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Comment by jgeada | Hacker News Reader

Bring back Glass Steagall and stop all this madness. Regular banking should be boring, not all that profitable and separated from speculation.

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By all accounts, SVB's banking was boring. They borrowed short and lent long, and their long bets were very safe. The problem wasn't that they too exciting bets; its that they played the standard playbook incompetently.

They actually let their interest rate hedges expire in '22 (while they had no CRO). That was insane. Every banker knows about duration/rate risk so this is really next level incompetence.

The best spin I can think of is that they assumed HTM was sufficient to prevent a bank run, but it wasn't.

If the comment below is accurate, HTM assets can not legally be hedged against interest rate risk.

https://news.ycombinator.com/item?id=35130813

Maybe remarking them that way let them get rid of the expensive hedges? That would be even more damning.

Edit: I went looking and PWC has a nice overview...

6.4.3.4 Hedging held-to-maturity debt securities ASC 815-20-25-12(d) provides guidance on the eligibility of held-to-maturity debt securities for designation as a hedged item in a fair value hedge.

... The notion of hedging the interest rate risk in a security classified as held to maturity is inconsistent with the held-to-maturity classification under ASC 320, which requires the reporting entity to hold the security until maturity regardless of changes in market interest rates. For this reason, ASC 815-20-25-43(c)(2) indicates that interest rate risk may not be the hedged risk in a fair value hedge of held-to-maturity debt securities.

https://viewpoint.pwc.com/dt/us/en/pwc/accounting_guides/der...

i saw that, but then i also saw matt levine saying they should have hedged their htm assets against interest rate risk, which presumably he wouldn't have said if it were illegal

They could have hedged and marked to market though. In that case, the accounting would have said they were fine, and they would actually have been fine.

In reality, they didn't hedge, and they used the HTM accounting treatment. So the accounting still said they were fine, since that permitted them to ignore the loss when interest rates increased; but accounting doesn't change reality, so they actually weren't fine and they blew up.

Yes, by all accounts, SVB was managed incompetently. But look at the thread we're on, which starts with the idea that Glass-Steagal might have prevented this, as if SVB had gone long on upper tranche subprime loans.

I agree with you about G-S, all it did was separate the Investment banking from regular banking. That doesn't make it boring at all!

But I just can't wrap my head around the decision making process at SVB. I wouldn't expect to be paid high 6 figures to run risk at a $200B bank and I knew not to be in long bonds. hn_throwaway_99's comment about the legality of hedging their HTM book makes me wonder if they just reclassified it to reduce their costs in 2022. (Only credit and servicing risks can be hedged)

And that gets to the real issue. Current regulations actually encourage rate risk at banks <$250B, because you can either pay for insurance or just mark it HTM. The majors don't have this choice and have to eat the extra cost.

It is not that way in EU banking due to the Basel framework and IRRB. At least they have reporting standards and don't allow more than 15% to be at risk in the Supervisory Outlier Test (SOT).

https://www.bis.org/fsi/fsisummaries/irrbb.htm

Also, if we expect government regulators to protect bank executives from their own incompetence and make sure no banks ever go under, this brings up the question of why we need bank executives at all. Just let the government run the banks or, since there would no longer be competition between banks, roll all deposits and assets into one big government-run bank. An alternate, roughly equivalent scheme is to shut down all private banks and give everyone a Fed account.

You can argue that incompetence is not the same as recklessness. Incompetence was sufficiently penalized in this case, IMHO.

Seems like if they had just laddered their mortgage backed or other securities more, they could have survived?

>> By all accounts, SVB's banking was boring. They borrowed short and lent long, and their long bets were very safe.

Clearly not safe. IMHO anyone buying 10 year treasuries in the last several years is an idiot. Those rates were guaranteed to rise, as they could not fall below zero.

Next up: anyone who bought a house in the last few years is gonna get hurt. We knew rates would be rising, and hence prices falling. So far it's mostly sales volume dropping near zero, but soon...

And then when people are broke, many will raid their retirement investments. The stock market has benefitted for decades from people blindly (via 401k funds) dumping money into the market. More buyers than sellers equals rising prices. Guess what a jump in sellers causes...

And then after the market drops, people with money elsewhere will want to buy, resulting in one more shift of money from here to there.

Safe, as in they're going to be paid back dollar for dollar. People are talking about SVB's assets as if they were toxic, rather than just not as attractive as other available bonds.

The problem with SVBs bonds is that they're long term, so if they need the money early they have to sell them at a loss.

> Next up: anyone who bought a house in the last few years is gonna get hurt. We knew rates would be rising, and hence prices falling. So far it's mostly sales volume dropping near zero, but soon...

People who bought a house as an investment might be in trouble, but people who bought a home to live in are making out like bandits with their 30 year fixed mortgages.

In a down economy, fewer people sell their houses, so housing prices haven't fallen as much as they would if interest rates were raised in a vacuum.

Also people who bought house borrowing money from friend on promising to return it whenever asked for. This is what SVB did.

