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Comment by mitthrowaway2 | Hacker News Reader

> BTW you can blame the Fed for low interest rates, but it's the yield curve inversion and long rates which caused the liquidity/solvency problem not the short term rate hikes

Can't we sort of blame the Fed for that [yield curve inversion and long rates] too? It undertook massive quantitative easing during the pandemic, which depressed the yield of long-term bonds such as those bought by SVB. Perhaps if it hadn't done so much QE, the yield on SVB's long-term bonds would have gone from, say, 3% to 4% instead of 1.56% to 4%.

Edit to clarify: I'm not saying that the Fed deserves blame for SVB taking such a risky long-term position, I'm saying the Fed deserves some blame for long-term bonds being risky.

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> Can't we sort of blame the Fed for that too?

No. SVB chose to pursue a risky investment strategy with no risk manager at the helm for months, the banking equivalent of stupidly storing all of your nitrous fertilizer in one place and then being surprised when the whole thing blows up.

SVB made numerous, critical mistakes in their management. If anything, one could argue the Fed enabled this stupidity by keeping rates low for so long. But ultimately, the failure falls on the bank.

Oh, I'm not looking to absolve SVB of their responsibility for their position. I think you misread my comment. I mean blaming the Fed for the yield curve inversion and the steep change in long-term rates, and thus value of long-term debt, as opposed to only low overnight interest rates. The Fed does not deserve blame for SVB's choice to load up on that long-term debt without hedging those risks. I'm answering the parent's context, which is discussing how the gun got loaded; we all agree it was SVB to blame for pointing it at their own head.

I’d say it’s more like the Fed opened up a “Free ammo and cocaine store”. Most banks came by, got their free coke and went on their way. SVB came alone and said “well let’s have a fucking party: get rocked up and play some Russian roulette.” And every other bank that might’ve been eyeing that ammo realized “holy shit this is for reals.”

I haven't seen a lot of evidence yet that SVB was necessarily pursuing a risky strategy. Certainly, proceeding at all without a risk manager is risky in and of itself. However, the "risky" investments that I have heard described thus far are mostly treasury securities. They simply had too many for a time horizon too far out. There is no bank right now that could withstand a withdrawal rate of nearly 50% of total assets in a single day.

> However, the "risky" investments that I have heard described thus far are mostly treasury securities

You assume that all risk is default risk. The risk that SVB took wasn't that the US govt will default on its bonds. It was that the treasuries will lose their value in case of interest rate changes.

SVB bought billions of dollars of US treasuries which lost their value in the last year due to rate hikes. This showed up as unrealized losses on their balance sheet which spooked their depositors and precipitated the collapse.

No, I understand the liquidity risk involved in having too much tied up in long term treasuries. But I am yet to see evidence that any bank could have withstood a run of that magnitude. Nor have I seen much evidence that most other banks have significantly less liquidity risk than svb did.

> But I am yet to see evidence that any bank could have withstood a run of that magnitude.

I think you're right that no bank can withstand a run of that magnitude, and it has been pointed out elsewhere in the thread that entities that can do so aren't really a bank anymore. However, the bank run only occurred because it was public knowledge that SVB had terrible duration risk, so it's somewhat of a chicken-or-egg problem.

All the findings that came out since then points to minimal duration hedging on SVB's part, so all in all it sounds like a bank that was poorly managed, perhaps adapted too well to a ZIRP world, and was ripe for a run to happen.

> I think you're right that no bank can withstand a run of that magnitude,

They're not right. No bank could sell assets quickly enough to withstand such a run, but that's why the Fed serves as lender of last resort. Even under previous policy, the Fed would lend against the mark-to-market value of the collateral. So in theory any MTM-solvent bank could survive any run, so there was no incentive to start the run in the first place.

The SVB was MTM insolvent due to that excessive duration risk, so it couldn't do that. It's not the only MTM-insolvent bank (see the link in my other comment), but that in combination with its unusually high fraction of uninsured and thus flighty deposits was apparently enough to start the run.

Thanks for the posted paper. But if SVB was able to borrow against the mark to market value of their collateral, I don't understand why they couldn't remain solvent. Because they had plenty of assets, even at mtm value to cover a 50% run. Even all the way to nearly a 90% run, it seems.

> Nor have I seen much evidence that most other banks have significantly less liquidity risk than SVB did.

In traditional banking, rising interest rates are a good thing because it means that banks in turn get to underwrite loans at higher interest rates, which positively affects their bottom line. SVB's problems were twofold: A) they had a one-dimensional investment strategy that was adversely affected by rising rates, and B) outstanding loans made up a very small portion of their business relative to their size, which made it so that they weren't able to capture meaningful value from rising interest rates. The latter is actually pretty rare for a bank, which shows how uninterested they were in actually functioning like one.

It's solvency risk, not liquidity risk. When interest rates are 4%, having $1000 ten years from now means I have 1000/1.04^10 = $676 now. If my current liabilities exceed that, I'm insolvent, not illiquid.

Liquidity is about bid/ask spreads, disorderly markets in which the price becomes temporarily irrational. The SVB's problem was simply the time value of money, that the liquid and economically rational price of their long-term bond-like assets is lower than they wished it would be.

This paper estimates that 190/4800 ~ 4% of banks would have deposits at risk if half of uninsured deposits were withdrawn. That means 96% of banks wouldn't. The SVB's situation wasn't completely unique, but it's far from the norm.

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4387676

The COVID money printer was guaranteed to cause inflation. Raising rates to combat that was an inevitability. If you don't understand such basic economics and lack the wherewithal to hedge against likely future outcomes you shouldn't be running a bank.

SVB was warned by the Fed numerous times about their risky strategies. Certainly that implies they were pursuing a risk strategy. In 2021, the Fed issued citations and said SVB had "serious weaknesses in how it was handling key risks,"

Meanwhile, the bank run happened because people noticed the horrible risk management, not randomly. And those people talked.

Please explain to me what you think rates would have needed to do given that there was a massive decrease in economic activity due to a pandemic followed by inflation.

IMO? Overnight term rates should have been zero from 2020 to about July of 2021, then allowed to rise by 0.25 per month to perhaps about 3.5%. Long-term rates should have been left to float with the market, pricing in the expected risk of inflation. Not that my opinion matters, since I wasn't in charge.

That still leads to losses on long term treasuries. That's what it means to raise rates.

Yes, of course it does. But there are losses, and then there are losses. 10-year yields going from 1.56% in 2021 to 4% in 2023 is equivalent to a price drop of 17% (given maturity in 2031). If 10-year yields had only been, say, 3% in 2021 before rising to 4%, the bond price drop would have been closer to 7%.

I think the real damage was done between 2008 and 2018, when we spent 10+ years under zero interest rates in the US and negative rates in parts of Europe. I think that conditioned people to forget about things like duration risk and interest rate risk. Had we been under a "normal" rate regime during that period, I don't think people would have thought 10 year t-bonds paying 1.5% were in any sense of the word a "good deal." I think peoples' expectations were so messed up that Austria (?) issued a 97 year zero coupon, zero interest rate bond. Like it was a good thing.

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