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> I honestly was thinking we will stay in this zero-rate regime for the next decade or more. I suspect the people at SVB thought in a similar fashion and plan a

> I honestly was thinking we will stay in this zero-rate regime for the next decade or more. I suspect the people at SVB thought in a similar fashion and plan accordingly I have been working in several trading companies, both as trader and in IT, and the first thing they teach you when trading, is that the market always knows better than you. So hedge your risks and don't trust that you have some kind of vision that knows better than the markets. Actually 'vision' was used jokingly when someone accidentally made a profit by not hedging and ending up on the right side of the market. Bankers know this. In this case, SVB could have hedged their risk with interest rate swaps, for instance. But for those they would have to pay a premium. Why? Because the market believed there was a real chance the rates would go up. If at SVB they really planned on zero rates to stay for a decade or more, they have simply been gambling.

ianai 4y ago
Imagine how different the calculus would have been through the pandemic had the Fed been raising rates in 17-19? They would have had runway to lower interest rates before going to zero. In hindsight, the zero interest rate regime was aberrant-unprecedented and forced the market to magic up lots of “accommodations.” Anyway, the problem with svb was exactly that they decided to not hedge against the possibility of raising interest rates. And for much of the market, that was a bad call. So anyone defending them needs to explain the rational of keeping the zero interest rate regime post-Covid. And it’s got to be better than “line goes up and to the right” for your chosen asset
Dwolb 4y ago
There’s interest rate risk, credit risk, and prepayment risk with the securities they buy. On a Treasury or guaranteed bond, there is no credit risk. On a Treasury there is no prepayment risk. Therefore if you hedge out the interest rate risk, you’re essentially left with 0 risk. 0 risk = 0 or near 0 premium. e.g. there’s no point in doing the trade if you hedge.
- misja111 4y ago
  You don't need to hedge out all the risk. You can for instance hedge the risk that rates go up more than one percent and take the risk when it changes less, in return for a moderate yield. This way you limit your losses when things go wrong and probably you'll avoid bankruptcy. Besides that, financial institutions don't only make money on re-investing deposits. They charge all kinds of fees as well, which make for a steady income.
- _0w8t 4y ago
  There is always a point as the risk is not binary. SVB should have hedged against big interest jump that would bankrupt them, not against any risk.
- zarzavat 4y ago
  Yes that’s the point. Treasuries are cash, they are not meant to make money for banks, they are meant to be a place for banks to put money when they don’t have anything else to do with it. Banks are supposed to make money from the premium between the base interest rate and the rate on the loans they make. The implied contract when you deposit money in a bank is that the bank has a dependable business model as a lender. They are not supposed to be gambling. SVB got greedy. They thought that zirp would continue forever and they made long term bets on that basis and lost. Banks should not be making long bets on macroeconomic conditions: that’s not a bank, that’s a hedge fund.
  - kgwgk 4y ago
    > Treasuries are cash, Obviously not. [edit to add: this seems a controversial comment, it’s being upvoted and downvoted wildly]
    - amalcon 4y ago
      Some brokerages break down various types of position (equity, bond, etc). Mine in particular has a "Cash and equivalents" section. Money market accounts go there, but so do treasury funds and such. I suspect the upvotes are because you're technically correct, treasuries are not literally cash. The downvotes are because grandparent obviously meant that treasuries are considered cash equivalents (whether or not they actually should be, given liquidity concerns).
      - kgwgk 4y ago
        Treasuries (without further qualification) are not cash equivalents. (And it’s not because of liquidity concerns.) Treasury bills may be cash equivalents. They present (almost) no interest risk. Long-term treasury notes/bonds is what was being discussed. There is interest risk in that case and neither your broker nor anyone else would consider them cash equivalents (unless they are already close to maturity).
  - makomk 4y ago
    The trouble is that other US government interventions also eliminated a big chunk of the "anything else to do with it". In particular, most mortgages in the US are fixed rate for the entire duration of their term through government backing, which almost entirely eliminates one of the big sectors of loans that banks in other countries can use to make money on the premium from interest payments with less duration mismatch than 10-year or 30-year bonds. In most other countries, mortgages are either variable rate or only fixed rate for a relatively short period. Also, a substantial proportion of all US mortgages in existence apparently locked in their interest rates during the time period in 2020 and 2021 when they were at record lows.
- sanp 4y ago
  Would pre-2018 regulations (when they were eased for banks with deposits less than $250B) have prevented this?
  - disgruntledphd2 4y ago
    I think so. I believe that this is the reason EU banks have been ok so far, as they do need to hedge interest rate risk.
    - brabel 4y ago
      EU banks are ok? Didn't Credite Suisse just go under and had to be forcedly saved by its main competitor?
      - disgruntledphd2 4y ago
        Yeah, I almost added CS to the original post, but their problems were relatively unique to them, rather than being an extreme case of a common problem, like regional banks in the US (who didn't need to hedge interest rate risk).
      - the_mitsuhiko 4y ago
        Credite Suisse's problems predate the interest rate issues by years.
      - School-Cotton 4y ago
        I have no idea about the substantive discussion, but just to point out: Switzerland is not in the EU.
