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Does the government require banks to buy long-term treasuries? [1] Or did banks choose to buy long-term treasury bills, chasing the highest paper returns (i.e.

by gen220 4y ago

Does the government require banks to buy long-term treasuries? [1] Or did banks choose to buy long-term treasury bills, chasing the highest paper returns (i.e. discounting the risk of potential rising interest rates in the future)? It's not a rhetorical question, but a sincere one. [1]: https://en.wikipedia.org/wiki/United_States_Treasury_security https://en.wikipedia.org/wiki/United_States_Treasury_securit... states that Treasuries are sold in all varieties of duration, from 4 week bills to 30 year bonds.

bombcar 4y ago
They bought the greediest ones and ignored TIPS. They wanted profit.
simple-thoughts 4y ago
Imagine you run a small regional bank. You have marketing and operational expenses you need to cover, and you also need to be attractive enough to depositors to keep them from leaving to your giant to big to fail competitors who have explicit state backing. You’re required to buy from a very limited selection of assets that have government approval, especially government debt. Interest rates for short term debt are at 0%, at these rates you will run at a loss. Your only choice to keep your bank competitive is to find any yield at all, so you buy long duration treasuries. Yes you take interest rate risk, but your bank is able to operate for another day. Of course the flaw in this story is that the interest rate risk should have been hedged, and it wasn’t. But viewing this as a straightforward story of “banks greedy, government good” is not reflecting the realities for regional banks.
- User23 4y ago
  > Of course the flaw in this story is that the interest rate risk should have been hedged, and it wasn’t. How does the banking sector in aggregate hedge its interest rate risk exactly? They have to find a net counterparty outside the sector who wants exposure to interest rate risk. Who exactly would that be at sufficient scale to protect trillions in deposits?
  - taeric 4y ago
    I'm also interested in this answer. I've seen running credit cards?
  - lordnacho 4y ago
    Speculators aka hedge funds.
  - quickthrower2 4y ago
    Damn is no one gonna pay for the free lunch?
  - balderdash 4y ago
    It’s probably easier to think of who wants long duration risk, and I think the answer is 1. Speculators (who like the volatility/convexity) 2. Pension funds (they have very long dated liabilities, and so potentially want to increase the duration of their portfolio)
- xadhominemx 4y ago
  Ok but the fact is a lot of regional banks didn’t buy very long-dated treasuries
- watwut 4y ago
  But small regional banks had not done that in general.
- kgwgk 4y ago
  > Interest rates for short term debt are at 0%, at these rates you will run at a loss. Your only choice to keep your bank competitive is to find any yield at all […] Of course the flaw in this story is that the interest rate risk should have been hedged, and it wasn’t. If you buy long-term Treasuries for the high yield and you hedge the interest risk rate… what you get is the yield of the short-term Treasuries. Why buy them in the first place then? (There is no credit risk in this case - if you neutralize the interest rate risk there is nothing left.)
- itsoktocry 4y ago
  >Of course the flaw in this story is that the interest rate risk should have been hedged, and it wasn’t. Oh, so the thing that could have prevented the bank from failing (but, unsurprisingly, costs them money to do), didn't happen? But it's the governments fault?
petrocrat 4y ago
> Does the government require banks to buy long-term treasuries? Yes, there are a number of banks that have "Primary Dealer" [1] status which confers to them some benefits, but also makes them legally obligated to make some minimum number of winning bids on government treasury auctions. See the section under "Expectations & Requirements" in the link. Probably the most quantifiable requirement is they have to maintain a minimum of 0.25% market share in winning Treasury bids: "Maintain a share of Treasury market making activity of at least 0.25 percent." [1]: https://www.newyorkfed.org/markets/primarydealers https://www.newyorkfed.org/markets/primarydealers
- SideQuark 4y ago
  Of the over 4000 banks in the US, only around 20 are Primary Dealers.
- balderdash 4y ago
  The answer to the parents question is no. While most of the primary dealers are banks these days, they have nothing to do with the conversation at hand, or SVB and it’s problems
- AnimalMuppet 4y ago
  There are a number of banks that are Primary Dealers, but it's a fairly small list. SVB wasn't on it. So SVB, in particular, was not required to buy long-term treasuries.

