5 ms·

In fairness, it wasn't the risk-taking that did them in... it was the fact that they went all-in on 10-yr bonds at low interest rates and didn't adequately acco

by cal5k 4y ago

In fairness, it wasn't the risk-taking that did them in... it was the fact that they went all-in on 10-yr bonds at low interest rates and didn't adequately account for duration risk.

williamtrask 4y ago
Forgive me but I think this may be a contradiction. “didn’t adequately account for duration risk” == “risk taking that did them in”
- deleted 4y ago
  [deleted]
- cal5k 4y ago
  There's a big difference between accounting for KNOWN risks wrt managing your treasury - something that every bank does as a matter of course - and trying new things.
  - CrazyStat 4y ago
    Surely having your reserves locked up in assets that you can't sell without taking large losses is a known risk?
  - nairboon 4y ago
    What kind of bank doesn't know about interest rate risk? That's their whole business.
    - cal5k 4y ago
      That's what I'm saying. That's not the bank doing anything fancy and failing because of it, it's them not doing the basic things every bank should be doing.
SteveNuts 4y ago
Especially when the fed is telegraphing every move.
- hef19898 4y ago
  One of the reasons each and every central bank does telegraph heavily is exactly to prevent situations like this one.
adam_arthur 4y ago
Duration risk is risk. Bonds are not risk free. Buying treasuries at ~0% rates was frankly stupid. The narrative going around that there was adequate risk management here and at Silvergate is not correct. The main question is whether they were forced into these investments via regulations. It's likely they could have bought shorter dated treasuries and been fine. In the end, regulations may change such that banks can only buy short dated treasuries... or limitations on the level of duration they can hold.
- shadowgovt 4y ago
  The weird thing about all this to me is that the bank got sunk because they... Invested in very solid, predictable assets with guaranteed-except-for-apocalypse ROI. They're not being punished for losing money; they're being punished for not having the money put somewhere it could grow faster. I can't escape the feeling that America has lost its grip on what banks are supposed to be for.
  - adam_arthur 4y ago
    If you buy bonds you can lose money. To say they're risk free is wrong. Treasuries carry no credit risk, but they do carry duration risk. If you buy treasury bonds above par, you can also lose money even if you hold to maturity (though it would be illogical to buy them with negative yield. However we have seen this being done in Europe anyway) Duration risk is risk. Taking on 10-30y maturity is not "risk free" Many of these banks are holding Munis and other non-treasury bonds, which are not free of credit risk and can be worth 0 in some circumstances. I don't know about SVB's balance sheet, just speaking generally
    - shadowgovt 4y ago
      In this context, "lose" money means "You won't get as much money out as you would have if you had invested the money in something else?" Because if I buy a t-bond at $5, I'm expecting to get at least $5 back when it matures unless Uncle Sam has died.
p_j_w 4y ago
>it wasn't the risk-taking that did them in [...] didn't adequately account for duration risk. This sounds like risk taking to me.

by cal5k 4y ago

In fairness, it wasn't the risk-taking that did them in... it was the fact that they went all-in on 10-yr bonds at low interest rates and didn't adequately account for duration risk.

williamtrask 4y ago

Forgive me but I think this may be a contradiction. “didn’t adequately account for duration risk” == “risk taking that did them in”

deleted 4y ago
[deleted]
cal5k 4y ago
There's a big difference between accounting for KNOWN risks wrt managing your treasury - something that every bank does as a matter of course - and trying new things.
- CrazyStat 4y ago
  Surely having your reserves locked up in assets that you can't sell without taking large losses is a known risk?
- nairboon 4y ago
  What kind of bank doesn't know about interest rate risk? That's their whole business.
  - cal5k 4y ago
    That's what I'm saying. That's not the bank doing anything fancy and failing because of it, it's them not doing the basic things every bank should be doing.

SteveNuts 4y ago

Especially when the fed is telegraphing every move.

hef19898 4y ago
One of the reasons each and every central bank does telegraph heavily is exactly to prevent situations like this one.

adam_arthur 4y ago

Duration risk is risk. Bonds are not risk free. Buying treasuries at ~0% rates was frankly stupid. The narrative going around that there was adequate risk management here and at Silvergate is not correct. The main question is whether they were forced into these investments via regulations. It's likely they could have bought shorter dated treasuries and been fine. In the end, regulations may change such that banks can only buy short dated treasuries... or limitations on the level of duration they can hold.

shadowgovt 4y ago
The weird thing about all this to me is that the bank got sunk because they... Invested in very solid, predictable assets with guaranteed-except-for-apocalypse ROI. They're not being punished for losing money; they're being punished for not having the money put somewhere it could grow faster. I can't escape the feeling that America has lost its grip on what banks are supposed to be for.
- adam_arthur 4y ago
  If you buy bonds you can lose money. To say they're risk free is wrong. Treasuries carry no credit risk, but they do carry duration risk. If you buy treasury bonds above par, you can also lose money even if you hold to maturity (though it would be illogical to buy them with negative yield. However we have seen this being done in Europe anyway) Duration risk is risk. Taking on 10-30y maturity is not "risk free" Many of these banks are holding Munis and other non-treasury bonds, which are not free of credit risk and can be worth 0 in some circumstances. I don't know about SVB's balance sheet, just speaking generally
  - shadowgovt 4y ago
    In this context, "lose" money means "You won't get as much money out as you would have if you had invested the money in something else?" Because if I buy a t-bond at $5, I'm expecting to get at least $5 back when it matures unless Uncle Sam has died.

p_j_w 4y ago

>it wasn't the risk-taking that did them in [...] didn't adequately account for duration risk. This sounds like risk taking to me.