      - Maakuth 4y ago
        Credit Suisse is Swiss. Switzerland is not a member of EU and they don't use euro.
        brabel 4y ago
        I appreciate the correction but that probably doesn't change the point being made, as the economy of Switzerland is obviously closely tied to that of the EU (when I read EU I normally think Europe, not just European Union, which is my mistake, but in conversations like this I think "Europe" would be the better term after all).
- lucozade 4y ago
  If you bought treasuries at the prevailing rate and swapped them at the same rate then the market price of the swap will be zero. You'll still have to pay credit and funding premia though. If, however, you only hedge once the prevailing rate moves against you, you'll pay a market premium in the form of a spread.
- hcknwscommenter 4y ago
  Oh you can get a lot more creative than that. You can hedge out "catastrophic" interest rate rises while taking your chances on smaller increases. In this case, catastrophic can easily be estimated by taking the duration of the book and the equity cushion and applying a margin of safety. Or you can simply ladder Treasury durations that inherently don't have enough duration to cause problems. SVB apparently did none of that.
  - scott00 4y ago
    There is exactly one investment strategy that presents no risk of ruin for a bank: depositing all customer deposits in the bank's account at the fed. That investment strategy is so discouraged by regulators that they literally denied the application for a charter from an organization whose stated investment strategy was exactly that. (google the narrow bank if this is unfamiliar to you). For any other investment of any amount of your deposits, a run of sufficient size combined with an investment loss of sufficient size will ruin a bank. That being said, SVB had by a wide margin the flightiest deposits and the most IR risk. But it was an error of magnitude, not category. There is no run-proof fractional reserve bank.
- lottin 4y ago
  Interest isn't just compensation for risk. It's also compensation for temporarily giving up control of your money.
kriro 4y ago
If the market always knows best then why do I need traders except for market making purposes? Shouldn't everyone just buy the lowest cost passive ETF of a big enough index like S&P 500 then? I think "the market always knows best" is correct in most cases and if you think you know better you are probably wrong but there are empirical counterexamples like the Buffets of the world (unless one would claim that his gains come from some sort of other unfair advantages like the deals only he gets to make). I also think that human behaviour isn't always rational and herd effects and the like are a thing and not always priced in correctly. And while the flow of information feels pretty efficient in this day and age, I also think that there have to be some pockets where individuals can gain informational advantages. I do like Sorros' book (Alchemy of Finance) which is dense and hard to get through but vibed well with me philosophically.
- misja111 4y ago
  > Shouldn't everyone just buy the lowest cost passive ETF of a big enough index like S&P 500 then? Yes, this is very best the advise to invest your money (except if your name is Warren Buffet). Buy it and hold it. There have been so many papers published that show this. You cannot predict the market, what you can do is save yourself some risk and some transaction costs. Any investment advisor that tells you different is plain wrong and probably has a second agenda.
  - jocaal 4y ago
    You can also save yourself time. I see so many people use enormous amounts of time reading headlines about companies and consuming videos about the economy and all that jazz to stay up to date and make "informed trades". But in the end a lot of that time is wasted. And you might say that's ok if that is their hobby, but lets be honest, the reason people do this is because they got sold on the idea that they can get rich from it.
  - bluGill 4y ago
    If everyone invested in index funds, then there would be a lot of money to be made from you alone looking at the market. There are often companies that announce some new product that will (at least for a few years) outsell their competition. Index fund have no way to know that the company will thus be worth more money than their competition, but you do. The problem is the above is similar to a zero sum game in that there is a fixed total profit to be made in that way, and that money is shared between everyone who is correct (including index funds!). Since there are a lot of people trying to make the above trades the total profit you can make is reduced as they have already moved the price above what a pure index fund market would have it at. (a true zero sum game every winner is paired with a loser, while the above doesn't actually have losers in the same way, but I don't know any other way to explain it) I concluded long ago that if I made studying the market my full time job and hobby I could make a good income doing it. However reading all the reports is boring, while writing code is fun, so I just invest in index funds.
csomar 4y ago
> But for those they would have to pay a premium. Wouldn't that be equal to holding short-term treasuries. In that case, they'd be sitting at billions of "worthless" money. Question is, who is the other bank that took that risk. Because of the nature of the market (ie: competition) they had to produce yield comparing to their peers. So either their peers were smarter or the big unfolding is yet to happen.
shagie 4y ago
Their exuberance at the state of the economy in 2020 and early 2021 can be seen in their interview with Bloomberg. They expected the growth of tech to continue to grow at the rate that it did with the start of the pandemic and that that was going to be stable afterwards. https://www.bloomberg.com/news/videos/2021-05-20/innovation-economy-is-the-best-place-to-be-svb-ceo-video https://www.bloomberg.com/news/videos/2021-05-20/innovation-...
latchkey 4y ago
> the market always knows better than you If humans could predict the future, we wouldn't have gambling.