Agreed in general but I don’t think there is anything structurally preventing <0% yields on treasuries. The ECB has already set a central bank rate as low as -0.50% before.

It would of course be deeply unintuive to a regular person and likely very unpopular if rates went negative enough to require it to be reflected in consumer banking (eg negative rates on a checking/savings account). But I don’t think it’s impossible and we may see it in our lifetimes.

That is just a nitpick though because I think the US public as-is would throw a fit if it happened, making it unlikely. Fully agreed that purchasing a 10y bond at 1% was boneheaded given plenty of people predicted interest rates to need to increase to fight inflation (come on, just because the fed said it was transitory for a while, doesn’t give professionals an excuse to blindly take that at face value). The effective yields could have been so much higher just keeping the cash uninvested or in short term treasuries, then purchasing 10y bonds after the rate hikes started or stabilized.

Yeah that is much more obvious in hindsight but it’s not like it was a fringe position even in 2021

There were some proposals from the treasury for ways to make below zero rates work.

Risk management is much more than that. If that's easy then everyone can be a good fund manager: just take people's money and buy bonds. This doesn't work in real life.

Would that have made the difference? I thought that restricted banks to "safe" investments, which SVB's likely were. It's simply that they couldn't extract enough liquidity from that position to cover the run. Or were there other restrictions?

SVB failed because they bought government bonds, typically the most secure thing. The problem is the Federal Reserve raised interest rates, which made the bonds pointless. They Fed will supposedly keep raising rates, which I expect will make more banks fail. After all, if the most-secure thing (bonds) is not secure, what is?

I assume most banks should be going after shorter term bonds to adjust with those changes. Wasn't the problem with SVB that they had too much money in long term bonds and MBS? So they were locked into really low rates (based on today's srandards), which is fine if they held to maturity, but they couldn't hold due to the withdrawals and then nobody wants to buy those low rate securities for them to exit without losing too much.

It's really important to make this distinction: those bonds were, and still are safe investments, guaranteed by the full faith and credit of the United States Government. The issue is that you have to wait for them to mature. So SVB had too much of their depositor's money tied up in long term investments.

I don't want to turn this into another tutorial about pricing works on the bond market, but the issue isn't that they invested in bonds, it's that they made a bet about the Federal reserve reversing course and not hiking interest rates. This is really stupid - the federal reserve has been saying over and over again that they will not be lowering rates any time soon.

And they also had a bank run. I think it was Stratechery that mentioned everyone knew the issue SVB was in for months. Had there been no bank run, SVB would possibly have been fine.

With that said, it's good they got punished for poor decisions given their depositor profile.

That’s a pretty solid ‘as long as no one says the emperor has no clothes, he is fully clothed’ line though?

If it was a short period of time (a week?) this was going on, then sure. The emperor darting to the bathroom without his clothes on is unlikely to be a scandal after all.

But even if fed rates dropped tomorrow those bonds will not recover to par, because inflation on their principal amounts has already happened, and their interest rates are too low to ever recover back how much they have lost value barring truly exceptional deflation.

So unless they somehow come up with even more cash on hand to be able to avoid ever realizing those losses (good luck when everyone starts drawing down savings and boomers start retiring more and more), they’re boned inevitably.

Deflation wise, the fed will fight THAT even harder than the current inflation fight they are doing, and that’s relatively easy to combat - print more money. It’s why they’ve been printing money since ‘08.

Since the expectation is that inflation will continue for some time of course makes the math and present value even worse, but there is no plausible situation right now where the expected future dollar value of those bonds will be high enough to recoup a large percentage of their purchase value in today’s or a future dates currency.

That value is gone.

> That’s a pretty solid ‘as long as no one says the emperor has no clothes, he is fully clothed’ line though?

This is banking in general though. Any bank will struggle if a significant portion of deposits suddenly outflow. SVB was unique in that it had relatively large balances concentrated in relatively few depositors. This made it especially susceptible to a bank run. Of course they knew this and should have handled their risk appropriately.

Also, according to reports, they were very close to getting bridge financing. The run caused the financing to fall through, and we all saw what happened.

Eh, kinda.

There is the run from ‘can’t liquidate fast enough’, and there is the run from ‘can liquidate fast enough, but don’t have enough value if they do’.

The first one any bank is susceptible to, the second one is a bad bank issue - and it means that any sustained rate of deposit outflow is going to eventually implode it, as they’ll run out of value at some point regardless of how slow the draw down is.

That’s because that second scenario is essentially forced ‘mark to market’, which unlike ‘stress tests’ and regulator driven accounting standards, can’t be gamed. That’s the real issue here.

SVB was in the last category, but everyone is pretending it was in the first category because this problem is systemic due to fed reductions in interest rates for so long. We’re trying really hard to not look behind the curtain because it’s too scary.

The really interesting thing is easy fed cash has caused this issue globally. Global interest rates have been suppressed everywhere the USD touches, even China. Now that they’re ending, the bill coming due is a global one.

