7 ms·

The latter. Arguably, being exempt from Dodd-Frank may well have allowed SVB to be more resilient than otherwise. The general thrust of Dodd-Frank was to push

by fwlr 4y ago

The latter. Arguably, being exempt from Dodd-Frank may well have allowed SVB to be more resilient than otherwise. The general thrust of Dodd-Frank was to push banks away from high-risk investments. The Volcker Rule that’s at the heart of Dodd-Frank is most explicit about this, it expressly forbids certain types of investment for being too high-risk. Treasury bonds are considered to be some of the lowest-risk investments possible, with correspondingly low returns (in fact, in researching this I discovered, horrifyingly, that it’s not uncommon for Treasury bonds to be described as literally risk-free). The Volcker Rule has a specific exemption to explicitly allow trading in U.S. Government securities, in recognition of their perceived low risk. SVB held a lot of Treasury bonds, percentage-wise more than most other banks. This is because they had a lot of startups depositing a lot of venture capital funding, they needed somewhere to invest it, and Treasury bonds were one of the few investment options that were in regulatory compliance and available in large amounts. When the Federal Reserve started rapidly increasing interest rates, this tanked the value of Treasury bonds. And “tanked” is no exaggeration; there are grim charts from the beginning of this year like https://www.usbancorpassetmanagement.com/index/our-insights/quick-insights-blog/TheImpactofRisingRatesontheBankingSystem/_jcr_content/root/responsivegrid/image.coreimg.png/1672927656284/screen-shot-2023-01-05-at-9.07.23-am.png https://www.usbancorpassetmanagement.com/index/our-insights/... and back in November 2022 we had the Chairman of the FDIC warning that these unrealized losses could very quickly become actual losses for a bank that needed to increase liquidity. Which is precisely what happened to SVB, down to the letter. The argument that “Dodd-Frank exemption is good actually” goes like so: if the regulations were applied more stringently to SVB, they would have bought even more safe-bet Treasury bonds (and offered lower interest rates to depositors), and thus they would have been even more blown out by Federal Reserve increasing rates.