ianai 4y ago

Imagine how different the calculus would have been through the pandemic had the Fed been raising rates in 17-19? They would have had runway to lower interest rates before going to zero. In hindsight, the zero interest rate regime was aberrant-unprecedented and forced the market to magic up lots of “accommodations.” Anyway, the problem with svb was exactly that they decided to not hedge against the possibility of raising interest rates. And for much of the market, that was a bad call. So anyone defending them needs to explain the rational of keeping the zero interest rate regime post-Covid. And it’s got to be better than “line goes up and to the right” for your chosen asset

Dwolb 4y ago

There’s interest rate risk, credit risk, and prepayment risk with the securities they buy. On a Treasury or guaranteed bond, there is no credit risk. On a Treasury there is no prepayment risk. Therefore if you hedge out the interest rate risk, you’re essentially left with 0 risk. 0 risk = 0 or near 0 premium. e.g. there’s no point in doing the trade if you hedge.

misja111 4y ago
You don't need to hedge out all the risk. You can for instance hedge the risk that rates go up more than one percent and take the risk when it changes less, in return for a moderate yield. This way you limit your losses when things go wrong and probably you'll avoid bankruptcy. Besides that, financial institutions don't only make money on re-investing deposits. They charge all kinds of fees as well, which make for a steady income.
_0w8t 4y ago
There is always a point as the risk is not binary. SVB should have hedged against big interest jump that would bankrupt them, not against any risk.
zarzavat 4y ago
Yes that’s the point. Treasuries are cash, they are not meant to make money for banks, they are meant to be a place for banks to put money when they don’t have anything else to do with it. Banks are supposed to make money from the premium between the base interest rate and the rate on the loans they make. The implied contract when you deposit money in a bank is that the bank has a dependable business model as a lender. They are not supposed to be gambling. SVB got greedy. They thought that zirp would continue forever and they made long term bets on that basis and lost. Banks should not be making long bets on macroeconomic conditions: that’s not a bank, that’s a hedge fund.
- kgwgk 4y ago
  > Treasuries are cash, Obviously not. [edit to add: this seems a controversial comment, it’s being upvoted and downvoted wildly]
  - amalcon 4y ago
    Some brokerages break down various types of position (equity, bond, etc). Mine in particular has a "Cash and equivalents" section. Money market accounts go there, but so do treasury funds and such. I suspect the upvotes are because you're technically correct, treasuries are not literally cash. The downvotes are because grandparent obviously meant that treasuries are considered cash equivalents (whether or not they actually should be, given liquidity concerns).
    - kgwgk 4y ago
      Treasuries (without further qualification) are not cash equivalents. (And it’s not because of liquidity concerns.) Treasury bills may be cash equivalents. They present (almost) no interest risk. Long-term treasury notes/bonds is what was being discussed. There is interest risk in that case and neither your broker nor anyone else would consider them cash equivalents (unless they are already close to maturity).
- makomk 4y ago
  The trouble is that other US government interventions also eliminated a big chunk of the "anything else to do with it". In particular, most mortgages in the US are fixed rate for the entire duration of their term through government backing, which almost entirely eliminates one of the big sectors of loans that banks in other countries can use to make money on the premium from interest payments with less duration mismatch than 10-year or 30-year bonds. In most other countries, mortgages are either variable rate or only fixed rate for a relatively short period. Also, a substantial proportion of all US mortgages in existence apparently locked in their interest rates during the time period in 2020 and 2021 when they were at record lows.
sanp 4y ago
Would pre-2018 regulations (when they were eased for banks with deposits less than $250B) have prevented this?
- disgruntledphd2 4y ago
  I think so. I believe that this is the reason EU banks have been ok so far, as they do need to hedge interest rate risk.
  - brabel 4y ago
    EU banks are ok? Didn't Credite Suisse just go under and had to be forcedly saved by its main competitor?
    - disgruntledphd2 4y ago
      Yeah, I almost added CS to the original post, but their problems were relatively unique to them, rather than being an extreme case of a common problem, like regional banks in the US (who didn't need to hedge interest rate risk).
    - the_mitsuhiko 4y ago
      Credite Suisse's problems predate the interest rate issues by years.
    - School-Cotton 4y ago
      I have no idea about the substantive discussion, but just to point out: Switzerland is not in the EU.
    - Maakuth 4y ago
      Credit Suisse is Swiss. Switzerland is not a member of EU and they don't use euro.
      - brabel 4y ago
        I appreciate the correction but that probably doesn't change the point being made, as the economy of Switzerland is obviously closely tied to that of the EU (when I read EU I normally think Europe, not just European Union, which is my mistake, but in conversations like this I think "Europe" would be the better term after all).
lucozade 4y ago
If you bought treasuries at the prevailing rate and swapped them at the same rate then the market price of the swap will be zero. You'll still have to pay credit and funding premia though. If, however, you only hedge once the prevailing rate moves against you, you'll pay a market premium in the form of a spread.
hcknwscommenter 4y ago
Oh you can get a lot more creative than that. You can hedge out "catastrophic" interest rate rises while taking your chances on smaller increases. In this case, catastrophic can easily be estimated by taking the duration of the book and the equity cushion and applying a margin of safety. Or you can simply ladder Treasury durations that inherently don't have enough duration to cause problems. SVB apparently did none of that.
- scott00 4y ago
  There is exactly one investment strategy that presents no risk of ruin for a bank: depositing all customer deposits in the bank's account at the fed. That investment strategy is so discouraged by regulators that they literally denied the application for a charter from an organization whose stated investment strategy was exactly that. (google the narrow bank if this is unfamiliar to you). For any other investment of any amount of your deposits, a run of sufficient size combined with an investment loss of sufficient size will ruin a bank. That being said, SVB had by a wide margin the flightiest deposits and the most IR risk. But it was an error of magnitude, not category. There is no run-proof fractional reserve bank.
lottin 4y ago
Interest isn't just compensation for risk. It's also compensation for temporarily giving up control of your money.

