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> Can't we sort of blame the Fed for that too? No. SVB chose to pursue a risky investment strategy with no risk manager at the helm for months, the banking equ

> Can't we sort of blame the Fed for that too? No. SVB chose to pursue a risky investment strategy with no risk manager at the helm for months, the banking equivalent of stupidly storing all of your nitrous fertilizer in one place and then being surprised when the whole thing blows up. SVB made numerous, critical mistakes in their management. If anything, one could argue the Fed enabled this stupidity by keeping rates low for so long. But ultimately, the failure falls on the bank.

mitthrowaway2 4y ago
Oh, I'm not looking to absolve SVB of their responsibility for their position. I think you misread my comment. I mean blaming the Fed for the yield curve inversion and the steep change in long-term rates, and thus value of long-term debt, as opposed to only low overnight interest rates. The Fed does not deserve blame for SVB's choice to load up on that long-term debt without hedging those risks. I'm answering the parent's context, which is discussing how the gun got loaded; we all agree it was SVB to blame for pointing it at their own head.
- reverend_gonzo 4y ago
  I’d say it’s more like the Fed opened up a “Free ammo and cocaine store”. Most banks came by, got their free coke and went on their way. SVB came alone and said “well let’s have a fucking party: get rocked up and play some Russian roulette.” And every other bank that might’ve been eyeing that ammo realized “holy shit this is for reals.”
jjeaff 4y ago
I haven't seen a lot of evidence yet that SVB was necessarily pursuing a risky strategy. Certainly, proceeding at all without a risk manager is risky in and of itself. However, the "risky" investments that I have heard described thus far are mostly treasury securities. They simply had too many for a time horizon too far out. There is no bank right now that could withstand a withdrawal rate of nearly 50% of total assets in a single day.
- nafey 4y ago
  > However, the "risky" investments that I have heard described thus far are mostly treasury securities You assume that all risk is default risk. The risk that SVB took wasn't that the US govt will default on its bonds. It was that the treasuries will lose their value in case of interest rate changes. SVB bought billions of dollars of US treasuries which lost their value in the last year due to rate hikes. This showed up as unrealized losses on their balance sheet which spooked their depositors and precipitated the collapse.
  - jjeaff 4y ago
    No, I understand the liquidity risk involved in having too much tied up in long term treasuries. But I am yet to see evidence that any bank could have withstood a run of that magnitude. Nor have I seen much evidence that most other banks have significantly less liquidity risk than svb did.
    - prottog 4y ago
      > But I am yet to see evidence that any bank could have withstood a run of that magnitude. I think you're right that no bank can withstand a run of that magnitude, and it has been pointed out elsewhere in the thread that entities that can do so aren't really a bank anymore. However, the bank run only occurred because it was public knowledge that SVB had terrible duration risk, so it's somewhat of a chicken-or-egg problem. All the findings that came out since then points to minimal duration hedging on SVB's part, so all in all it sounds like a bank that was poorly managed, perhaps adapted too well to a ZIRP world, and was ripe for a run to happen.
      - tripletao 4y ago
        > I think you're right that no bank can withstand a run of that magnitude, They're not right. No bank could sell assets quickly enough to withstand such a run, but that's why the Fed serves as lender of last resort. Even under previous policy, the Fed would lend against the mark-to-market value of the collateral. So in theory any MTM-solvent bank could survive any run, so there was no incentive to start the run in the first place. The SVB was MTM insolvent due to that excessive duration risk, so it couldn't do that. It's not the only MTM-insolvent bank (see the link in my other comment), but that in combination with its unusually high fraction of uninsured and thus flighty deposits was apparently enough to start the run.

mitthrowaway2 4y ago

Oh, I'm not looking to absolve SVB of their responsibility for their position. I think you misread my comment. I mean blaming the Fed for the yield curve inversion and the steep change in long-term rates, and thus value of long-term debt, as opposed to only low overnight interest rates. The Fed does not deserve blame for SVB's choice to load up on that long-term debt without hedging those risks. I'm answering the parent's context, which is discussing how the gun got loaded; we all agree it was SVB to blame for pointing it at their own head.

reverend_gonzo 4y ago
I’d say it’s more like the Fed opened up a “Free ammo and cocaine store”. Most banks came by, got their free coke and went on their way. SVB came alone and said “well let’s have a fucking party: get rocked up and play some Russian roulette.” And every other bank that might’ve been eyeing that ammo realized “holy shit this is for reals.”

jjeaff 4y ago

I haven't seen a lot of evidence yet that SVB was necessarily pursuing a risky strategy. Certainly, proceeding at all without a risk manager is risky in and of itself. However, the "risky" investments that I have heard described thus far are mostly treasury securities. They simply had too many for a time horizon too far out. There is no bank right now that could withstand a withdrawal rate of nearly 50% of total assets in a single day.

nafey 4y ago
> However, the "risky" investments that I have heard described thus far are mostly treasury securities You assume that all risk is default risk. The risk that SVB took wasn't that the US govt will default on its bonds. It was that the treasuries will lose their value in case of interest rate changes. SVB bought billions of dollars of US treasuries which lost their value in the last year due to rate hikes. This showed up as unrealized losses on their balance sheet which spooked their depositors and precipitated the collapse.
- jjeaff 4y ago
  No, I understand the liquidity risk involved in having too much tied up in long term treasuries. But I am yet to see evidence that any bank could have withstood a run of that magnitude. Nor have I seen much evidence that most other banks have significantly less liquidity risk than svb did.
  - prottog 4y ago
    > But I am yet to see evidence that any bank could have withstood a run of that magnitude. I think you're right that no bank can withstand a run of that magnitude, and it has been pointed out elsewhere in the thread that entities that can do so aren't really a bank anymore. However, the bank run only occurred because it was public knowledge that SVB had terrible duration risk, so it's somewhat of a chicken-or-egg problem. All the findings that came out since then points to minimal duration hedging on SVB's part, so all in all it sounds like a bank that was poorly managed, perhaps adapted too well to a ZIRP world, and was ripe for a run to happen.
    - tripletao 4y ago
      > I think you're right that no bank can withstand a run of that magnitude, They're not right. No bank could sell assets quickly enough to withstand such a run, but that's why the Fed serves as lender of last resort. Even under previous policy, the Fed would lend against the mark-to-market value of the collateral. So in theory any MTM-solvent bank could survive any run, so there was no incentive to start the run in the first place. The SVB was MTM insolvent due to that excessive duration risk, so it couldn't do that. It's not the only MTM-insolvent bank (see the link in my other comment), but that in combination with its unusually high fraction of uninsured and thus flighty deposits was apparently enough to start the run.