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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 cas
by 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 agoThere 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.