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Well then there’s 4: The regulators failed massively, allowing banks to mask their duration losses. Obviously this needs to change, but they probably need to f

by tomp 4y ago

Well then there’s 4: The regulators failed massively, allowing banks to mask their duration losses. Obviously this needs to change, but they probably need to fix the other banks first (that are still hiding their losses).

adolph 4y ago
Did SVB do anything irregularly? How would the pre-2018 regulations have changed anything?
- tomp 4y ago
  From what I’ve read, they would have to mark the portfolio to market (i.e. report its value in terms of current market prices), not say “we intend to hold this to maturity” and account it at face value. Like, the latter actually makes more sense to me, but only if you actually don’t need to sell which might be true for a university endowment (all assets, no liabilities or at least very predictable liabilities) not for a hedging institution.
  - zeroonetwothree 4y ago
    Wouldn’t it have just made them insolvent earlier then? How does it actually prevent the problem?
    - matt_morgan 4y ago
      Requiring that they provide more information earlier encourages them to behave more safely (by exposing them to scrutiny backed by sound evidence). And if they still go down, at least it happened sooner and there are fewer depositors to be harmed.
    - chowchowchow 4y ago
      Not necessarily, since the gap in finances accumulated over time. They would have had to acknowledge asset price drops on their balance sheet much sooner. Basically they were allowed to build up a bigger integration risk with their accounting if they ever did have to sell due to not having to MTM in the mean time.
      - adolph 4y ago
        Was the accumulation duration larger than the regulatory mark-to-market period? As I understand it, SVG was heavy on US Treasuries, which lost a great deal of value due to recent interest rate hikes. As a result of a higher than expected deposit withdrawal rate, SVG sold US Treasuries for less than what they would have received if they had held them to maturity. If the gap in finances was discovered earlier, would they have just converted more equities and other long-term higher-yeild instruments into treasuries and then go under because they couldn't get returns to match their deposit interest rates?
        chowchowchow 4y ago
        Had they been marking their holdings regularly they would have sold their depreciated holdings sooner when losses were smaller, instead of waiting until they had to to cover withdrawals. Deposit interest is not fixed so that wouldn’t make them go under, they’d have to reduce their interest paid.
  - deleted 4y ago
    [deleted]
kasey_junk 4y ago
The regulators had the regulations changed out from under them by Congress (at behest of the banks). They can’t regulate what’s not in the law. As far back as 2019 the FDIC was sounding the alarm about regional banks. In 2020, SVB’s risk committee told them to change their asset mix, they were over ruled because it would lower profits. If we are going to allow lax regulations fine, then the market (including depositors) have to do the regulation, but you can’t blame regulators in that case.
- ericmay 4y ago
  Exactly. Let’s not be so quick to say “the regulators failed”, particularly when the case is that even if the regulators did somehow fail and not have stronger regulations removed by Congress leading to said failure, these financial firms as a business failed first by making poor business decisions.
- thunky 4y ago
  > but you can’t blame regulators When I read "regulators failed", I don't think of Joe Regulator phoning it in at work. If Congress creates and oversees regulations, then they are the regulators in my book. This may be what the comment you replied to meant as well.
  - kasey_junk 4y ago
    The rollback of Dodd-Frank was at least nominally bipartisan. Limiting the feds power is broadly popular with the population. This is one of the outcomes of those desires, Congress representing their constituents wishes seems hard to call a failure just because the outcomes have some negative outcomes (all laws have negative outcomes for someone).
  - shagie 4y ago
    Note that this is a state chartered bank rather than a national one. Thus, state regulators are the ones with the oversight power and the ability to really do things. California Financial Regulator Takes Possession of Silicon Valley Bank - https://dfpi.ca.gov/2023/03/10/california-financial-regulator-takes-possession-of-silicon-valley-bank/ https://dfpi.ca.gov/2023/03/10/california-financial-regulato... > SAN FRANCISCO – The California Department of Financial Protection and Innovation (DFPI) announced today that, pursuant to California Financial Code section 592, it has taken possession of Silicon Valley Bank, citing inadequate liquidity and insolvency. The DFPI appointed the Federal Deposit Insurance Corporation (FDIC) as receiver of Silicon Valley Bank. > Silicon Valley Bank is a state-chartered commercial bank based in Santa Clara and is a member of the Federal Reserve System, with total assets of approximately $209 billion and total deposits of approximately $175.4 billion as of Dec. 31, 2022. Its deposits are federally insured by the FDIC subject to applicable limits. --- Note California and "state-chartered" in there.
worrycue 4y ago
There needs to be some kind of penalty for the C-suites for running a bank with no risk manager for 9 months too. They had no interest rate risk hedges the entire time. Edit: Downvotes with no replies. I hate it when that happens.
- pjc50 4y ago
  In this case, the SVB C-suite have all lost their jobs, and any equity (RSUs etc) they may have held has been zeroed.
  - Gwypaas 4y ago
    The next SVB then knows to cash out early and treat the stock as zero-value.
  - Red_Leaves_Flyy 4y ago
    What about claw backs and garnishment?
- vgatherps 4y ago
  I think the risk manager think is a bit of a red herring, outside of pointing towards a culture that didn’t care in the first place. SVB got blown up on a trade that is kind of at the core of what banks do (this is also why every bank is hurting). To even exist the bank has to be stuffed full of people very knowledgeable about rates risk at all levels of management. There should have been no shortage of people at any level, including executive, that understood the risks. It wasn’t even like this was some weird bespoke product or something, they got blown up by plain treasuries afaiu. This is the sort of thing that’s “introduction to rates 101” material. They didn’t need a CRO to tell them this.
  - gregw2 4y ago
    Why not buy a hedge? Their risk committee met 18 times. Because HoldForMaturity assets can't be hedged? Or it cuts into profit and affects your stock and management bonuses which they weren't used to giving up, and your share losses due to the hedge imperil your company but just in a different way?
pclmulqdq 4y ago
Banks are supposed to take duration risk like this - they borrow short-term (deposits) to lend long-term (business loans and mortgages). The thing that's new in the current environment is that the fed has hiked rates so aggressively that even banks that took sane levels of duration risk are in danger of insolvency if their assets get marked to market.
- salawat 4y ago
  You have that backwards. You borrow long term, then lend short term. Trying to keep enough liquidity to match withdrawal rates to "keep money working". Lending long (10 year) on money deposited for only a year is a recipe for disaster.
  - pclmulqdq 4y ago
    Every other institution borrows long to lend short. That's how money is usually made in a financial company, like a hedge fund or something similar. Banks are the counterparty (in a cosmic sense) to that trade: they borrow short to lend long. It is an inherently unstable business model, but it works if you trust them enough.

