4 ms·

The reason why their safe investments were losing value is that the Fed had raised rates. Their assets weren't bad, they had lost value because the Fed has rais

by abirch 4y ago

The reason why their safe investments were losing value is that the Fed had raised rates. Their assets weren't bad, they had lost value because the Fed has raised rates. The market is expecting rates to drop hence the inverted yield curve.

gruez 4y ago
>The reason why their safe investments were losing value is that the Fed had raised rates. Their assets weren't bad, they had lost value because the Fed has raised rates. In other words, those "safe investments" weren't so safe?
- abirch 4y ago
  No banking investment is safe if there is a run on the bank. It's not like this result was inevitable. If the bonds didn't need to be sold, they would have paid out.
  - gruez 4y ago
    >If the bonds didn't need to be sold, they would have paid out. Yeah, but only several years later, and all the while earning a low interest rate. In other words, the net present value of the security still dropped. Sure, if the bank holds to maturity it'll get its principal back, but it would have lost out on a lot of interest. Why would you want to hold your money at a bank that's lending out at 2% (made up number) when the fed is paying 4.5%? The bank will either have to offer lower interest on deposit to compensate, or take a loss. The former case basically creates a bank run dynamic. You want to get your cash out while you still can, otherwise your money will be stuck earning low interest rates for the next half decade. In the latter case, it leads to bankruptcy of the bank as the loss eats into capital reserves.
  - __blockcipher__ 4y ago
    > No banking investment is safe if there is a run on the bank This isn't true. Runs can only happen when a bank has insufficient liquidity. Such as when it holds long-dated bonds that it purchased at historical rock-bottom low interest rates. > If the bonds didn't need to be sold, they would have paid out. This is the "you don't lose money unless you sell" fallacy. Which yes, is actually a fallacy. (Note the fallacy is useful to use, psychologically speaking, to try to manipulate panic-susceptible individuals into doing the sane thing and not panic selling every dip; that doesn't make it less of a fallacy though)
JohnFen 4y ago
That sounds like blaming the Fed, when the actual problem was that the bank's prediction of the future turned out to be incorrect. They placed a bet and it didn't pay out, that's all.
- abirch 4y ago
  They made a bet that people wouldn't need their money back right now. It's the constant risk in fractional reserve banking. SVB should have purchased more swaps or swaptions, but this is me Monday morning quarterbacking. If depositors had left their money like It's a Wonderful Life things would have been fine.
  - __blockcipher__ 4y ago
    > They made a bet that people wouldn't need their money back right now. It's the constant risk in fractional reserve banking. Meh. Fractional reserve banking is not without risks, but I don't see any mention from you of the fact that SVB was holding bad assets.
    - JohnFen 4y ago
      It's not that they were holding bad assets, it's that they put too much money into assets that took too long to mature. They were betting that they wouldn't need that money sooner than that, and that's the bet they lost.

by abirch 4y ago

gruez 4y ago

>The reason why their safe investments were losing value is that the Fed had raised rates. Their assets weren't bad, they had lost value because the Fed has raised rates. In other words, those "safe investments" weren't so safe?

abirch 4y ago
No banking investment is safe if there is a run on the bank. It's not like this result was inevitable. If the bonds didn't need to be sold, they would have paid out.
- gruez 4y ago
  >If the bonds didn't need to be sold, they would have paid out. Yeah, but only several years later, and all the while earning a low interest rate. In other words, the net present value of the security still dropped. Sure, if the bank holds to maturity it'll get its principal back, but it would have lost out on a lot of interest. Why would you want to hold your money at a bank that's lending out at 2% (made up number) when the fed is paying 4.5%? The bank will either have to offer lower interest on deposit to compensate, or take a loss. The former case basically creates a bank run dynamic. You want to get your cash out while you still can, otherwise your money will be stuck earning low interest rates for the next half decade. In the latter case, it leads to bankruptcy of the bank as the loss eats into capital reserves.
- __blockcipher__ 4y ago
  > No banking investment is safe if there is a run on the bank This isn't true. Runs can only happen when a bank has insufficient liquidity. Such as when it holds long-dated bonds that it purchased at historical rock-bottom low interest rates. > If the bonds didn't need to be sold, they would have paid out. This is the "you don't lose money unless you sell" fallacy. Which yes, is actually a fallacy. (Note the fallacy is useful to use, psychologically speaking, to try to manipulate panic-susceptible individuals into doing the sane thing and not panic selling every dip; that doesn't make it less of a fallacy though)

JohnFen 4y ago

That sounds like blaming the Fed, when the actual problem was that the bank's prediction of the future turned out to be incorrect. They placed a bet and it didn't pay out, that's all.

abirch 4y ago
They made a bet that people wouldn't need their money back right now. It's the constant risk in fractional reserve banking. SVB should have purchased more swaps or swaptions, but this is me Monday morning quarterbacking. If depositors had left their money like It's a Wonderful Life things would have been fine.
- __blockcipher__ 4y ago
  > They made a bet that people wouldn't need their money back right now. It's the constant risk in fractional reserve banking. Meh. Fractional reserve banking is not without risks, but I don't see any mention from you of the fact that SVB was holding bad assets.
  - JohnFen 4y ago
    It's not that they were holding bad assets, it's that they put too much money into assets that took too long to mature. They were betting that they wouldn't need that money sooner than that, and that's the bet they lost.