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They actually let their interest rate hedges expire in '22 (while they had no CRO). That was insane. Every banker knows about duration/rate risk so this is real

by kurthr 4y ago

They actually let their interest rate hedges expire in '22 (while they had no CRO). That was insane. Every banker knows about duration/rate risk so this is really next level incompetence. The best spin I can think of is that they assumed HTM was sufficient to prevent a bank run, but it wasn't.

toomuchtodo 4y ago
If the comment below is accurate, HTM assets can not legally be hedged against interest rate risk. https://news.ycombinator.com/item?id=35130813 https://news.ycombinator.com/item?id=35130813
- kurthr 4y ago
  Maybe remarking them that way let them get rid of the expensive hedges? That would be even more damning. Edit: I went looking and PWC has a nice overview... 6.4.3.4 Hedging held-to-maturity debt securities ASC 815-20-25-12(d) provides guidance on the eligibility of held-to-maturity debt securities for designation as a hedged item in a fair value hedge. ... The notion of hedging the interest rate risk in a security classified as held to maturity is inconsistent with the held-to-maturity classification under ASC 320, which requires the reporting entity to hold the security until maturity regardless of changes in market interest rates. For this reason, ASC 815-20-25-43(c)(2) indicates that interest rate risk may not be the hedged risk in a fair value hedge of held-to-maturity debt securities. https://viewpoint.pwc.com/dt/us/en/pwc/accounting_guides/derivatives_and_hedg/derivatives_and_hedg_US/chapter_6_hedges_of__US/64_hedging_fixedrate_US.html https://viewpoint.pwc.com/dt/us/en/pwc/accounting_guides/der...
- kragen 4y ago
  i saw that, but then i also saw matt levine saying they should have hedged their htm assets against interest rate risk, which presumably he wouldn't have said if it were illegal
- tripletao 4y ago
  They could have hedged and marked to market though. In that case, the accounting would have said they were fine, and they would actually have been fine. In reality, they didn't hedge, and they used the HTM accounting treatment. So the accounting still said they were fine, since that permitted them to ignore the loss when interest rates increased; but accounting doesn't change reality, so they actually weren't fine and they blew up.
tptacek 4y ago
Yes, by all accounts, SVB was managed incompetently. But look at the thread we're on, which starts with the idea that Glass-Steagal might have prevented this, as if SVB had gone long on upper tranche subprime loans.
- kurthr 4y ago
  I agree with you about G-S, all it did was separate the Investment banking from regular banking. That doesn't make it boring at all! But I just can't wrap my head around the decision making process at SVB. I wouldn't expect to be paid high 6 figures to run risk at a $200B bank and I knew not to be in long bonds. hn_throwaway_99's comment about the legality of hedging their HTM book makes me wonder if they just reclassified it to reduce their costs in 2022. (Only credit and servicing risks can be hedged) And that gets to the real issue. Current regulations actually encourage rate risk at banks <$250B, because you can either pay for insurance or just mark it HTM. The majors don't have this choice and have to eat the extra cost. It is not that way in EU banking due to the Basel framework and IRRB. At least they have reporting standards and don't allow more than 15% to be at risk in the Supervisory Outlier Test (SOT). https://www.bis.org/fsi/fsisummaries/irrbb.htm https://www.bis.org/fsi/fsisummaries/irrbb.htm
- ElevenLathe 4y ago
  Also, if we expect government regulators to protect bank executives from their own incompetence and make sure no banks ever go under, this brings up the question of why we need bank executives at all. Just let the government run the banks or, since there would no longer be competition between banks, roll all deposits and assets into one big government-run bank. An alternate, roughly equivalent scheme is to shut down all private banks and give everyone a Fed account.
ihaveajob 4y ago
You can argue that incompetence is not the same as recklessness. Incompetence was sufficiently penalized in this case, IMHO.
deleted 4y ago
[deleted]

by kurthr 4y ago

toomuchtodo 4y ago

If the comment below is accurate, HTM assets can not legally be hedged against interest rate risk. https://news.ycombinator.com/item?id=35130813 https://news.ycombinator.com/item?id=35130813

kurthr 4y ago
Maybe remarking them that way let them get rid of the expensive hedges? That would be even more damning. Edit: I went looking and PWC has a nice overview... 6.4.3.4 Hedging held-to-maturity debt securities ASC 815-20-25-12(d) provides guidance on the eligibility of held-to-maturity debt securities for designation as a hedged item in a fair value hedge. ... The notion of hedging the interest rate risk in a security classified as held to maturity is inconsistent with the held-to-maturity classification under ASC 320, which requires the reporting entity to hold the security until maturity regardless of changes in market interest rates. For this reason, ASC 815-20-25-43(c)(2) indicates that interest rate risk may not be the hedged risk in a fair value hedge of held-to-maturity debt securities. https://viewpoint.pwc.com/dt/us/en/pwc/accounting_guides/derivatives_and_hedg/derivatives_and_hedg_US/chapter_6_hedges_of__US/64_hedging_fixedrate_US.html https://viewpoint.pwc.com/dt/us/en/pwc/accounting_guides/der...
kragen 4y ago
i saw that, but then i also saw matt levine saying they should have hedged their htm assets against interest rate risk, which presumably he wouldn't have said if it were illegal
tripletao 4y ago
They could have hedged and marked to market though. In that case, the accounting would have said they were fine, and they would actually have been fine. In reality, they didn't hedge, and they used the HTM accounting treatment. So the accounting still said they were fine, since that permitted them to ignore the loss when interest rates increased; but accounting doesn't change reality, so they actually weren't fine and they blew up.

tptacek 4y ago

Yes, by all accounts, SVB was managed incompetently. But look at the thread we're on, which starts with the idea that Glass-Steagal might have prevented this, as if SVB had gone long on upper tranche subprime loans.

kurthr 4y ago
I agree with you about G-S, all it did was separate the Investment banking from regular banking. That doesn't make it boring at all! But I just can't wrap my head around the decision making process at SVB. I wouldn't expect to be paid high 6 figures to run risk at a $200B bank and I knew not to be in long bonds. hn_throwaway_99's comment about the legality of hedging their HTM book makes me wonder if they just reclassified it to reduce their costs in 2022. (Only credit and servicing risks can be hedged) And that gets to the real issue. Current regulations actually encourage rate risk at banks <$250B, because you can either pay for insurance or just mark it HTM. The majors don't have this choice and have to eat the extra cost. It is not that way in EU banking due to the Basel framework and IRRB. At least they have reporting standards and don't allow more than 15% to be at risk in the Supervisory Outlier Test (SOT). https://www.bis.org/fsi/fsisummaries/irrbb.htm https://www.bis.org/fsi/fsisummaries/irrbb.htm
ElevenLathe 4y ago
Also, if we expect government regulators to protect bank executives from their own incompetence and make sure no banks ever go under, this brings up the question of why we need bank executives at all. Just let the government run the banks or, since there would no longer be competition between banks, roll all deposits and assets into one big government-run bank. An alternate, roughly equivalent scheme is to shut down all private banks and give everyone a Fed account.

ihaveajob 4y ago

You can argue that incompetence is not the same as recklessness. Incompetence was sufficiently penalized in this case, IMHO.

deleted 4y ago

[deleted]