by tomp 4y ago

adolph 4y ago

Did SVB do anything irregularly? How would the pre-2018 regulations have changed anything?

tomp 4y ago
From what I’ve read, they would have to mark the portfolio to market (i.e. report its value in terms of current market prices), not say “we intend to hold this to maturity” and account it at face value. Like, the latter actually makes more sense to me, but only if you actually don’t need to sell which might be true for a university endowment (all assets, no liabilities or at least very predictable liabilities) not for a hedging institution.
- zeroonetwothree 4y ago
  Wouldn’t it have just made them insolvent earlier then? How does it actually prevent the problem?
  - matt_morgan 4y ago
    Requiring that they provide more information earlier encourages them to behave more safely (by exposing them to scrutiny backed by sound evidence). And if they still go down, at least it happened sooner and there are fewer depositors to be harmed.
  - chowchowchow 4y ago
    Not necessarily, since the gap in finances accumulated over time. They would have had to acknowledge asset price drops on their balance sheet much sooner. Basically they were allowed to build up a bigger integration risk with their accounting if they ever did have to sell due to not having to MTM in the mean time.
    - adolph 4y ago
      Was the accumulation duration larger than the regulatory mark-to-market period? As I understand it, SVG was heavy on US Treasuries, which lost a great deal of value due to recent interest rate hikes. As a result of a higher than expected deposit withdrawal rate, SVG sold US Treasuries for less than what they would have received if they had held them to maturity. If the gap in finances was discovered earlier, would they have just converted more equities and other long-term higher-yeild instruments into treasuries and then go under because they couldn't get returns to match their deposit interest rates?
      - chowchowchow 4y ago
        Had they been marking their holdings regularly they would have sold their depreciated holdings sooner when losses were smaller, instead of waiting until they had to to cover withdrawals. Deposit interest is not fixed so that wouldn’t make them go under, they’d have to reduce their interest paid.
- deleted 4y ago
  [deleted]

kasey_junk 4y ago

The regulators had the regulations changed out from under them by Congress (at behest of the banks). They can’t regulate what’s not in the law. As far back as 2019 the FDIC was sounding the alarm about regional banks. In 2020, SVB’s risk committee told them to change their asset mix, they were over ruled because it would lower profits. If we are going to allow lax regulations fine, then the market (including depositors) have to do the regulation, but you can’t blame regulators in that case.

