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SVB had two main risks: 1. Their despositors were overwhelmingly in tech, which meant they had tons of spare cash they needed to park when interests rates were

by Lazare 4y ago

SVB had two main risks: 1. Their despositors were overwhelmingly in tech, which meant they had tons of spare cash they needed to park when interests rates were low and VC money was plentiful, but would presumably need to pull that cash back out later when conditions changed. SVB was founded in 1983, and was presumably well aware that conditions in tech could change, which leads to the conclusion that they were just gambling that things wouldn't change. 2. They had parked an unusually high percentage of that depositor cash in long dated treasuries, which were vulnerable to having their value decline if interests rates rose. Again, SVB was founded in 1983, and was well aware that interests rates hadn't always been roughly zero, and presumably wouldn't always remain so. Again, presumably this was just a gamble that things wouldn't change. Are we to believe that SVB just totally missed these and, critically, that the reason was because they were all working remotely? Like, the risk management committee would have met, gone "wow, we should hedge our interest rate risk", and then they would have done that and there would have been no issues, but they were all trying to use Amazon Chime, and the sound just wasn't working for like, two years straight, so no hedging was done? The chief risk officer would have done their job, but they had to answer the door because a tradesman was fixing the plumbing...? What about the horrible ways they communicated with stakeholders as problems mounted? Did remote work cause that tone deaf "don't panic" statement? What about all that lobbying SVB did to reduce how strictly regulated they were? Is the story that if there hadn't been so much remote work, then somehow they would have NOT done that? ...why? Like just mechanically, how is that meant to have worked? If your story is "our execs will gamble the company away making bad interest rate bets unless their colleagues are physically there to prevent them", I don't think this is really making the executive team sound better!

neilwilson 4y ago
Neither of those risks are an issue though if the 'lender of last resort' is doing its job. Long dated treasuries and F&F mortgage bonds are 'safe'. They will pay out the par value on maturity come what may. Which means if the deposits run from SVB to another bank, then all that happens is that there is an increase in reserves at the Fed owned by those other banks and a decrease in reserves at the Fed for SVB. The Fed then just lends reserves back to SVB - offset by the increase from other banks. SVB still had enough income coming in to pay the rate at the Fed. Now that the Fed is lending against bonds at par via the Bank Term Funding Program, that is what will happen for other banks who find themselves in the same situation. Essentially the Fed has just reduced the long term interest rate. If regulations were reduced in scope, and the regulator declares that a bank is in compliance with those reduced regulations, then the lender of last resort really need to put its money where its regulatory mouth is. Otherwise we get the mess we're seeing now. Banks will always try to wriggle the jacket. This whole thing is a failure of regulation - where the left hand didn't seem to know what the right hand was doing. SVB may have been pushing the envelope. It's the job of the regulator to push back.

by Lazare 4y ago

neilwilson 4y ago

Neither of those risks are an issue though if the 'lender of last resort' is doing its job. Long dated treasuries and F&F mortgage bonds are 'safe'. They will pay out the par value on maturity come what may. Which means if the deposits run from SVB to another bank, then all that happens is that there is an increase in reserves at the Fed owned by those other banks and a decrease in reserves at the Fed for SVB. The Fed then just lends reserves back to SVB - offset by the increase from other banks. SVB still had enough income coming in to pay the rate at the Fed. Now that the Fed is lending against bonds at par via the Bank Term Funding Program, that is what will happen for other banks who find themselves in the same situation. Essentially the Fed has just reduced the long term interest rate. If regulations were reduced in scope, and the regulator declares that a bank is in compliance with those reduced regulations, then the lender of last resort really need to put its money where its regulatory mouth is. Otherwise we get the mess we're seeing now. Banks will always try to wriggle the jacket. This whole thing is a failure of regulation - where the left hand didn't seem to know what the right hand was doing. SVB may have been pushing the envelope. It's the job of the regulator to push back.