3 ms·

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 u

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 3y 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 3y 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 3y 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.

voisin 3y 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 3y 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 3y 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.