4 ms·
Wow. I did not realized that. What SVB did, basically having a gigantic unhedged position on the interest rate through mismatched duration, is just plain crazy.
by g42gregory 4y ago
Wow. I did not realized that. What SVB did, basically having a gigantic unhedged position on the interest rate through mismatched duration, is just plain crazy. It should have never happened in any bank with the basic risk controls. Not a rocket science at all. But if there are more banks out there with such unhedged positions, this is scary. I am guessing this is what the "Moral Hazard" looks like, that people were talking about during 2007-2008 financial crisis. Everybody is expecting a bailout and people are incentivized to take crazy risks.
- simple-thoughts 4y agoIt’s a bit different from 2007-2008 because these assets that are causing problems are required by law to be held by these banks, in part from the regulations that came out of the previous crisis. Banks do have freedom with respect to duration but when small banks need funds for operations, are required to hold low yielding assets, and the short durations are at 0%, they really don’t have much of a choice.
- chenliw 4y agoActually, most banks have mismatched duration. Accepting short term deposits in checking accounts and giving out longer term mortgage and business loans. SVB undertook a strategy that had a similar duration as issuing loans, and via a portfolio of govt treasuries - as safe and liquid as it gets (outside of interest risk). The broader concern, with hindsight, is they had an extremely correlated/flighty deposit base compared to most banks, and that meant they should NOT have copied what other banks did. They needed to keep duration on the loan book much shorter and have much more liquidity/equity cushion.