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> No. SVB hid market to market losses by saying "these securities are held to maturity so I don't have to realize losses". THAT is the source of the problem. No

> No. SVB hid market to market losses by saying "these securities are held to maturity so I don't have to realize losses". THAT is the source of the problem. Not all banks did this. All major US banks - and all or virtually all US banks in general - have assets that are designated as held to maturity. Continuously marking all assets to market would create massive swings in banks' income and obscure the real gains and losses from their operations. SVB probably had a somewhat longer asset duration and somewhat lower book yield than US banks on average, since its deposit base grew so quickly in a low interest rate environment in 2020-2021. It also had a higher share of uninsured deposits. But nothing that SVB did was categorically different than other banks, and in the absence of a government backstop, I'm not convinced that any US bank would fare much better if faced with a similar volume of deposit outflows. "Magically" transforming long-dated assets into short-dated liabilities wasn't any kind of malfeasance on SVB's part - it's just how banking works.

beezle 4y ago
Well, I'll take issue with your post as you captured the problem with the others. Where SVB was different than other banks is the absence of hedging. SVB's tier 1 capital was basically wiped out by a mark of the HTM portfolio, unlike other banks who suffered hits but far, far smaller.
trilobyte 4y ago
Any investment strategy will require addressing various forms of risk and making tradeoffs, but it is a choice. SVB did not properly hedge against this risk which, as soon as interest rates started rising, should have been a priority for their leadership to have a plan to address.
- norswap 4y ago
  Could they have done better? Sure. Hindsight is 20/20. Would it have been a reasonable assumption? No. As pointed out in the parent, every bank pretty much works like this, they're all liable to go under in the presence of a big enough run. Also if it must have been so obvious to them, it probably should have been obvious to the regulatory agencies in charge of monitoring banks and avoiding exactly these situations, as well as the Fed who set the policies leading to this in the first place. It just wasn't part of anyone's threat model.
  - trilobyte 4y ago
    This isn't a hindsight thing, this is a well-understood risk in finance. The lead time on rising interest rates was also significant enough for SVB to have shifted their investment strategy. Regulatory bodies in the US are both underfunded and hamstrung in their ability to regulate, and for a bank of SVBs size, they would not have been a prime target for regulators.
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cm2187 4y ago
More problematically it would create uncontrolled swings in their regulatory capital ratios. But those assets are typically hedges against long term fixed rate bonds issued by the bank, or are funded by a diversified (and mostly retail, ie more stable) deposit base with a large enough liquidity pool to sustain a period of stress, as mandated by liquidity regulations.
martinflack 4y ago
> nothing that SVB did was categorically different than other banks That appears to be untrue; the other banks hedged interest rate exposure. https://www.fdic.gov/analysis/cfr/working-papers/2006/2006-02.pdf https://www.fdic.gov/analysis/cfr/working-papers/2006/2006-0... See p6: "Larger banks are the predominant users of derivatives. ... Banks facing higher likelihood of financial distress manage their interest rate risks more - both by maintaining lower maturity GAPs and by engaging in higher derivatives activities. Consistent with the predictions of Froot et al. (1993), I find that the high growth banks and banks with less liquid assets engage in higher hedging activities"
aeternum 4y ago
Assets designated as 'held to maturity' should simply be illegal for banks unless depositors also agree to never withdraw until maturity. Banks are subject to daily reserve requirements, so everything they invest in should also be market priced (aka mark-to-market) each day.

beezle 4y ago

Well, I'll take issue with your post as you captured the problem with the others. Where SVB was different than other banks is the absence of hedging. SVB's tier 1 capital was basically wiped out by a mark of the HTM portfolio, unlike other banks who suffered hits but far, far smaller.

trilobyte 4y ago

Any investment strategy will require addressing various forms of risk and making tradeoffs, but it is a choice. SVB did not properly hedge against this risk which, as soon as interest rates started rising, should have been a priority for their leadership to have a plan to address.

norswap 4y ago
Could they have done better? Sure. Hindsight is 20/20. Would it have been a reasonable assumption? No. As pointed out in the parent, every bank pretty much works like this, they're all liable to go under in the presence of a big enough run. Also if it must have been so obvious to them, it probably should have been obvious to the regulatory agencies in charge of monitoring banks and avoiding exactly these situations, as well as the Fed who set the policies leading to this in the first place. It just wasn't part of anyone's threat model.
- trilobyte 4y ago
  This isn't a hindsight thing, this is a well-understood risk in finance. The lead time on rising interest rates was also significant enough for SVB to have shifted their investment strategy. Regulatory bodies in the US are both underfunded and hamstrung in their ability to regulate, and for a bank of SVBs size, they would not have been a prime target for regulators.

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cm2187 4y ago

More problematically it would create uncontrolled swings in their regulatory capital ratios. But those assets are typically hedges against long term fixed rate bonds issued by the bank, or are funded by a diversified (and mostly retail, ie more stable) deposit base with a large enough liquidity pool to sustain a period of stress, as mandated by liquidity regulations.

martinflack 4y ago

> nothing that SVB did was categorically different than other banks That appears to be untrue; the other banks hedged interest rate exposure. https://www.fdic.gov/analysis/cfr/working-papers/2006/2006-02.pdf https://www.fdic.gov/analysis/cfr/working-papers/2006/2006-0... See p6: "Larger banks are the predominant users of derivatives. ... Banks facing higher likelihood of financial distress manage their interest rate risks more - both by maintaining lower maturity GAPs and by engaging in higher derivatives activities. Consistent with the predictions of Froot et al. (1993), I find that the high growth banks and banks with less liquid assets engage in higher hedging activities"

aeternum 4y ago

Assets designated as 'held to maturity' should simply be illegal for banks unless depositors also agree to never withdraw until maturity. Banks are subject to daily reserve requirements, so everything they invest in should also be market priced (aka mark-to-market) each day.