bequanna 4y ago
I think your explanation is missing one big thing: duration It isn’t that treasury bonds are inherently “risky”. The risk is that when you hold longer duration bonds at low interest rates like SVB did, even modest rate increases will have a large effect on value. Combine that with the bonehead investment in MBS which allegedly only yielded 1.5% at 10 year duration and you have massive losses.
- gruez 4y ago
  But is that covered by Dodd-Frank? I think what the parent is getting at is that interest rate risk isn't factored in at all, only asset type (ie. whether it's "safe" stuff like treasury or it's "risky" stuff like derivatives). I skimmed https://en.wikipedia.org/wiki/Provisions_of_the_Dodd%E2%80%93Frank_Wall_Street_Reform_and_Consumer_Protection_Act https://en.wikipedia.org/wiki/Provisions_of_the_Dodd%E2%80%9... and can't find anything relating to interest rate risk.
  - eep_social 4y ago
    Here is Dean Baker quoted in The Intercept, “SVB would have been required to undergo regular stress tests before the [Dodd-Frank] revision; among the stresses you look at are sharp rises in interest rates, which is apparently what did in SVB. Presumably, if its books had been subject to this test, the risk would have been detected and they would have been required to raise more capital and/or shed deposits.” [1] And in fact we know that the proximate trigger was SVB announcing that they were raising capital. [1] https://theintercept.com/2023/03/11/silicon-valley-bank-used-former-mccarthy-staffers-to-weaken-regulations-lobby-fdic/ https://theintercept.com/2023/03/11/silicon-valley-bank-used...
    - pickovven 4y ago
      The is the most "smoking gun" explanation that I've seen of how everyday corruption caused this. However, I'd love to see a follow that confirms the law resulted in a change in bond purchases by SVB.
      - eep_social 4y ago
        I think that’s fair. I hope we do see that and other details of how this all went sideways come out over the next months and years. I assume though, that like any black swan there were many things that went wrong together. Lately at work, I have been telling people that one in a million happens eight times per day at just 100 requests per second! Shit is going wrong in small ways all the time. So you design for that — but eventually in a big system enough of those minor failures will line up to cause something you notice. You probably remember that huge facebook outage in 2021? Lots of things went wrong and then they were locked out of their own conference rooms. The financial system is different parts at a different scale but the same theory of failure applies. Not smoking guns, more like a bad bet here, and a stupid decision there, and one dumbass VC influencer gets jumpy and runs his dumbass mouth in slack and bobs your uncle bye bye SVB.
EMM_386 4y ago
I thought the majority of SVB's cash was tied up in 10-year MBSs, not treasury bonds?
- nonethewiser 4y ago
  Pretty sure that is the case
- fwlr 4y ago
  The kind of mortgage-backed securities they held are still US Government securities! They are “mortgage-backed” more-or-less in the sense that the Government is willing to offer such-and-such amount of investment opportunity at so-and-so rate of return because they are holding a bunch of mortgages that they expect will be able to pay for it. They are different to Treasury bonds in important ways so it’s imprecise for me to refer to all of it as Treasury bonds, I agree. In practical terms, the reason SVB held MBSes was the same reason they held Treasury bonds (low risk because of Government guarantee), Treasury bonds and MBSes react to Federal Reserve rate increases in much the same way, and the ways that MBSes and Treasury bonds differ are largely walled off by the Government guarantee and thus immaterial to SVB (if the housing market does some wild stuff then MBSes might pay out differently to Treasury bonds, but this didn’t happen here).
  - deleted 4y ago
    [deleted]
  - MrMan 4y ago
    you are doing a pretty good job trying to explain away the officers of this bank running it into the ground. you havent even started to try to excuse their lending practices. what are you trying to accomplish? their CRO committed career-ending blunders and even with only short term securities on their books this bank could run into serious trouble simply by dint of their customer base all running into trouble at the same time, as is happening. why do you need to posture here man-splaining this shit incorrectly to people who dont know any better
    - 4y ago
riffraff 4y ago
Notice the risk free rate is based on short term bonds. Those are not as sensitive to rate changes as they regularly reach maturity and you roll them over. If SVB had owner those they would not have had liquidity problems which lead to insolvency.
- nonethewiser 4y ago
  Why is n earth did they buy 10 year bonds at historically low rates? I don’t understand why that seemed like a good idea.
  - muzz 4y ago
    Because the rate in long term bonds was 1.x% compared to 0% for the short term bonds. It was a risky move but one that could have panned out if the deposits had remained.
    - NhanH 4y ago
      It could only have panned out if the interest rate have remained. Once the interest rate increased, the deposits will chase higher rate, which SVB can’t provide and depositors will naturally withdraw their funds.
      - muzz 4y ago
        True but that doesn't happen all at once. Rates have been rising for more than a year now (not in a straight line but overall of course). They could have unwound this carry trade in March 2022 and probably come out ahead. Had they waited until summer 2022 they probably would have had a small loss. As it turns out though they held on for bigger losses.
  - riffraff 4y ago
    Banks often do this, trade short term risk for long term and pocket the difference. It seems SVB didn't account for the fact that there was a strong correlation between the source of their money (tech propped up by low rates) and their investment risk (bonds/loans propped up by low rates). I'm honestly unsure if we can ascribe this to to incompetence or greed.
gadders 4y ago
What about their exemption from Basel 3? https://www.ft.com/content/c95e7708-b903-405d-a017-963844eb3dc3 https://www.ft.com/content/c95e7708-b903-405d-a017-963844eb3...
guerby 4y ago
