 1.5%. Likewise for the previous year: in 2020, baseline took it to 2.7% in 2023 while the adverse scenario went to 2.2%. The 2022 Test variables are quoted at https://www.federalreserve.gov/publications/2022-Stress-Test... saying year 2025 would see 2-1/2 and 1-1/2, for baseline and adverse respectively. For comparison, the actual rate now is close to 4%. So, honestly, I’m not sure if DFAST would have caught it, since this is a full percentage point and a half above the highest values they used in the last three tests. 2019 had 3.6% in baseline for 2022, so maybe it would have, though.

But ignore that, let’s assume DFAST would have clearly highlighted this. If it did, it would be cautioning “you have the potential for significant unrealized losses, make sure you maintain a good position so you can carry those securities to maturity” - which SVB was doing right up until its dwindling liquidity was in reach of a big bank run. The stress test is simply not designed to detect all potential periods where a sudden bank run of significant scale might kill a bank - fundamentally, it’s a capital stress test, not a liquidity stress test.

At best I think we can say DFAST, in some years but not in others, could plausibly have given a moderate to strong indication that more of SVB’s assets would be tied up than usual. From that, you could certainly take a hint and look at liquidity.

But then you have to have enough paranoia to model “The Fed lights a rocket under the interest rate just like they said they wouldn’t” and “our depositors, who all walk around with their burn rates practically tattooed on their foreheads, decide to do a bank run” at the same time to see this coming. And then you have to tell other people this is coming, and grit your teeth listening to them quote the Fed’s forecast that interest rates will stay low. Ultimately they would calculate the cost of your proposal and ask you why they ought to give up that much potential profit to hedge against the chance of these two unlikely events happening together - “that’s like seeing a pair of black swans mating”, they would say to you.

Again, I want to stress I’m not saying Dodd-Frank caused this, I’m not saying Dodd-Frank exemptions for SVB were a good thing, etc. I’m saying that this collapse was mostly out of scope of Dodd-Frank, the parts that were in scope were affected in both directions, and all of this in service of the original point: the article bringing up their exemption lobbying is just airing dirty laundry, not elucidating the cause of the downfall.

But if you buy $1B in bonds at 1% and inflations runs 4-5% over the bond term, you’re running a -3-4% real return.

Keeping cash in a vault is of course highly impractical, and also doesn't produce any money for you or the bank. If that's what you want, I think you could find it but it would be at a security company (security as in guards), not a bank.

The electronic equivalent would be depositing the money with the federal reserve. (What they do with the physical bills I don't know! But most deposits would be coming in electronically these days anyways.) However, up until the passage of the Emergency Economic Stabilization Act of 2008, the fed didn't even pay interest on reserves. [1] Now they do, but until 2022 this rate was only 0.15%. [2]

The first problem with this would have been it didn't provide enough money to run the bank. SVB's non-interest expenses were over $2 billion annually for the last 3 years, so with $200 billion of deposits you need at least to earn 1%, just to keep the lights on. Also your deposits will go up and down but you'll still have to pay your rent, so better be more than 1%. (This is how they ended up invested in longer duration treasuries, to earn more money by taking on greater interest rate risk.)

But the more fundamental problem with just keeing the money at the fed is that I don't think they would let you. It is not, traditionally, the social-economic purpose of a bank to just collect deposits and do nothing with them. Instead, the bank is supposed to take in deposits and then provide loans to the community (credit cards, business loans, mortgages, etc.). Probably this purpose has gotten a little fuzzy over time, since banks are not holding on to the loans, but it is the basic idea.

There is a company calling itself "The Narrow Bank" that actually wants to do exactly this, deposit all client money at the fed. [3] Tellingly, the fed has not granted them approval yet to do so. Maybe they will! But notice that this proposed bank is bare bones: no physical branches, no tellers, no ATMs, no FDIC insurance, just a place to deposit vast amounts of money from institutional clients and earn money from the interest rate spread from the fed vs what you pay out. I do not think such a bank would be very popular with many "regular" people or businesses, who have needs beyond just stashing money under an electronic mattress.

[1] https://www.stlouisfed.org/open-vault/2018/april/why-fed-pay...

[2] https://fred.stlouisfed.org/series/IORB

[3] https://www.tnbusa.com/2022/04/tnb-seeks-to-become-states-ne...

