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So here's what I'm confused by. The writing was on the wall a year ago for rapid interest rate hikes. This has well-known and predictable effects on long-term b

by jmyeet 4y ago

So here's what I'm confused by. The writing was on the wall a year ago for rapid interest rate hikes. This has well-known and predictable effects on long-term bond holdings. Why didn't banks liquidate their long-term bond holdings a year ago? I can guess the answer: they wanted to protect executive bonuses and share prices. They hoped they could just stick their heads in the sands and hold those bonds to maturity. Another question: why even hold their liquidity in long-term bonds that are more sensitive to interest rate changes? Banks could've rolled 90 day Fed debt instead of 10+ year bonds. Again, I can guess the answer: long-term bonds have better yields so the bank can artificially improve its position (ie executive bonuses and share prices again) by adding risk to their depositor funds. I'm happy to see the solution for poor financial management (eg SVB) is for the bank to be dissolved. Let shareholders bear the cost for poor management.

rosywoozlechan 4y ago
There was an article in the WSJ today how the San Francisco Fed cited SVB multiple times in 2022 for their risk to rising interest rates, and how SVB's models were wrong. SVB believed the rising interest rates would improve their outlook, not be a risk.
joe_the_user 4y ago
I think the main thing is that holding long bonds was a way to get profits and pay interest. Despite being doomed long term, there were a couple reasons banks did it - they couldn't make money by making conventional business loans, profitable loan opportunities weren't available and most banks expected to be bailed out when things went bad (Silicon Valley Bank and Signature had each been previously bailed out). The related question is why did regulators turn a blind eye? Interest rate risk is something regulators look at. I know SVB had some loopholes that prevented a lot of oversight but one other factor that comes to mind is that the Fed needed to get rid of high prices/low-interest Fannie Mae bonds somehow and letting bonds feed on them was one way.
- Dylan16807 4y ago
  The fed sent multiple warnings. Not exactly a blind eye but not great either.
chii 4y ago
> by adding risk to their depositor funds. lending by a bank could've also achieved the same. Depositor's funds are always "risked" in a non 100% fractional reserve system. The problem isn't with banks buying long-dated bonds, but that they may have bought too much. The central bank, the thinking goes, could lend as a last resort, so the risk of liquidity (or lack thereof) is lowered; this means any bank that _didn't_ buy a higher yield is losing money compared to their competitors who did (until the shit hits the fan).
drexlspivey 4y ago
> Why didn't banks liquidate their long-term bond holdings a year ago? Because these bonds are in the Hold-to-maturity portfolio and you can't sell them. If you sell one you have to mark down everything.
marcosdumay 4y ago
> Why didn't banks liquidate their long-term bond holdings a year ago? Too many bonds / too little time. Bank assets are several times larger than the real economy. It's impossible to transact them in one year. > long-term bonds have better yields so the bank can artificially improve its position (ie executive bonuses and share prices again) by adding risk to their depositor funds. About this, that one seems right on the mark to me. Banks seem to love all kinds of "tails we win, heads you lose" games. But then, I wonder if the US didn't increase their rates much faster than they should.
lamontcg 4y ago
> Why didn't banks liquidate their long-term bond holdings a year ago? Who do "the banks" sell them to? A bank can sell them to another bank. Someone is still sitting on it. We can't sell mortgage bonds to space aliens yet AFAIK, and other banks in other countries can also see that they don't want to touch them in a rising rate environment, and they'll have their own problems back home. Economics 101 is learning that "why doesn't everyone just X" usually doesn't work when it comes to macroeconomics.
- Dylan16807 4y ago
  Specifically the issue was certain banks having much too high a ratio of long-term bonds, and they could have sold those to less concentrated investors without upending the market.
  - lamontcg 4y ago
    The US Banking system as a whole is sitting on $620B of underwater bonds. https://fortune.com/2023/03/10/svb-collapse-fdic-takeover-martin-gruenberg-620-billion-hole-banks-balance-sheet/ https://fortune.com/2023/03/10/svb-collapse-fdic-takeover-ma... I doubt anyone wants more than they already have.
    - Dylan16807 4y ago
      The market thought they were fine at the time. If only the banks with the most rate risk were selling, the price would have been stable. It's too late now, but there was a big period of time where the rate risk was obvious but the price was still good because institutions were comfortable with that bet. And it was okay for 95% of them to make that bet, just not the ones going too hard on it.
SilasX 4y ago
>Why didn't banks liquidate their long-term bond holdings a year ago? Because if they had all done it then, the crisis would have happened at that time instead of this one. For any mass-liquidation, you can always ask, "well why didn't you beat the rest of the market to dumping this trash?" It's a problem in any bubble.