"Arguably, being exempt from Dodd-Frank may well have allowed SVB to be more resilient than otherwise." Wow, that's wrong wrong wrong. Dodd-Frank would have forced SVB to do and report tests including the vanilla interest rate curve sensitivity values. Look for "10-year Treasury yield" in this document (it's about everywhere as a parameter): https://www.federalreserve.gov/publications/files/2019-march-supervisory-stress-test-methodology.pdf https://www.federalreserve.gov/publications/files/2019-march... Which would have alerted the authority that SVB management was heavily playing a dangerous game.
- ignoramous 4y ago
  All fair and good, as a noob I ask what else should SVB have done if not invest in Treasury Bonds (which according to OP are lowest risk)?
  - JumpCrisscross 4y ago
    > what else should SVB have done if not invest in Treasury Bonds Bought Treasury bills. They’re more liquid and have less interest rate risk. They yield less, however, which is why SVB bought the riskier stuff.
    - abofh 4y ago
      That's the thing I don't get at all, they had what, something like 160b in deposits - they could've kept 150b in bills, ten billion in Treasury bonds, and still made millions to hundreds of millions per year ostensibly risk free - surely enough to keep a ledger balanced. The bet on mbs at historic lows seemed like a pennies in front of steam rollers play
      - jjoonathan 4y ago
        It was. You're not missing anything.
      - UncleMeat 4y ago
        Bob, responsible for risk management, goes to the boss and says "Hey here is the plan that makes us $X and keeps us at acceptable risk of interest rate changes." Jim, the boss says "Jeez $X isn't very much money, our shareholders expect returns! If we changed our portfolio like this we'd make $Y. You are being a debbie downer, bond prices won't collapse and even if they do we just hold them to maturity and we are fine. We simply can't leave this much money on the table."
worrycue 4y ago
> (in fact, in researching this I discovered, horrifyingly, that it’s not uncommon for Treasury bonds to be described as literally risk-free) Correct me if I'm wrong, they are practically risk-free if held to maturity no? It's only when you need them to be a liquid asset that you can sell for money in a pinch that it's not so risk free as the amount you can get for them depends on the market.
- refurb 4y ago
  Risk free in the sense they’ll pay out. But if you buy $1B in bonds at 1% and inflations runs 4-5% over the bond term, you’re running a -3-4% real return.
  - deleted 4y ago
    [deleted]
thepangolino 4y ago
One thing I don’t get is why do banks need to buy treasuries and not just keep it all in cash?
- evancox100 4y ago
  Well what do you mean by cash? Keeping cash in a vault is of course highly impractical, and also doesn't produce any money for you or the bank. If that's what you want, I think you could find it but it would be at a security company (security as in guards), not a bank. The electronic equivalent would be depositing the money with the federal reserve. (What they do with the physical bills I don't know! But most deposits would be coming in electronically these days anyways.) However, up until the passage of the Emergency Economic Stabilization Act of 2008, the fed didn't even pay interest on reserves. [1] Now they do, but until 2022 this rate was only 0.15%. [2] The first problem with this would have been it didn't provide enough money to run the bank. SVB's non-interest expenses were over $2 billion annually for the last 3 years, so with $200 billion of deposits you need at least to earn 1%, just to keep the lights on. Also your deposits will go up and down but you'll still have to pay your rent, so better be more than 1%. (This is how they ended up invested in longer duration treasuries, to earn more money by taking on greater interest rate risk.) But the more fundamental problem with just keeing the money at the fed is that I don't think they would let you. It is not, traditionally, the social-economic purpose of a bank to just collect deposits and do nothing with them. Instead, the bank is supposed to take in deposits and then provide loans to the community (credit cards, business loans, mortgages, etc.). Probably this purpose has gotten a little fuzzy over time, since banks are not holding on to the loans, but it is the basic idea. There is a company calling itself "The Narrow Bank" that actually wants to do exactly this, deposit all client money at the fed. [3] Tellingly, the fed has not granted them approval yet to do so. Maybe they will! But notice that this proposed bank is bare bones: no physical branches, no tellers, no ATMs, no FDIC insurance, just a place to deposit vast amounts of money from institutional clients and earn money from the interest rate spread from the fed vs what you pay out. I do not think such a bank would be very popular with many "regular" people or businesses, who have needs beyond just stashing money under an electronic mattress. [1] https://www.stlouisfed.org/open-vault/2018/april/why-fed-pays-interest-banks-reserves https://www.stlouisfed.org/open-vault/2018/april/why-fed-pay... [2] https://fred.stlouisfed.org/series/IORB https://fred.stlouisfed.org/series/IORB [3] https://www.tnbusa.com/2022/04/tnb-seeks-to-become-states-newest-bank-in-face-of-fed-delays/ https://www.tnbusa.com/2022/04/tnb-seeks-to-become-states-ne...
epolanski 4y ago
There's one thing I don't understand. If I'm buying low yield bonds for 100B, even if interest rates go much higher, shouldn't I still be able to sell the bonds for 100B? There's still an obligation by the government to give me 100B back at the end of the loan.
- cornstalks 4y ago
  Not necessarily. They’re worth 100B still, but they require the purchaser to “lock up” their capital. If you need liquid cash now and potential buyers are only interested in locking up their capital for higher gains/rewards, you might consider selling at a loss.
- shkkmo 4y ago
  Yes, and if you hold it for the 10 year term, you do get the money back, plus a small amount of interest. The problem is that now, you can buy bonds with a shorter term that provide higher interest rates. Thus to sell the old bonds now, you have to sell them for less than you paid for them so that the return on them becomes competitive with buying a new bond.
  - epolanski 4y ago
    Okay that is clear, thank you.
- evancox100 4y ago
  No, if you have to sell your bonds with, say, 9 years remaining, you won't get 100B for them. Think about it, you paid 100B to get 10-yr treasury bonds paying 2%/$4 billion, annually. Now someone can go to a treasury auction and pay 100B and get 4%/$8 billion annually. Why would they still pay you $100 B for yours? They are obviously worth less.