ericmay 4y ago
Exactly. Let’s not be so quick to say “the regulators failed”, particularly when the case is that even if the regulators did somehow fail and not have stronger regulations removed by Congress leading to said failure, these financial firms as a business failed first by making poor business decisions.
thunky 4y ago
> but you can’t blame regulators When I read "regulators failed", I don't think of Joe Regulator phoning it in at work. If Congress creates and oversees regulations, then they are the regulators in my book. This may be what the comment you replied to meant as well.
- kasey_junk 4y ago
  The rollback of Dodd-Frank was at least nominally bipartisan. Limiting the feds power is broadly popular with the population. This is one of the outcomes of those desires, Congress representing their constituents wishes seems hard to call a failure just because the outcomes have some negative outcomes (all laws have negative outcomes for someone).
- shagie 4y ago
  Note that this is a state chartered bank rather than a national one. Thus, state regulators are the ones with the oversight power and the ability to really do things. California Financial Regulator Takes Possession of Silicon Valley Bank - https://dfpi.ca.gov/2023/03/10/california-financial-regulator-takes-possession-of-silicon-valley-bank/ https://dfpi.ca.gov/2023/03/10/california-financial-regulato... > SAN FRANCISCO – The California Department of Financial Protection and Innovation (DFPI) announced today that, pursuant to California Financial Code section 592, it has taken possession of Silicon Valley Bank, citing inadequate liquidity and insolvency. The DFPI appointed the Federal Deposit Insurance Corporation (FDIC) as receiver of Silicon Valley Bank. > Silicon Valley Bank is a state-chartered commercial bank based in Santa Clara and is a member of the Federal Reserve System, with total assets of approximately $209 billion and total deposits of approximately $175.4 billion as of Dec. 31, 2022. Its deposits are federally insured by the FDIC subject to applicable limits. --- Note California and "state-chartered" in there.

worrycue 4y ago

There needs to be some kind of penalty for the C-suites for running a bank with no risk manager for 9 months too. They had no interest rate risk hedges the entire time. Edit: Downvotes with no replies. I hate it when that happens.

pjc50 4y ago
In this case, the SVB C-suite have all lost their jobs, and any equity (RSUs etc) they may have held has been zeroed.
- Gwypaas 4y ago
  The next SVB then knows to cash out early and treat the stock as zero-value.
- Red_Leaves_Flyy 4y ago
  What about claw backs and garnishment?
vgatherps 4y ago
I think the risk manager think is a bit of a red herring, outside of pointing towards a culture that didn’t care in the first place. SVB got blown up on a trade that is kind of at the core of what banks do (this is also why every bank is hurting). To even exist the bank has to be stuffed full of people very knowledgeable about rates risk at all levels of management. There should have been no shortage of people at any level, including executive, that understood the risks. It wasn’t even like this was some weird bespoke product or something, they got blown up by plain treasuries afaiu. This is the sort of thing that’s “introduction to rates 101” material. They didn’t need a CRO to tell them this.
- gregw2 4y ago
  Why not buy a hedge? Their risk committee met 18 times. Because HoldForMaturity assets can't be hedged? Or it cuts into profit and affects your stock and management bonuses which they weren't used to giving up, and your share losses due to the hedge imperil your company but just in a different way?

pclmulqdq 4y ago

Banks are supposed to take duration risk like this - they borrow short-term (deposits) to lend long-term (business loans and mortgages). The thing that's new in the current environment is that the fed has hiked rates so aggressively that even banks that took sane levels of duration risk are in danger of insolvency if their assets get marked to market.

salawat 4y ago
You have that backwards. You borrow long term, then lend short term. Trying to keep enough liquidity to match withdrawal rates to "keep money working". Lending long (10 year) on money deposited for only a year is a recipe for disaster.
- pclmulqdq 4y ago
  Every other institution borrows long to lend short. That's how money is usually made in a financial company, like a hedge fund or something similar. Banks are the counterparty (in a cosmic sense) to that trade: they borrow short to lend long. It is an inherently unstable business model, but it works if you trust them enough.