[cplusplusfellow]

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).

[beezle]

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.

[throwaway2847]

Nobody forced SVB to buy up long bonds at negative real yields.

[testfoobar]

SVB failed to hedge their interest rate risk.

[teacpde]

Curious what are the ways SVB could have hedged in this scenario?

[snuxoll]

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).

[teacpde]

Makes me wonder why they made the risky move in the first place, they surely knew the risks, but still did it, because of greed for higher yields?

[snuxoll]

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.

[actionablefiber]

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."

[bjornsing]

> They yield less, but surely that's better than "the FDIC seizes your bank and your equity goes to zero."

For the individual banker, perhaps it's not? If rates stay low they get a fat bonus, if they go up they just get a new job somewhere else.

[actionablefiber]

Depends on the equity/cash split of your compensation. A failed bank is worth zero. Cash is cash.

[MrMan]

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.

[testfoobar]

Interest rate swaps is one solution.

Here is a primer: https://www.pimco.com/gbl/en/resources/education/understandi...

This is another (PDF): https://www.treasurer.ca.gov/cdiac/publications/math.pdf

[wskinner]

Buy T-Bills or other short maturity assets instead of long maturity T-Bonds and mortgage-backed assets.

[rufus_foreman]

> The issue becomes when the fed suddenly raises rates faster than any time in their history

The Fed funds rate was 9% in July of 1980 and 19% in December of 1980.

[cplusplusfellow]

So, roughly doubling (2.1x) in absolute terms versus 17x over the past year.

[rufus_foreman]

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?

[UncleOxidant]

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.

[Scoundreller]

It’s also a clientele mix issue.

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.

[worik]

> The issue becomes when the fed suddenly raises rates faster than any time in their history

No. That is a fact. But it does not collapse properly run banks.