4 ms·

> We know exactly why banks are failing. Federal rate increases pushed they are long-term Holdings underwater and account holders made a run on the bank. No, t

by voisin 4y ago

> We know exactly why banks are failing. Federal rate increases pushed they are long-term Holdings underwater and account holders made a run on the bank. No, they failed because the banks didn’t hedge interest rate risk whatsoever. It isn’t the Fed’s fault for doing it’s job to tame inflation. It is the banks’ fault for not doing basic risk reduction at the expense of some profit. They optimized for profit and not resiliency.

pempem 4y ago
They didn't hedge for something that is a once in the history of our nation's experience basically and quite literally freezing one of the most investable markets, housing. The increases have been relentless and its unclear that it is stemming inflation driven by corporate greed at all
- voisin 4y ago
  Betting that rates would never ever rise again is idiotic. Regardless of whether it is once in history (hint: it isn’t).
  - s1artibartfast 4y ago
    I think that's overly simplistic and a bit misleading. Banks weren't betting that rates would stay low, they were betting that their depositors wouldn't run in Mass. How many of your customers will flee is much more difficult to Gauge then if rates will go up. This is why we see winners and losers. Most banks have the same exact Long-term securities and will continue to make money off of them. It isn't as much about the investment as it is the investor. I might make 5% putting money in a CD account. You might put money in the same account and lose 5% because you have to pull out early. The difference is our situation, not the account
    - voisin 4y ago
      > Banks weren't betting that rates would stay low, they were betting that their depositors wouldn't run in Mass. I think you are confusing causality. The depositors fled because of the bad bet that rates would stay low. As a bank your entire existence depends on confidence. Make risky bets that rates will stay low forever, and you are eventually going to be proven wrong and then confidence in your institution will drop and depositors will flee.
      - s1artibartfast 4y ago
        Yep there are banks happy sitting on billions of dollars of low interest MBS and securities happily making profit. The assets themselves turn profit no matter what the current interest rate is. You only lose the "bet" when there is a run, not when interest rate Rises. If there is no run on your bank, the MBS will always add to your profit no matter what the Fed rate is.
  - pempem 4y ago
    Woah. No one is saying that and the tone of your comment is honestly wild. Its' betting that they wouldn't raise faster than ever in history. ( yea we all know interest rates were higher and have been subjected to the same posts about interest rates in the 80s) Source: https://www.weforum.org/agenda/2022/10/comparing-the-speed-of-u-s-interest-rate-hikes-1988-2022/ https://www.weforum.org/agenda/2022/10/comparing-the-speed-o...
sbierwagen 4y ago
Hedging doesn't eliminate risk, it moves it around. If you hedge away $100B of interest rate risk then your counterparty takes that hit when interest rates go up. Who's that counterparty supposed to be? Another bank? Pension funds?
- voisin 4y ago
  Whichever party has short duration assets to match short duration liabilities. Matching long assets to short liabilities is idiotic. If you can’t find someone with short duration assets then you don’t lock into 10+ year fixed rate bonds. Maybe you don’t leverage up your balance sheet as much. I think implicit in your comment is that this was unavoidable, and I am vehemently against this stance. Just like 2008’s financial crisis, this was entirely avoidable.
  - sbierwagen 4y ago
    Banks are in the business of maturity transformation, they have to borrow short to lend long. Silicon Valley, Signature and First Republic all blew up because depositors withdrew their deposits. You can "fix" this with withdrawl limits, (In which case connected insiders can get their money out early and regular guys get screwed) full FDIC insurance, ("Unlimited bailouts for banks", moral hazard) or just end fractional-reserve banking entirely. (Say goodbye to 30 year mortgages, or any mortgages at all.) Ending bank crises essentially requires ending the "business cycle" of credit expansion and credit contraction, which would take deleting quite a lot of the economy and turning everything into state owned enterprises.
    - s1artibartfast 4y ago
      I agree most people ignore the difficulty of estimating run risk, which is what actually killed these banks. However, this isn't really an all or nothing situation. There is are material reasons why some banks will make it through this just fine while others will fail, despite all running on the same fractional-reserve system and buying the same securities. Some will be right about their customer flight risk estimates, and others will be wrong. How much of this is due to better models or just luck is anyone's guess.

