4 ms·

> No mention of SVB's high-risk bets that the shape of the (interest) rate curve wouldn't change much. They for sure weren't good bets, but what part of that b

> No mention of SVB's high-risk bets that the shape of the (interest) rate curve wouldn't change much. They for sure weren't good bets, but what part of that bet is high-risk? They're government bonds, you still get the complete investment back with interest and there's (supposedly) no chance it will fail. The only thing that made it risky is their lack of liquidity combined with the subsequent bank run.

simiones 4y ago
"You'll get your money back 10 years later" is not exactly "low risk" for any significant amount of money, even for a bank.
- armada651 4y ago
  What's the alternative? That banks make no long-term investments at all? If government bonds are too risky to make a 10-year investment on, then what is? Should we just stop investing in projects that take 10 years to get a return entirely?
  - sambull 4y ago
    Regulation to prevent them from getting into dangerous situations.. financial regulations on capital requirements and stress tests, the sort of the things that in 2018 the SVB CEO worked successfully to be removed. "SVB CEO and President Greg Becker "personally led" the bank's $500,000 lobbying efforts to reduce financial regulations on capital requirements and stress tests, according to the Accountable.US report." [0] https://www.salon.com/2023/03/15/rolled-back-regulations-got-donations-from-svb--now-they-want-to-go-further/ https://www.salon.com/2023/03/15/rolled-back-regulations-got...
    - armada651 4y ago
      Fully agreed there, we should indeed be focusing on the lack of regulation of the bank rather than whether 10-year investment are good bets or not. Because even a bank with lots of short-term bets can be driven into the ground without those kinds of regulations.
  - kasey_junk 4y ago
    Bank assets are typically laddered so that they aren’t dominated by 10 year assets that were all originated at the same time. A well run bank keeps some amount of assets in lots of different durations including longer terms, just not all at once.
    - armada651 4y ago
      Right, but that's more of a problem with diversification, it doesn't make a 10-year investment inherently high-risk.
      - kasey_junk 4y ago
        It’s not exposed to credit risk but is exposed to interest rate risk.
  - llampx 4y ago
    What SVB did was not best practice, as shown by the fact that they are now bankrupt and the FDIC had to step in to make depositors whole. Why are you painting it as if it was?
    - armada651 4y ago
      I didn't mean to defend SVB, I'm just taking issue with the conclusion that banks should not make 10-year investments and instead only focus on investments that have short-term returns. As if banks weren't already overly focused on that.
      - llampx 4y ago
        Their CRO should have told them this was a risky strategy, or how to hedge interest rate risk. Ooops, they've been without a CRO since Q2 2022.
MrMan 4y ago
[dead]
kasey_junk 4y ago
Bank risk has 2 major components credit risk and interest rate risk (duration risk is a subcomponent). SVB was over indexed on credit risk and under indexed on interest rate risk (so they could make more profit). This is banking 101 stuff and risk managers (including those at SVB) will point out when this imbalance happens. 2008 was about credit risk, large swaths of bank assets went down because the underlying credit defaulted. 2023 is about interest rates, large swaths of bank assets went down because they were attached to too low interest rates for too long.
Marazan 4y ago
10 years. That's the risk. Locking up your money for 10 years is a huge risk. SVBs risk department told the business that slapping the money in 10 year bonds was wrong and that they should put it in short dated bills but the exec team didn't like the lack of profit that would result in so decided to take a massive risk instead.
bell-cot 4y ago
If you are dealing with people who don't understand bond investing, and can disable their sense of caution with "US Govt. Guaranteed!" - then it is very easy to lose a boatload of their money. (As I learned the hard way, 4+ decades ago.) A very basic example - take a peek at the 1-year return on investing in US Treasury 20- to 30-year STRIP bonds: https://www.spglobal.com/spdji/en/indices/fixed-income/sp-us-treasury-principal-strips-20-30-year-bond-index/#overview https://www.spglobal.com/spdji/en/indices/fixed-income/sp-us... (Summary - the 1-year return is negative 23%.) Honest, competent bond investment managers will be very cautious about investing in longer-term bonds, and will hedge interest rate risk, and etc. etc. etc. Bond investment managers who lack those virtues can - most of the time - offer better yields and returns. Their blow-ups more than ruin that, long-term...but how many American financial sector executives care about the long term, these days? Certainly not - as other news stories have made clear in considerable detail - SVB's leaders.