That’s why the fed is willing to take all these bonds at par for cash - they recognize they created this mess and don’t want it to spread, as it will implode the system and break the orderly turnaround they are trying to accomplish.

Pain spread over years in ways the system can absorb without causing an out of control spiral is the goal. Retirees eating dogfood (or starving), and mobs of angry unemployed 20 something men burning cities are the thing they are trying to avoid.

>> those bonds were, and still are safe investments

No, whether they are safe or not depends on what you are using them for.

If you have to mark them to market, they aren't safe investments. If you can hold them to maturity, they are safe investments.

The problem is that no one has been allowed to price in (real) inflation risks into bonds for a very long time as the fed has artificially suppressed rates through QE.

Bonds have only ever been considered ‘safe’ from a repayment perspective (it’s the only thing they really get graded on risk wise), and even then junk bonds are a real thing. The value of the bond shrinking due to inflation is always a unquantifiable future risk that typically gets priced in price/interest wise by the buyer/underwriter - but with the fed suppressing rates? All bets are off.

Those who got those 2% mortgages though have a lot to be thankful for. As long as the zombie hordes don’t get them in the coming debt apocalypse anyway (/s).

My hot take is that demand deposits should be only invested in (EDIT: short dated, thx codexb) US treasuries (a la Narrow Bank), backed by the Federal Reserve and if a bank (or anyone) wants to lend, they can issue bonds to borrow versus the Rube Goldberg mechanism we currently have of deposits, FDIC, and then the Fed still providing an unlimited guarantee anyway.

The bond market already is built to handle this, and we should stop treating demand deposits as this Schrödinger collateral. If you want to insure lending, insure the lending directly, not with consumer and business cash. I know there are no simple solutions to complex problems, but this all seems very unnecessary when you pull the system apart conceptually.

> codexb

If that happens start preparing to pay money(instead of receiving interest) for your demand deposits.

Most people do not receive interest in their deposit accounts (or its minimal) because banks keep the spread between paying depositors nothing and the interest the Fed pays on reserves held at the central bank. A Narrow Bank (which the Fed won't approve [1]) would cover their costs with that same spread. Failing that, one can invest in short dated government securities (US treasuries) directly. "All Roads Lead To Treasuries" if you will. If someone is going to gamble your money, might as well be the US government (treasuries are considered "risk free") vs your rando bank executive leadership team (the CEO of SVB collected ~$9.9 million in 2022 total comp for overseeing and approving suboptimal duration risk mgmt decisions).

If banking is to be boring and minimally profitable, that leads us to the idea that it should be a utility, not a risk taking venture, no? And if the Fed interest is covering the costs of banking, aren't we already all paying that cost as taxes?

[1] https://www.chicagobooth.edu/review/safest-bank-fed-wont-san...

that already happens for many.

By all accounts, most of their demand deposits were invested in US treasuries. Those treasuries are just worth less now because of interest rate hikes and so even if they didn't have to do a fire sale on billions in treasuries, it still wouldn't be enough to cover deposits.

There are no completely safe investments.

IMO the Fed should provide publicly available CBDC banking (implemented as a narrow bank with no ROI and no risk, just a balance in a fed table) and make it easy to move that money into treasuries or to integrate with eg visa/banks for payments.

Then commercial banking becomes a competition of who can best manage risk/return on deposits, provide a good UX, integrate with other value add financial services, have the best risk models for lending, etc. I just don’t see a point in a banking system where my deposits are going to be stored in something dead-simple like treasuries with the interest skimmed off, when I could easily do that myself.

The current system where I as a normal (not off-grid or doing some fringe thing like going all cash) consumer have to trust at least one bank with my money, only to get 0% interest in my checking and be exposed to risk, does not seem fair.

I think there is some nuance around CBDC vs simple "accounts" but I agree with your thesis, as do others, on issuing deposit accounts directly from the Fed.

https://rooseveltinstitute.org/wp-content/uploads/2021/08/GD... (Central Banking for All: A Public Option for Bank Accounts By Morgan Ricks, John Crawford, and Lev Menand* | June 2018)

Would Glass-Steagall have prevented the SVB failure?

I don't think so. SVB wasn't an investment bank, was it?

No; Glass-Steagall allowed commercial banks to own investment-grade bonds.

Buying long-term Treasurys and booking them as high-grade capital (whatever they call it) was legal under GS too, and was the cause of SVB's failure.

SVB was killed by the boring part, not the startup banking risk.

Large venture capitalist depositors demanding to pull out billions of dollars because of relatively minor liquidity risk definitely contributed to the bank run though.

That's irrelevant to the topic of this subthread, about Glass-Steagall and the regulations that would have prevented this.

Current global dollar-based financial system can only be sustained by an ever-increasing leverage, that allows rolling over the ever-increasing pile of dollar-denominated debt.

Since 1971 everything (all relevant policies) were geared towards increasing the amount of debt in the system. It's no surprise that student debt, mortgage debt, credit card, auto loans and whatever else were ballooning.

Regular banks not making risky bets would go against it, so it will not be done.

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