Or did banks choose to buy long-term treasury bills, chasing the highest paper returns (i.e. discounting the risk of potential rising interest rates in the future)?
It's not a rhetorical question, but a sincere one.
[1]: https://en.wikipedia.org/wiki/United_States_Treasury_securit... states that Treasuries are sold in all varieties of duration, from 4 week bills to 30 year bonds.
Interest rates for short term debt are at 0%, at these rates you will run at a loss. Your only choice to keep your bank competitive is to find any yield at all, so you buy long duration treasuries. Yes you take interest rate risk, but your bank is able to operate for another day.
Of course the flaw in this story is that the interest rate risk should have been hedged, and it wasn’t. But viewing this as a straightforward story of “banks greedy, government good” is not reflecting the realities for regional banks.
How does the banking sector in aggregate hedge its interest rate risk exactly? They have to find a net counterparty outside the sector who wants exposure to interest rate risk. Who exactly would that be at sufficient scale to protect trillions in deposits?
If you buy long-term Treasuries for the high yield and you hedge the interest risk rate… what you get is the yield of the short-term Treasuries. Why buy them in the first place then? (There is no credit risk in this case - if you neutralize the interest rate risk there is nothing left.)
Oh, so the thing that could have prevented the bank from failing (but, unsurprisingly, costs them money to do), didn't happen? But it's the governments fault?
Yes, there are a number of banks that have "Primary Dealer" [1] status which confers to them some benefits, but also makes them legally obligated to make some minimum number of winning bids on government treasury auctions. See the section under "Expectations & Requirements" in the link. Probably the most quantifiable requirement is they have to maintain a minimum of 0.25% market share in winning Treasury bids: "Maintain a share of Treasury market making activity of at least 0.25 percent."