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> This concerns such a basic aspect of bank risk management one wonders how this sector could even call it self banking I feel like message boards like reddit/

> This concerns such a basic aspect of bank risk management one wonders how this sector could even call it self banking I feel like message boards like reddit/HackerNews are notorious for over-simplifying any topic. It's "reductionist". "How could these paid professionals consider themselves qualified?! As somebody not in that field without any insider knowledge or specific details into why hard decisions with tradeoffs were made, I know better, it's taught in economics 101!"

300bps 3y ago
notorious for over-simplifying any topic My last employer we managed money for community banks. I actually created the system that generated interest rate shock reports that showed the impact to a portfolio of fixed income assets for interest rate shocks of -300 to +300 basis points. Nobody thought interest rates would go +300 bp in such a short amount of time, especially in the short end of the yield curve. Banks essentially have 2 portfolios. Their loan portfolio is where they take the risk and it goes up and down with the traditional business cycle. Their fixed income portfolio is supposed to be almost no risk. They were whipsawed by the fed that lowered interest rates so quickly that it forced banks to buy longer-duration securities to just find any kind of yield within the regulatory constraints they were allowed to buy. Then the fed raised interest rates even more quickly causing staggering losses in the "almost no risk" fixed income portfolios of banks. Expect a lot more banks to be taken over even with the emergency backstops the fed has put into place. Look what the Fed did: https://www.federalreserve.gov/monetarypolicy/bst_recenttrends.htm https://www.federalreserve.gov/monetarypolicy/bst_recenttren... In 2008 the Fed flooded the economy with $2 trillion. In 2020 the Fed jumped up and flooded the economy with an additional $7 trillion. In September 2022 they started taking that money back (which incidentally led to tech company layoffs). As of March 2023 they removed about $600 billion. Then they suddenly put over half of that right back into the economy when SVB failed. It's impossible to predict or even appropriately react to what the Federal Reserve is doing.
- berkeleyjunk 3y ago
  It maybe impossible to predict what the Fed would do but it is certainly possible to avoid a lot of the damage by duration matching of assets and liabilities. e.g. Do not take short term deposits in checking that are callable at any time and invest them in 10 year maturity instruments. No issues at all taking proceeds from 5 year CDs and putting them into 5 year maturity bonds.
  - 300bps 3y ago
    avoid a lot of the damage by duration matching of assets and liabilities Respectfully, you have misunderstood the situation. This has almost nothing to do with duration matching assets and liabilities. That's how it works on the loan portfolio side of a bank. This has to do with how bonds work. If you buy $10MM of a bond with a 3% coupon and rates for the same duration bond go to 5% then you have a significant capital loss. Depending on how you classified the investment under FASB 115 rules (HTM, AFS, Trading) you can telegraph to the market that your capital situation is dire which can then cause a run on the bank as we've seen multiple times in the last several weeks.
BiteCode_dev 3y ago
Well, as somebody who is currently coding a calculation service that will handle a 500 billions portfolio, I can tell you this: the specs require the data to be interpolated + extrapolated left and right. And they use that to estimate risks and take huge decisions. And when they don't have enough data to interpolate from, they create a synthetic instrument from other instruments that have enough data, and use that to estimate risks and take decisions. The only thing that makes the whole jenga tower stable is the fact it's all interdependent. E.G: to diminish your exposure, you take a swap with some other entity, and if everybody do that enough, the risk is averaged on the entire economy. So from the inside, it's worse than it looks from the outside. And mind you, the client I do that for is one of the most serious in the business. They are extremely risk adverse, and they have been acting nothing but honestly, at least at the level I can observe. They are so by-the-book we have once found an error in $FAMOUS_DATA_PROVIDER calculations, because we thought we made a mistake, and we looked for it until we realized the data we compared ourselves to was wrong. So if they manage half a trillion by using excel FORECAST.LINEAR and Matlab interp, imagine what is done by JP Morgan.

300bps 3y ago

notorious for over-simplifying any topic My last employer we managed money for community banks. I actually created the system that generated interest rate shock reports that showed the impact to a portfolio of fixed income assets for interest rate shocks of -300 to +300 basis points. Nobody thought interest rates would go +300 bp in such a short amount of time, especially in the short end of the yield curve. Banks essentially have 2 portfolios. Their loan portfolio is where they take the risk and it goes up and down with the traditional business cycle. Their fixed income portfolio is supposed to be almost no risk. They were whipsawed by the fed that lowered interest rates so quickly that it forced banks to buy longer-duration securities to just find any kind of yield within the regulatory constraints they were allowed to buy. Then the fed raised interest rates even more quickly causing staggering losses in the "almost no risk" fixed income portfolios of banks. Expect a lot more banks to be taken over even with the emergency backstops the fed has put into place. Look what the Fed did: https://www.federalreserve.gov/monetarypolicy/bst_recenttrends.htm https://www.federalreserve.gov/monetarypolicy/bst_recenttren... In 2008 the Fed flooded the economy with $2 trillion. In 2020 the Fed jumped up and flooded the economy with an additional $7 trillion. In September 2022 they started taking that money back (which incidentally led to tech company layoffs). As of March 2023 they removed about $600 billion. Then they suddenly put over half of that right back into the economy when SVB failed. It's impossible to predict or even appropriately react to what the Federal Reserve is doing.

berkeleyjunk 3y ago
It maybe impossible to predict what the Fed would do but it is certainly possible to avoid a lot of the damage by duration matching of assets and liabilities. e.g. Do not take short term deposits in checking that are callable at any time and invest them in 10 year maturity instruments. No issues at all taking proceeds from 5 year CDs and putting them into 5 year maturity bonds.
- 300bps 3y ago
  avoid a lot of the damage by duration matching of assets and liabilities Respectfully, you have misunderstood the situation. This has almost nothing to do with duration matching assets and liabilities. That's how it works on the loan portfolio side of a bank. This has to do with how bonds work. If you buy $10MM of a bond with a 3% coupon and rates for the same duration bond go to 5% then you have a significant capital loss. Depending on how you classified the investment under FASB 115 rules (HTM, AFS, Trading) you can telegraph to the market that your capital situation is dire which can then cause a run on the bank as we've seen multiple times in the last several weeks.

BiteCode_dev 3y ago

Well, as somebody who is currently coding a calculation service that will handle a 500 billions portfolio, I can tell you this: the specs require the data to be interpolated + extrapolated left and right. And they use that to estimate risks and take huge decisions. And when they don't have enough data to interpolate from, they create a synthetic instrument from other instruments that have enough data, and use that to estimate risks and take decisions. The only thing that makes the whole jenga tower stable is the fact it's all interdependent. E.G: to diminish your exposure, you take a swap with some other entity, and if everybody do that enough, the risk is averaged on the entire economy. So from the inside, it's worse than it looks from the outside. And mind you, the client I do that for is one of the most serious in the business. They are extremely risk adverse, and they have been acting nothing but honestly, at least at the level I can observe. They are so by-the-book we have once found an error in $FAMOUS_DATA_PROVIDER calculations, because we thought we made a mistake, and we looked for it until we realized the data we compared ourselves to was wrong. So if they manage half a trillion by using excel FORECAST.LINEAR and Matlab interp, imagine what is done by JP Morgan.