by fwlr 4y ago

bequanna 4y ago

I think your explanation is missing one big thing: duration It isn’t that treasury bonds are inherently “risky”. The risk is that when you hold longer duration bonds at low interest rates like SVB did, even modest rate increases will have a large effect on value. Combine that with the bonehead investment in MBS which allegedly only yielded 1.5% at 10 year duration and you have massive losses.

gruez 4y ago
But is that covered by Dodd-Frank? I think what the parent is getting at is that interest rate risk isn't factored in at all, only asset type (ie. whether it's "safe" stuff like treasury or it's "risky" stuff like derivatives). I skimmed https://en.wikipedia.org/wiki/Provisions_of_the_Dodd%E2%80%93Frank_Wall_Street_Reform_and_Consumer_Protection_Act https://en.wikipedia.org/wiki/Provisions_of_the_Dodd%E2%80%9... and can't find anything relating to interest rate risk.
- eep_social 4y ago
  Here is Dean Baker quoted in The Intercept, “SVB would have been required to undergo regular stress tests before the [Dodd-Frank] revision; among the stresses you look at are sharp rises in interest rates, which is apparently what did in SVB. Presumably, if its books had been subject to this test, the risk would have been detected and they would have been required to raise more capital and/or shed deposits.” [1] And in fact we know that the proximate trigger was SVB announcing that they were raising capital. [1] https://theintercept.com/2023/03/11/silicon-valley-bank-used-former-mccarthy-staffers-to-weaken-regulations-lobby-fdic/ https://theintercept.com/2023/03/11/silicon-valley-bank-used...
  - pickovven 4y ago
    The is the most "smoking gun" explanation that I've seen of how everyday corruption caused this. However, I'd love to see a follow that confirms the law resulted in a change in bond purchases by SVB.
    - eep_social 4y ago
      I think that’s fair. I hope we do see that and other details of how this all went sideways come out over the next months and years. I assume though, that like any black swan there were many things that went wrong together. Lately at work, I have been telling people that one in a million happens eight times per day at just 100 requests per second! Shit is going wrong in small ways all the time. So you design for that — but eventually in a big system enough of those minor failures will line up to cause something you notice. You probably remember that huge facebook outage in 2021? Lots of things went wrong and then they were locked out of their own conference rooms. The financial system is different parts at a different scale but the same theory of failure applies. Not smoking guns, more like a bad bet here, and a stupid decision there, and one dumbass VC influencer gets jumpy and runs his dumbass mouth in slack and bobs your uncle bye bye SVB.

EMM_386 4y ago

I thought the majority of SVB's cash was tied up in 10-year MBSs, not treasury bonds?

