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> And, legally, if you mark bonds as HTM, you are not allowed to hedge against their interest rate risk. Basically, the regulations say that if you're hedging a

> And, legally, if you mark bonds as HTM, you are not allowed to hedge against their interest rate risk. Basically, the regulations say that if you're hedging against interest rate risk, you don't really intend to hold to maturity, so you need to put them in the "Available for Sale" category. This seems like an important point that I haven’t seen mentioned elsewhere. Lots of folks have been like “these people are morons they didn’t hedge their crappy bonds.” Can you write more about this?

hn_throwaway_99 4y ago
Well, "these people are morons they didn’t hedge their crappy bonds" is pretty much correct. Here's a good explainer on the topic: https://corporatefinanceinstitute.com/resources/accounting/held-to-maturity-securities https://corporatefinanceinstitute.com/resources/accounting/h... . But it's not just that they didn't hedge their interest rate risk, it's also that they assumed that their deposit base would continue to stay the same or grow. The problem is that their highly correlated deposit base of tech startups actually all needed to take their money out at the same time when they couldn't get additional funding. Thus, it's important to understand that banks themselves make the choice of whether a bond goes into the "held to maturity" or "available for sale" bucket. I'm not a bank compliance officer so I don't know the rules about how much they're allowed to put in each bucket, but one problem was that SVB incorrectly estimated how much liquidity they would need because they didn't plan for the risk of their deposits all needing to be drawn down simultaneously.
- landemva 4y ago
  They went overweight in long duration bonds to get a little more yield. Terrible timing when interest rates were at 1000-year lows, but it kept the bonuses flowing and the stock compensation in the green.

hn_throwaway_99 4y ago

Well, "these people are morons they didn’t hedge their crappy bonds" is pretty much correct. Here's a good explainer on the topic: https://corporatefinanceinstitute.com/resources/accounting/held-to-maturity-securities https://corporatefinanceinstitute.com/resources/accounting/h... . But it's not just that they didn't hedge their interest rate risk, it's also that they assumed that their deposit base would continue to stay the same or grow. The problem is that their highly correlated deposit base of tech startups actually all needed to take their money out at the same time when they couldn't get additional funding. Thus, it's important to understand that banks themselves make the choice of whether a bond goes into the "held to maturity" or "available for sale" bucket. I'm not a bank compliance officer so I don't know the rules about how much they're allowed to put in each bucket, but one problem was that SVB incorrectly estimated how much liquidity they would need because they didn't plan for the risk of their deposits all needing to be drawn down simultaneously.

landemva 4y ago
They went overweight in long duration bonds to get a little more yield. Terrible timing when interest rates were at 1000-year lows, but it kept the bonuses flowing and the stock compensation in the green.