Boom and Bust is a feature, not a bug in western fractional reserve banking. In China, where they have a different system, the central bank would electronically print debt free money and recapitalize the bank and execute any bankers violating lending guidelines or otherwise giving "illegal loans" in order to prevent the moral hazard this would otherwise create. Being a banker and screwing around is an extremely serious crime in China.
The only reason the boom/bust cycle is implemented thus in the west is so the banks can periodically redistribute assets of their least successful borrowers to other people. In China, the reorganizations are more market priced since the ownership and control of distressed assets is written down by the central bank and they are resold for pennies, while in the west it tends to go through bankruptcy court, which is a slow complex bureaucratic process and tends to destroy what was left of the company.
Self inflicted wounds this time, though. There is nothing wrong with a bank purchasing 80bln of MBS with their depositors money. The issue becomes when the fed suddenly raises rates faster than any time in their history while still failing to fight inflation (which is a result of having a stronger economy).
No, please do not even try to imply that this was the Fed's fault.
They did not raise "suddenly". The move away from ZIRP was well telegraphed. Once they did the first hike the only question was how fast and how far. Most in the market initially expected an end rate around 3% (ie, 100bp over their target inflation rate of 2%). As it became increasingly clear that the inflation was not just about supply chain disruptions that end rate target went to 4% and higher.
Further - every bank has a team with one responsibility - asset and liability management. They are responsible for not just the product choices (ie, MBS vs Treasuries, etc) but also matching durations. The Treasurer of the bank is also responsible for oversight, including whether or not any of these positions should be hedged and to what extent.
This is entirely on the bank staff and management.
Not investing such a large percentage of their capital in long-duration fixed income vehicles all at once.
There's nothing wrong with going long on duration, it's a hedge against decreasing rates. The problem is when you go all-in on long duration investments and rates suddenly shoot up like they did, you now can't sell those assets without eating a massive loss.
An appropriate hedge would have been doing what every retail bond trader does, build a ladder. If they had simply bought a wider variety of say 1/2/5/10 year securities then they could have let the longer-dated ones sit and sell the shorter duration ones (and they wouldn't have suffered such a huge loss of market value that spooked depositors and started the run in the first place).
Yields on short-term fixed income securities were absolute shit, barely above 0%. If you've got a bunch of cash and nowhere to put it to work then even a horribly yielding MBS seems like a good idea, and the inflation monster hadn't yet come to roost making the Fed start jacking rates up far earlier than anybody would have expected.
Even at the time it should have been seen as a short-sighted move, however. It was obvious ZIRP wouldn't go on forever and rate risk would bite you in the backside, so I can't call it anything but careless yield chasing without proper risk management.
They took deposits from depositors who would blow up if interest rates went up, and then used those deposits to buy assets that would blow up if interest rates went up. Interest rates went up, so their assets crashed at the same time that deposits plummeted and withdrawals skyrocketed.
If you want to standardly hedge against interest rate risk, that's what swaps are for. If you want to take on a comparatively less rate-sensitive portfolio, then you buy shorter-dated bonds. They yield less, but surely that's better than "the FDIC seizes your bank and your equity goes to zero."
I think the chief risk officer at this bank left last year, they may have been the person who got the bank into these positions. it will be interesting to see if there is news coverage about that person's role in the crisis.
Let me get this straight. You're making the argument that raising interest rates from 0.01% to 0.17% in a year would have a similar effect as raising interest rates from 5.9% to 100% in a year?
You would say the Fed raised rates as quickly in the first scenario as the second?
Not the Fed's fault. SVB's fault for going all-in on 10year duration MBS. If they had mixed in a good amount of shorter duration tbonds/tbills they would've been fine.
If you have a healthy mix of business and retail clients, payday is a wash. If it’s a lot of business customers; every payday is like a predictable mini bank run.
If you have a small number of large, correlated and communicating players, you have a huge bank run risk.
The only reason the boom/bust cycle is implemented thus in the west is so the banks can periodically redistribute assets of their least successful borrowers to other people. In China, the reorganizations are more market priced since the ownership and control of distressed assets is written down by the central bank and they are resold for pennies, while in the west it tends to go through bankruptcy court, which is a slow complex bureaucratic process and tends to destroy what was left of the company.