by gen220 4y ago

bombcar 4y ago

They bought the greediest ones and ignored TIPS. They wanted profit.

simple-thoughts 4y ago

Imagine you run a small regional bank. You have marketing and operational expenses you need to cover, and you also need to be attractive enough to depositors to keep them from leaving to your giant to big to fail competitors who have explicit state backing. You’re required to buy from a very limited selection of assets that have government approval, especially government debt. Interest rates for short term debt are at 0%, at these rates you will run at a loss. Your only choice to keep your bank competitive is to find any yield at all, so you buy long duration treasuries. Yes you take interest rate risk, but your bank is able to operate for another day. Of course the flaw in this story is that the interest rate risk should have been hedged, and it wasn’t. But viewing this as a straightforward story of “banks greedy, government good” is not reflecting the realities for regional banks.

User23 4y ago
> Of course the flaw in this story is that the interest rate risk should have been hedged, and it wasn’t. How does the banking sector in aggregate hedge its interest rate risk exactly? They have to find a net counterparty outside the sector who wants exposure to interest rate risk. Who exactly would that be at sufficient scale to protect trillions in deposits?
- taeric 4y ago
  I'm also interested in this answer. I've seen running credit cards?
- lordnacho 4y ago
  Speculators aka hedge funds.
- quickthrower2 4y ago
  Damn is no one gonna pay for the free lunch?
- balderdash 4y ago
  It’s probably easier to think of who wants long duration risk, and I think the answer is 1. Speculators (who like the volatility/convexity) 2. Pension funds (they have very long dated liabilities, and so potentially want to increase the duration of their portfolio)
xadhominemx 4y ago
Ok but the fact is a lot of regional banks didn’t buy very long-dated treasuries
watwut 4y ago
But small regional banks had not done that in general.
kgwgk 4y ago
> Interest rates for short term debt are at 0%, at these rates you will run at a loss. Your only choice to keep your bank competitive is to find any yield at all […] Of course the flaw in this story is that the interest rate risk should have been hedged, and it wasn’t. If you buy long-term Treasuries for the high yield and you hedge the interest risk rate… what you get is the yield of the short-term Treasuries. Why buy them in the first place then? (There is no credit risk in this case - if you neutralize the interest rate risk there is nothing left.)
itsoktocry 4y ago
>Of course the flaw in this story is that the interest rate risk should have been hedged, and it wasn’t. Oh, so the thing that could have prevented the bank from failing (but, unsurprisingly, costs them money to do), didn't happen? But it's the governments fault?

petrocrat 4y ago

> Does the government require banks to buy long-term treasuries? Yes, there are a number of banks that have "Primary Dealer" [1] status which confers to them some benefits, but also makes them legally obligated to make some minimum number of winning bids on government treasury auctions. See the section under "Expectations & Requirements" in the link. Probably the most quantifiable requirement is they have to maintain a minimum of 0.25% market share in winning Treasury bids: "Maintain a share of Treasury market making activity of at least 0.25 percent." [1]: https://www.newyorkfed.org/markets/primarydealers https://www.newyorkfed.org/markets/primarydealers

SideQuark 4y ago
Of the over 4000 banks in the US, only around 20 are Primary Dealers.
balderdash 4y ago
The answer to the parents question is no. While most of the primary dealers are banks these days, they have nothing to do with the conversation at hand, or SVB and it’s problems
AnimalMuppet 4y ago
There are a number of banks that are Primary Dealers, but it's a fairly small list. SVB wasn't on it. So SVB, in particular, was not required to buy long-term treasuries.