by voisin 4y ago

pempem 4y ago

They didn't hedge for something that is a once in the history of our nation's experience basically and quite literally freezing one of the most investable markets, housing. The increases have been relentless and its unclear that it is stemming inflation driven by corporate greed at all

voisin 4y ago
Betting that rates would never ever rise again is idiotic. Regardless of whether it is once in history (hint: it isn’t).
- s1artibartfast 4y ago
  I think that's overly simplistic and a bit misleading. Banks weren't betting that rates would stay low, they were betting that their depositors wouldn't run in Mass. How many of your customers will flee is much more difficult to Gauge then if rates will go up. This is why we see winners and losers. Most banks have the same exact Long-term securities and will continue to make money off of them. It isn't as much about the investment as it is the investor. I might make 5% putting money in a CD account. You might put money in the same account and lose 5% because you have to pull out early. The difference is our situation, not the account
  - voisin 4y ago
    > Banks weren't betting that rates would stay low, they were betting that their depositors wouldn't run in Mass. I think you are confusing causality. The depositors fled because of the bad bet that rates would stay low. As a bank your entire existence depends on confidence. Make risky bets that rates will stay low forever, and you are eventually going to be proven wrong and then confidence in your institution will drop and depositors will flee.
    - s1artibartfast 4y ago
      Yep there are banks happy sitting on billions of dollars of low interest MBS and securities happily making profit. The assets themselves turn profit no matter what the current interest rate is. You only lose the "bet" when there is a run, not when interest rate Rises. If there is no run on your bank, the MBS will always add to your profit no matter what the Fed rate is.
- pempem 4y ago
  Woah. No one is saying that and the tone of your comment is honestly wild. Its' betting that they wouldn't raise faster than ever in history. ( yea we all know interest rates were higher and have been subjected to the same posts about interest rates in the 80s) Source: https://www.weforum.org/agenda/2022/10/comparing-the-speed-of-u-s-interest-rate-hikes-1988-2022/ https://www.weforum.org/agenda/2022/10/comparing-the-speed-o...

sbierwagen 4y ago

Hedging doesn't eliminate risk, it moves it around. If you hedge away $100B of interest rate risk then your counterparty takes that hit when interest rates go up. Who's that counterparty supposed to be? Another bank? Pension funds?

voisin 4y ago
Whichever party has short duration assets to match short duration liabilities. Matching long assets to short liabilities is idiotic. If you can’t find someone with short duration assets then you don’t lock into 10+ year fixed rate bonds. Maybe you don’t leverage up your balance sheet as much. I think implicit in your comment is that this was unavoidable, and I am vehemently against this stance. Just like 2008’s financial crisis, this was entirely avoidable.
- sbierwagen 4y ago
  Banks are in the business of maturity transformation, they have to borrow short to lend long. Silicon Valley, Signature and First Republic all blew up because depositors withdrew their deposits. You can "fix" this with withdrawl limits, (In which case connected insiders can get their money out early and regular guys get screwed) full FDIC insurance, ("Unlimited bailouts for banks", moral hazard) or just end fractional-reserve banking entirely. (Say goodbye to 30 year mortgages, or any mortgages at all.) Ending bank crises essentially requires ending the "business cycle" of credit expansion and credit contraction, which would take deleting quite a lot of the economy and turning everything into state owned enterprises.
  - s1artibartfast 4y ago
    I agree most people ignore the difficulty of estimating run risk, which is what actually killed these banks. However, this isn't really an all or nothing situation. There is are material reasons why some banks will make it through this just fine while others will fail, despite all running on the same fractional-reserve system and buying the same securities. Some will be right about their customer flight risk estimates, and others will be wrong. How much of this is due to better models or just luck is anyone's guess.