nonethewiser 4y ago
Pretty sure that is the case
fwlr 4y ago
The kind of mortgage-backed securities they held are still US Government securities! They are “mortgage-backed” more-or-less in the sense that the Government is willing to offer such-and-such amount of investment opportunity at so-and-so rate of return because they are holding a bunch of mortgages that they expect will be able to pay for it. They are different to Treasury bonds in important ways so it’s imprecise for me to refer to all of it as Treasury bonds, I agree. In practical terms, the reason SVB held MBSes was the same reason they held Treasury bonds (low risk because of Government guarantee), Treasury bonds and MBSes react to Federal Reserve rate increases in much the same way, and the ways that MBSes and Treasury bonds differ are largely walled off by the Government guarantee and thus immaterial to SVB (if the housing market does some wild stuff then MBSes might pay out differently to Treasury bonds, but this didn’t happen here).
- deleted 4y ago
  [deleted]
- MrMan 4y ago
  you are doing a pretty good job trying to explain away the officers of this bank running it into the ground. you havent even started to try to excuse their lending practices. what are you trying to accomplish? their CRO committed career-ending blunders and even with only short term securities on their books this bank could run into serious trouble simply by dint of their customer base all running into trouble at the same time, as is happening. why do you need to posture here man-splaining this shit incorrectly to people who dont know any better
  - 4y ago

riffraff 4y ago

Notice the risk free rate is based on short term bonds. Those are not as sensitive to rate changes as they regularly reach maturity and you roll them over. If SVB had owner those they would not have had liquidity problems which lead to insolvency.

nonethewiser 4y ago
Why is n earth did they buy 10 year bonds at historically low rates? I don’t understand why that seemed like a good idea.
- muzz 4y ago
  Because the rate in long term bonds was 1.x% compared to 0% for the short term bonds. It was a risky move but one that could have panned out if the deposits had remained.
  - NhanH 4y ago
    It could only have panned out if the interest rate have remained. Once the interest rate increased, the deposits will chase higher rate, which SVB can’t provide and depositors will naturally withdraw their funds.
    - muzz 4y ago
      True but that doesn't happen all at once. Rates have been rising for more than a year now (not in a straight line but overall of course). They could have unwound this carry trade in March 2022 and probably come out ahead. Had they waited until summer 2022 they probably would have had a small loss. As it turns out though they held on for bigger losses.
- riffraff 4y ago
  Banks often do this, trade short term risk for long term and pocket the difference. It seems SVB didn't account for the fact that there was a strong correlation between the source of their money (tech propped up by low rates) and their investment risk (bonds/loans propped up by low rates). I'm honestly unsure if we can ascribe this to to incompetence or greed.

gadders 4y ago

What about their exemption from Basel 3? https://www.ft.com/content/c95e7708-b903-405d-a017-963844eb3dc3 https://www.ft.com/content/c95e7708-b903-405d-a017-963844eb3...

guerby 4y ago

"Arguably, being exempt from Dodd-Frank may well have allowed SVB to be more resilient than otherwise." Wow, that's wrong wrong wrong. Dodd-Frank would have forced SVB to do and report tests including the vanilla interest rate curve sensitivity values. Look for "10-year Treasury yield" in this document (it's about everywhere as a parameter): https://www.federalreserve.gov/publications/files/2019-march-supervisory-stress-test-methodology.pdf https://www.federalreserve.gov/publications/files/2019-march... Which would have alerted the authority that SVB management was heavily playing a dangerous game.

ignoramous 4y ago
All fair and good, as a noob I ask what else should SVB have done if not invest in Treasury Bonds (which according to OP are lowest risk)?
- JumpCrisscross 4y ago
  > what else should SVB have done if not invest in Treasury Bonds Bought Treasury bills. They’re more liquid and have less interest rate risk. They yield less, however, which is why SVB bought the riskier stuff.
  - abofh 4y ago
    That's the thing I don't get at all, they had what, something like 160b in deposits - they could've kept 150b in bills, ten billion in Treasury bonds, and still made millions to hundreds of millions per year ostensibly risk free - surely enough to keep a ledger balanced. The bet on mbs at historic lows seemed like a pennies in front of steam rollers play
    - jjoonathan 4y ago
      It was. You're not missing anything.
    - UncleMeat 4y ago
      Bob, responsible for risk management, goes to the boss and says "Hey here is the plan that makes us $X and keeps us at acceptable risk of interest rate changes." Jim, the boss says "Jeez $X isn't very much money, our shareholders expect returns! If we changed our portfolio like this we'd make $Y. You are being a debbie downer, bond prices won't collapse and even if they do we just hold them to maturity and we are fine. We simply can't leave this much money on the table."

