3 ms·
SVB would have failed even it held only Treasuries on its book. Those are literally used to define the risk-free rate of return. The assets were not risky. It w
by NovemberWhiskey 4y ago
SVB would have failed even it held only Treasuries on its book. Those are literally used to define the risk-free rate of return. The assets were not risky. It was their duration mismatch that was the problem.
- scotty79 4y agoEvery asset has some risk. If they were only allowed to own dollars and loans they created themselves there would be no problem.
- NovemberWhiskey 4y agoThat’s also totally wrong. What do you think the financial difference between originating a loan and buying a bond is? You pay out a principal sum, then (as long as the borrower is creditworthy) you get back the principal and interest. Unless you only make floating rate loans (which is extremely rare outside of revolving lines like credit cards) then you have exactly the same duration risk problems and you’re actually exposed to much greater credit risk with a loan than you are with a government bond.
- scotty79 4y agoTo issue a loan you need to individually check the borrower, and that's it. With bonds you put your trust in the whole system that banks apparently (as SBV debacle shows) don't understand (bacause they can't or because they have incentive not to understand). Also, floating rate loans and mortgages are super common. Maybe not in US.