kriro 4y ago

If the market always knows best then why do I need traders except for market making purposes? Shouldn't everyone just buy the lowest cost passive ETF of a big enough index like S&P 500 then? I think "the market always knows best" is correct in most cases and if you think you know better you are probably wrong but there are empirical counterexamples like the Buffets of the world (unless one would claim that his gains come from some sort of other unfair advantages like the deals only he gets to make). I also think that human behaviour isn't always rational and herd effects and the like are a thing and not always priced in correctly. And while the flow of information feels pretty efficient in this day and age, I also think that there have to be some pockets where individuals can gain informational advantages. I do like Sorros' book (Alchemy of Finance) which is dense and hard to get through but vibed well with me philosophically.

misja111 4y ago
> Shouldn't everyone just buy the lowest cost passive ETF of a big enough index like S&P 500 then? Yes, this is very best the advise to invest your money (except if your name is Warren Buffet). Buy it and hold it. There have been so many papers published that show this. You cannot predict the market, what you can do is save yourself some risk and some transaction costs. Any investment advisor that tells you different is plain wrong and probably has a second agenda.
- jocaal 4y ago
  You can also save yourself time. I see so many people use enormous amounts of time reading headlines about companies and consuming videos about the economy and all that jazz to stay up to date and make "informed trades". But in the end a lot of that time is wasted. And you might say that's ok if that is their hobby, but lets be honest, the reason people do this is because they got sold on the idea that they can get rich from it.
- bluGill 4y ago
  If everyone invested in index funds, then there would be a lot of money to be made from you alone looking at the market. There are often companies that announce some new product that will (at least for a few years) outsell their competition. Index fund have no way to know that the company will thus be worth more money than their competition, but you do. The problem is the above is similar to a zero sum game in that there is a fixed total profit to be made in that way, and that money is shared between everyone who is correct (including index funds!). Since there are a lot of people trying to make the above trades the total profit you can make is reduced as they have already moved the price above what a pure index fund market would have it at. (a true zero sum game every winner is paired with a loser, while the above doesn't actually have losers in the same way, but I don't know any other way to explain it) I concluded long ago that if I made studying the market my full time job and hobby I could make a good income doing it. However reading all the reports is boring, while writing code is fun, so I just invest in index funds.

csomar 4y ago

> But for those they would have to pay a premium. Wouldn't that be equal to holding short-term treasuries. In that case, they'd be sitting at billions of "worthless" money. Question is, who is the other bank that took that risk. Because of the nature of the market (ie: competition) they had to produce yield comparing to their peers. So either their peers were smarter or the big unfolding is yet to happen.

shagie 4y ago

Their exuberance at the state of the economy in 2020 and early 2021 can be seen in their interview with Bloomberg. They expected the growth of tech to continue to grow at the rate that it did with the start of the pandemic and that that was going to be stable afterwards. https://www.bloomberg.com/news/videos/2021-05-20/innovation-economy-is-the-best-place-to-be-svb-ceo-video https://www.bloomberg.com/news/videos/2021-05-20/innovation-...

latchkey 4y ago

> the market always knows better than you If humans could predict the future, we wouldn't have gambling.