The fact that these were marked as "hold to maturity" for accounting purposes, means this insolvency was concealed until SVB faced a a liquidity crunch.

The issue was never that these bonds can't be sold (are illiquid), but that their real value was much lower than how they were valued under the applicable accounting rules.

Only thing that can stop this misalignment of incentives is to revoke the regulatory privileges of banks. Let everyone bank directly at the Fed. There's no reason these banks should get the privilege of holding other people's money. They dont hold the risk so they shouldn't hold the privilege.

>Except in this case you want more “dependencies.”

More specifically, if you must have 3rd party dependencies, make sure you fully understand the risks, distribute exposure to adequately minimize central points of failure, and have failover procedures in place to reduce possible downtime.

The technical crowd that successfully run high-uptime web infrastructure with demanding SLAs generally understand this idea very well.

OP mentioned that there might be a service for that, and potentially also insurance that you can take out yourself for higher amounts.

> Insane that this is something that people now need to worry about.

Always has been, that is if you were just somewhat risk averse - more than one (unrelated!) bank account has always made sense.

FWIW, here in the EU we're only covered until 100k €, so 2.5 times as many banks required to spread safely ;-P

But, a lot of people do not need to have the cash around all the time, so one can but a big amount into relatively safe securities like S&P500 or for lower risk, which might be preferred here, gov bonds, and keep only the cash on hand for a few months of your expenses, which means most of the time two banks are enough, and having an account on two unrelated banks makes sense anyway - as if one has a bank run or fails completely you have still access to the cash on the other, for short-term things.

For companies this can work too, but they need a constant revenue stream matching their normal monthly expenses (e.g., salaries, office rents, ...) for it to work best.

It’s abstracted away from you and trivial to do. These startups just didn’t do it.

Call me crazy but I think a company with this much financial holdings would normally have a CFO that buys bonds that vest at the right times, and would have cried a tiny tear at getting less than ideal interest rates on them instead of having a bank collapse with all their finances because it wouldn't be competitive at recruiting more clients with zero financial management going forward.

Perhaps decades of no inflation and low interest expectations have left people confused to the fact that when you have millions you are an investment holding company.

Not all banks are equally likely to have a bank run.

China for example restricts banks from being over exposed to a single sector, so the rapid collapse of an industry does not trigger liquidity issues as badly ad those that hit SVB.

Not dodd-frank or Basel 3 required this tho.

No, they wouldn’t. SVB’s duration would have triggered noncompliance with Fed stress tests and Basel III.

If SVB were solvent, they could have borrowed at the Fed’s discount window.

I grade this as a fail of a hypothetical CFO interview I’m running. Sorry.

> Note that liquidity crunches can ruin balance sheets even without this bond-specific feature. For example if you own 10% of a company stock, and need to dump all of it, the price will drop by a lot.

Of course, but that’s an unrelated effect.

I can lose money by buying something that loses value. I can also lose money by buying something that is hard to sell without paying large spread or causing a large market impact because I sold it. These are entirely orthogonal — I could buy securities that go up and lose some or all of the gain due to a forced sale.

SVB’s bonds went down, in an NPV sense or a mid-market sense or any other sense that considers what they’re actually worth today.

A dollar in ten years isn't equivalent to a dollar today, so I don't think it's really an accurate picture to claim otherwise.

You could use the held to maturity value as part of a projection of your balance sheet into the future. Although, mark to market to get current value and assume prevailing interest rates to get to future value should get you to the same place.

I agree that if 20% of your deposits are demanded in the same day, that's going to cause at least big problems if not failures to most banks.

But really, this is obscuring the point. The people screaming "bailout" aren't the unfortunate people who work for a company who uses Rippling. No it's the person who normally yells "free market!".

As a result stress tests which measure various interest rate scenarios, deposit withdrawals and increased bad debt ratios aren't overly affected by these long duration bonds.

That is all good and well as long as these assets truly are held to maturity and forced selling doesn't take place.

Then again, maybe it's fine. These tests are meant to ensure the banks can handle changing economic conditions. They aren't meant to be able to protect banks against a bank run of this scale.

https://finance.yahoo.com/quote/SJIM

And also $LJIM (Long Cramer Tracker)

https://finance.yahoo.com/quote/LJIM