simiones 4y ago

"You'll get your money back 10 years later" is not exactly "low risk" for any significant amount of money, even for a bank.

armada651 4y ago
What's the alternative? That banks make no long-term investments at all? If government bonds are too risky to make a 10-year investment on, then what is? Should we just stop investing in projects that take 10 years to get a return entirely?
- sambull 4y ago
  Regulation to prevent them from getting into dangerous situations.. financial regulations on capital requirements and stress tests, the sort of the things that in 2018 the SVB CEO worked successfully to be removed. "SVB CEO and President Greg Becker "personally led" the bank's $500,000 lobbying efforts to reduce financial regulations on capital requirements and stress tests, according to the Accountable.US report." [0] https://www.salon.com/2023/03/15/rolled-back-regulations-got-donations-from-svb--now-they-want-to-go-further/ https://www.salon.com/2023/03/15/rolled-back-regulations-got...
  - armada651 4y ago
    Fully agreed there, we should indeed be focusing on the lack of regulation of the bank rather than whether 10-year investment are good bets or not. Because even a bank with lots of short-term bets can be driven into the ground without those kinds of regulations.
- kasey_junk 4y ago
  Bank assets are typically laddered so that they aren’t dominated by 10 year assets that were all originated at the same time. A well run bank keeps some amount of assets in lots of different durations including longer terms, just not all at once.
  - armada651 4y ago
    Right, but that's more of a problem with diversification, it doesn't make a 10-year investment inherently high-risk.
    - kasey_junk 4y ago
      It’s not exposed to credit risk but is exposed to interest rate risk.
- llampx 4y ago
  What SVB did was not best practice, as shown by the fact that they are now bankrupt and the FDIC had to step in to make depositors whole. Why are you painting it as if it was?
  - armada651 4y ago
    I didn't mean to defend SVB, I'm just taking issue with the conclusion that banks should not make 10-year investments and instead only focus on investments that have short-term returns. As if banks weren't already overly focused on that.
    - llampx 4y ago
      Their CRO should have told them this was a risky strategy, or how to hedge interest rate risk. Ooops, they've been without a CRO since Q2 2022.

MrMan 4y ago

[dead]

kasey_junk 4y ago

Bank risk has 2 major components credit risk and interest rate risk (duration risk is a subcomponent). SVB was over indexed on credit risk and under indexed on interest rate risk (so they could make more profit). This is banking 101 stuff and risk managers (including those at SVB) will point out when this imbalance happens. 2008 was about credit risk, large swaths of bank assets went down because the underlying credit defaulted. 2023 is about interest rates, large swaths of bank assets went down because they were attached to too low interest rates for too long.

Marazan 4y ago

10 years. That's the risk. Locking up your money for 10 years is a huge risk. SVBs risk department told the business that slapping the money in 10 year bonds was wrong and that they should put it in short dated bills but the exec team didn't like the lack of profit that would result in so decided to take a massive risk instead.

bell-cot 4y ago

If you are dealing with people who don't understand bond investing, and can disable their sense of caution with "US Govt. Guaranteed!" - then it is very easy to lose a boatload of their money. (As I learned the hard way, 4+ decades ago.) A very basic example - take a peek at the 1-year return on investing in US Treasury 20- to 30-year STRIP bonds: https://www.spglobal.com/spdji/en/indices/fixed-income/sp-us-treasury-principal-strips-20-30-year-bond-index/#overview https://www.spglobal.com/spdji/en/indices/fixed-income/sp-us... (Summary - the 1-year return is negative 23%.) Honest, competent bond investment managers will be very cautious about investing in longer-term bonds, and will hedge interest rate risk, and etc. etc. etc. Bond investment managers who lack those virtues can - most of the time - offer better yields and returns. Their blow-ups more than ruin that, long-term...but how many American financial sector executives care about the long term, these days? Certainly not - as other news stories have made clear in considerable detail - SVB's leaders.