by jmyeet 4y ago

rosywoozlechan 4y ago

There was an article in the WSJ today how the San Francisco Fed cited SVB multiple times in 2022 for their risk to rising interest rates, and how SVB's models were wrong. SVB believed the rising interest rates would improve their outlook, not be a risk.

joe_the_user 4y ago

I think the main thing is that holding long bonds was a way to get profits and pay interest. Despite being doomed long term, there were a couple reasons banks did it - they couldn't make money by making conventional business loans, profitable loan opportunities weren't available and most banks expected to be bailed out when things went bad (Silicon Valley Bank and Signature had each been previously bailed out). The related question is why did regulators turn a blind eye? Interest rate risk is something regulators look at. I know SVB had some loopholes that prevented a lot of oversight but one other factor that comes to mind is that the Fed needed to get rid of high prices/low-interest Fannie Mae bonds somehow and letting bonds feed on them was one way.

Dylan16807 4y ago
The fed sent multiple warnings. Not exactly a blind eye but not great either.

chii 4y ago

> by adding risk to their depositor funds. lending by a bank could've also achieved the same. Depositor's funds are always "risked" in a non 100% fractional reserve system. The problem isn't with banks buying long-dated bonds, but that they may have bought too much. The central bank, the thinking goes, could lend as a last resort, so the risk of liquidity (or lack thereof) is lowered; this means any bank that _didn't_ buy a higher yield is losing money compared to their competitors who did (until the shit hits the fan).

drexlspivey 4y ago

> Why didn't banks liquidate their long-term bond holdings a year ago? Because these bonds are in the Hold-to-maturity portfolio and you can't sell them. If you sell one you have to mark down everything.

marcosdumay 4y ago

> Why didn't banks liquidate their long-term bond holdings a year ago? Too many bonds / too little time. Bank assets are several times larger than the real economy. It's impossible to transact them in one year. > long-term bonds have better yields so the bank can artificially improve its position (ie executive bonuses and share prices again) by adding risk to their depositor funds. About this, that one seems right on the mark to me. Banks seem to love all kinds of "tails we win, heads you lose" games. But then, I wonder if the US didn't increase their rates much faster than they should.

lamontcg 4y ago

> Why didn't banks liquidate their long-term bond holdings a year ago? Who do "the banks" sell them to? A bank can sell them to another bank. Someone is still sitting on it. We can't sell mortgage bonds to space aliens yet AFAIK, and other banks in other countries can also see that they don't want to touch them in a rising rate environment, and they'll have their own problems back home. Economics 101 is learning that "why doesn't everyone just X" usually doesn't work when it comes to macroeconomics.

Dylan16807 4y ago
Specifically the issue was certain banks having much too high a ratio of long-term bonds, and they could have sold those to less concentrated investors without upending the market.
- lamontcg 4y ago
  The US Banking system as a whole is sitting on $620B of underwater bonds. https://fortune.com/2023/03/10/svb-collapse-fdic-takeover-martin-gruenberg-620-billion-hole-banks-balance-sheet/ https://fortune.com/2023/03/10/svb-collapse-fdic-takeover-ma... I doubt anyone wants more than they already have.
  - Dylan16807 4y ago
    The market thought they were fine at the time. If only the banks with the most rate risk were selling, the price would have been stable. It's too late now, but there was a big period of time where the rate risk was obvious but the price was still good because institutions were comfortable with that bet. And it was okay for 95% of them to make that bet, just not the ones going too hard on it.

SilasX 4y ago

>Why didn't banks liquidate their long-term bond holdings a year ago? Because if they had all done it then, the crisis would have happened at that time instead of this one. For any mass-liquidation, you can always ask, "well why didn't you beat the rest of the market to dumping this trash?" It's a problem in any bubble.