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While we can easily see that long-duration low-yield bonds are risky if interest rates rise, I would point out 2 things. 1. Financial analysts were not devotin
by fwlr 4y ago
While we can easily see that long-duration low-yield bonds are risky if interest rates rise, I would point out 2 things.
1. Financial analysts were not devoting much time to analyzing the risks from rapid rate increases, as rapid rate increases were deemed very unlikely (in part because the Federal Reserve itself had offered guidance that it was unlikely!). Furthermore, the time that was spent on analysis of this low-probability event was spread very thin (interest rate increases affect pretty much everything), and the perception of “zero risk” in T bonds would have bumped them to the end of the list for analysis, meaning even less analysis time for this outcome. Just now on Twitter I’ve seen two financial analyses praised for their prescience in this event - one from the FDIC, one from Byrne Hobart. Both of them only picked this up after the rate increases came into effect.
2. Even if there was full awareness of this risk, and plenty of forewarning that the rapid rate increase was definitely coming, the regulations as written would still permit these investments. The bank itself would probably have made smarter decisions and wouldn’t have collapsed, but that would be orthogonal to the regulations under discussion in the OP. (In my initial comment I even sketched out the argument that the regulations would have been mildly opposed to the smarter decisions.)
- evancox100 4y agoYou're making a lot of very specific assertions in this thread about what bank officers or regulators would/should have done, or what the effect of SIFI stress tests would have been, without any actual evidence to back this up. Do you actually have inside information or prior experience on these things?
- fwlr 4y agoI have no inside information on SVB or their depositors, and no prior experience with managing a bank run. (I also have no exposure to SVB, nor do I have any stock market positions that may be affected by it.) If you want my motivation for discussing it all day: I’m curious, it’s an interesting and fast-moving puzzle that a lot of smart people are discussing. If you want my qualifications for offering so many specific assertions: I’ve read the primary sources and it just doesn’t seem like it would fix or prevent this the way other people assume it would. If in my enthusiasm I’ve oversold myself as an expert, I apologize unreservedly.
- anon84873628 4y agoAt least they're the only person who bothered to look up the interest rates used in the stress tests (although citing sources would have been nice)
- fwlr 4y agohttps://news.ycombinator.com/item?id=35119007 https://news.ycombinator.com/item?id=35119007 Sources here for DFAST 2022, 2021, 2020. 2019 is in the parent comment to that. You’re looking for Appendix A, Supervisory Scenarios, Tables A3 and A5 (Domestic Variables). Note that the actual interest rate used is not explicitly specified anywhere I could see, there’s a footnote that it was calculated by Federal Reserve staff according to Lars E. O. Svensson (1995), “Estimating Forward Interest Rates with the Extended Nelson-Siegel Method”. The 10 year treasury bond return is derived largely from just the interest rate, though, and it’s also the variable we actually care about - if they did give us the interest rate we would just be using it to calculate the Treasury rate anyway.