worrycue 4y ago

> (in fact, in researching this I discovered, horrifyingly, that it’s not uncommon for Treasury bonds to be described as literally risk-free) Correct me if I'm wrong, they are practically risk-free if held to maturity no? It's only when you need them to be a liquid asset that you can sell for money in a pinch that it's not so risk free as the amount you can get for them depends on the market.

refurb 4y ago
Risk free in the sense they’ll pay out. But if you buy $1B in bonds at 1% and inflations runs 4-5% over the bond term, you’re running a -3-4% real return.
- deleted 4y ago
  [deleted]

thepangolino 4y ago

One thing I don’t get is why do banks need to buy treasuries and not just keep it all in cash?

evancox100 4y ago
Well what do you mean by cash? Keeping cash in a vault is of course highly impractical, and also doesn't produce any money for you or the bank. If that's what you want, I think you could find it but it would be at a security company (security as in guards), not a bank. The electronic equivalent would be depositing the money with the federal reserve. (What they do with the physical bills I don't know! But most deposits would be coming in electronically these days anyways.) However, up until the passage of the Emergency Economic Stabilization Act of 2008, the fed didn't even pay interest on reserves. [1] Now they do, but until 2022 this rate was only 0.15%. [2] The first problem with this would have been it didn't provide enough money to run the bank. SVB's non-interest expenses were over $2 billion annually for the last 3 years, so with $200 billion of deposits you need at least to earn 1%, just to keep the lights on. Also your deposits will go up and down but you'll still have to pay your rent, so better be more than 1%. (This is how they ended up invested in longer duration treasuries, to earn more money by taking on greater interest rate risk.) But the more fundamental problem with just keeing the money at the fed is that I don't think they would let you. It is not, traditionally, the social-economic purpose of a bank to just collect deposits and do nothing with them. Instead, the bank is supposed to take in deposits and then provide loans to the community (credit cards, business loans, mortgages, etc.). Probably this purpose has gotten a little fuzzy over time, since banks are not holding on to the loans, but it is the basic idea. There is a company calling itself "The Narrow Bank" that actually wants to do exactly this, deposit all client money at the fed. [3] Tellingly, the fed has not granted them approval yet to do so. Maybe they will! But notice that this proposed bank is bare bones: no physical branches, no tellers, no ATMs, no FDIC insurance, just a place to deposit vast amounts of money from institutional clients and earn money from the interest rate spread from the fed vs what you pay out. I do not think such a bank would be very popular with many "regular" people or businesses, who have needs beyond just stashing money under an electronic mattress. [1] https://www.stlouisfed.org/open-vault/2018/april/why-fed-pays-interest-banks-reserves https://www.stlouisfed.org/open-vault/2018/april/why-fed-pay... [2] https://fred.stlouisfed.org/series/IORB https://fred.stlouisfed.org/series/IORB [3] https://www.tnbusa.com/2022/04/tnb-seeks-to-become-states-newest-bank-in-face-of-fed-delays/ https://www.tnbusa.com/2022/04/tnb-seeks-to-become-states-ne...

epolanski 4y ago

There's one thing I don't understand. If I'm buying low yield bonds for 100B, even if interest rates go much higher, shouldn't I still be able to sell the bonds for 100B? There's still an obligation by the government to give me 100B back at the end of the loan.

cornstalks 4y ago
Not necessarily. They’re worth 100B still, but they require the purchaser to “lock up” their capital. If you need liquid cash now and potential buyers are only interested in locking up their capital for higher gains/rewards, you might consider selling at a loss.
shkkmo 4y ago
Yes, and if you hold it for the 10 year term, you do get the money back, plus a small amount of interest. The problem is that now, you can buy bonds with a shorter term that provide higher interest rates. Thus to sell the old bonds now, you have to sell them for less than you paid for them so that the return on them becomes competitive with buying a new bond.
- epolanski 4y ago
  Okay that is clear, thank you.
evancox100 4y ago
No, if you have to sell your bonds with, say, 9 years remaining, you won't get 100B for them. Think about it, you paid 100B to get 10-yr treasury bonds paying 2%/$4 billion, annually. Now someone can go to a treasury auction and pay 100B and get 4%/$8 billion annually. Why would they still pay you $100 B for yours? They are obviously worth less.