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No, they did not have to put the money somewhere. They could've kept the cash as cash if they wanted to. Holding cash is free for a bank, it's not like their co

No, they did not have to put the money somewhere. They could've kept the cash as cash if they wanted to. Holding cash is free for a bank, it's not like their costs increased since they weren't paying any interest on deposits. They could've bought derivatives to hedge against the likely scenario that interest rates increase. They could've bought 1 year bonds instead of 10. They really fucked up here. > But this is a side effect that no one really saw. Literally everyone except SVB saw that long term bonds would decrease in value post pandemic when interest rates increase. Interest rate increases lowering the value of bonds is quite literally the most basic rule of bonds.

nemo44x 4y ago
I don't think you're right. Here is an article from 2021 describing this. [1] Everyone has been doing it. SVB is unique in that its customers relied on financing to continue and because it hasn't they have been drawing their runway down. Other banks don't face this dilemma necessarily. Or they do and are coming up next. I don't know if you noticed, but a lot of banks stocks are down massively this week. [1] https://www.nytimes.com/2021/08/25/business/banks-government-bonds.html https://www.nytimes.com/2021/08/25/business/banks-government...
- lazide 4y ago
  Folks knew it was going to happen - but banks are highly regulated and don't have a lot of choice in what they can invest in, it has to be 'safe'. Which means specific types of bonds. It's why the fed is currently bailing out the industry by being willing to take them all at par value, not market value, in exchange for cash.
hnfong 4y ago
Smaller banks are usually pressured into offering higher interest rates to compete with larger banks. Holding cash gives you exactly 0%, and short term maturity bonds pre-2022 basically gave you roughly 0%. So, as a small bank how do you entice your customers to keep money in your bank? If the large banks are offering say 0.5%, you're probably pressured into offering ~1%. And how do you afford to do that? By buying longer term bonds. OK, now comes 2022, inflation is high and you think the Fed will increase rates. Now your bonds have already dropped in price due to the anticipated rate hikes. The billion dollar question now is whether you believe the Fed's "it's fine, don't worry we can get inflation under control", and keep your bonds, or whether you believe aggressive rate hikes are coming? It's easy to ridicule in hindsight, but as the saying goes hindsight is 20-20.

nemo44x 4y ago

I don't think you're right. Here is an article from 2021 describing this. [1] Everyone has been doing it. SVB is unique in that its customers relied on financing to continue and because it hasn't they have been drawing their runway down. Other banks don't face this dilemma necessarily. Or they do and are coming up next. I don't know if you noticed, but a lot of banks stocks are down massively this week. [1] https://www.nytimes.com/2021/08/25/business/banks-government-bonds.html https://www.nytimes.com/2021/08/25/business/banks-government...

lazide 4y ago
Folks knew it was going to happen - but banks are highly regulated and don't have a lot of choice in what they can invest in, it has to be 'safe'. Which means specific types of bonds. It's why the fed is currently bailing out the industry by being willing to take them all at par value, not market value, in exchange for cash.

hnfong 4y ago

Smaller banks are usually pressured into offering higher interest rates to compete with larger banks. Holding cash gives you exactly 0%, and short term maturity bonds pre-2022 basically gave you roughly 0%. So, as a small bank how do you entice your customers to keep money in your bank? If the large banks are offering say 0.5%, you're probably pressured into offering ~1%. And how do you afford to do that? By buying longer term bonds. OK, now comes 2022, inflation is high and you think the Fed will increase rates. Now your bonds have already dropped in price due to the anticipated rate hikes. The billion dollar question now is whether you believe the Fed's "it's fine, don't worry we can get inflation under control", and keep your bonds, or whether you believe aggressive rate hikes are coming? It's easy to ridicule in hindsight, but as the saying goes hindsight is 20-20.