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you should be worried about the case where inflation continues to rise and the unrealized losses from these bonds increases and may cause a much more consequent
by mjfl 3y ago
you should be worried about the case where inflation continues to rise and the unrealized losses from these bonds increases and may cause a much more consequential default now that the bond portfolios are becoming more and more concentrated. Basically the fed needs to slow the rate at which it is raising interest rates, even if inflation continues. The problem is it's going to take a long time to release this pressure, since the majority of the bonds that are in crisis have expirys in like 30 years. So we are looking at entrenched inflation for a decade long period or more, or an explosion of our banking system, or both!
- JumpCrisscross 3y ago> you should be worried about the case where inflation continues to rise and the unrealized losses from these bonds increases and may cause a much more consequential default No, you shouldn’t. Duration is stress tested at the larger banks. The smaller banks lobbied to be exempted from liquidity coverage ratios in 2017 and got it, which is a large part of why we are in this mess. There is no evidence the Fed is constrained by bank balance sheets. (This could change, regionally, with CRE write downs. But again, money being destroyed.)
- deleted 3y ago[deleted]
- votepaunchy 3y ago> Duration is stress tested at the larger banks. Then why do we read this: “Fed’s Bank Tests Overlooked Risk of Rapid Rise in Interest Rates”. https://www.bloomberg.com/news/articles/2023-03-15/fed-s-key-bank-test-overlooked-interest-rate-risk-for-a-decade https://www.bloomberg.com/news/articles/2023-03-15/fed-s-key...
- JumpCrisscross 3y agoShort answer is we didn’t pay attention to it but we do now and we always measured it. That’s how SVB’s issues were flagged in 2021 [1]. (The systemic solution will be re-defining HQLAs in the LCR to reflect market value [2].) [1] https://www.nytimes.com/2023/03/19/business/economy/fed-silicon-valley-bank.html https://www.nytimes.com/2023/03/19/business/economy/fed-sili... [2] https://www.richmondfed.org/-/media/richmondfedorg/publications/research/economic_brief/2016/pdf/eb_16-01.pdf https://www.richmondfed.org/-/media/richmondfedorg/publicati...
- mjfl 3y agoI'm just not sure these regulations took into account a historically large pulse of stimulus followed by a rapid rise of interest rates.