Politics And Current Events

[mac5155]

Because it seems to me like the 2018 (bipartisan) regulation change is just a hindsight is 20/20 thing.

It's probably not THE issue, but let's not act like it didn't contribute to the situation.

I'm not. But when the president comes out and says that's why it happened in the same sentence during his statement, it's a bit overblown. Not surprising though.

[Shyster]

"They got me addicted, it's their fault."

To be clear, I am not excusing the people who ran those banks, and neither am I saying they are blameless. But every factor that led to the collapse of SVB was aided and abetted by Fed policy. Who caused the inflation? The Fed. Who permits banks to maintain essentially no reserves? The Fed. Who maintained a loose money policy for years that permitted banks to make risky decisions? The Fed. Who maintains a monetary policy that is expressly designed to corrode the money over time and force US citizens to hand their money over the same Wall Street banks whose employees constantly pass through the revolving door to Fed/Treasury employment? The Fed. Until last week when he was basically fired, the CEO of SVB was a director of the Federal Reserve Bank of San Francisco. Quis custodiet ipsos custodes?

"It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning."
- Henry Ford

[MalkinIsMyHomeboy]

can we all admit that not even professionals know how the economy works, let alone us?

[MrKennethTKangaroo]

I have a hard time believing that the sifi designation would prevent a bank from using its capital to buy 10 year treasuries instead of a one year Treasury

[MrKennethTKangaroo]

Or that a sifi designation would prevent depositors from panicking when they learn that a bank needs to issue stock to mitigate losses on super safe bonds

[Troy Loney]

I have a hard time believing that the sifi designation would prevent a bank from using its capital to buy 10 year treasuries instead of a one year Treasury

I am mostly unclear on what the stress testing routines would have revealed.

I mean, hasn't it been obvious a long that interest rates were going up? How can a bank be this exposed to interest rate increases? and bank runs by holding such a high proportion of non-secured deposits? Just seems like such a foolish banking strategy, like, do they just not like lending money?

[Shyster]

I have a hard time believing that the sifi designation would prevent a bank from using its capital to buy 10 year treasuries instead of a one year Treasury

I am mostly unclear on what the stress testing routines would have revealed.

I mean, hasn't it been obvious a long that interest rates were going up? How can a bank be this exposed to interest rate increases? and bank runs by holding such a high proportion of non-secured deposits? Just seems like such a foolish banking strategy, like, do they just not like lending money?

From one of the articles you didn't read:

SVB’s asset base read like the clearest example of the old mantra “Don’t fight the Fed.” SVB made one big mistake: follow exactly the incentives created by loose monetary policy and regulation.

What happened in 2021? Massive success that, unfortunately, was also the first step to demise. The bank’s deposits nearly doubled with the tech boom. Everyone wanted a piece of the unstoppable new tech paradigm. SVB’s assets also rose and almost doubled.

The bank’s assets rose in value. More than 40 percent were long-dated Treasurys and MBS. The rest were seemingly world-conquering new tech and venture capital investments.

Most of those “low risk” bonds and securities were held to maturity. SVB was following the mainstream rulebook: low-risk assets to balance the risk in venture capital investments. When the Federal Reserve raised interest rates, SVB must have been shocked.

Its entire asset base was a single bet: low rates and quantitative easing for longer. Tech valuations soared in the period of loose monetary policy, and the best way to “hedge” that risk was with Treasurys and MBS. Why bet on anything else? This is what the Fed was buying in billions every month. These were the lowest-risk assets according to all regulations, and, according to the Fed and all mainstream economists, inflation was purely “transitory,” a base-effect anecdote. What could go wrong?

Inflation was not transitory, and easy money was not endless.

Rate hikes happened. And they caught the bank suffering massive losses everywhere. Goodbye, bonds and MBS prices. Goodbye, “new paradigm” tech valuations. And hello, panic. A good old bank run, despite the strong recovery of SVB shares in January. Mark-to-market unrealized losses of $15 billion were almost 100 percent of the bank’s market capitalization. Wipeout.

As the bank manager said in the famous South Park episode: “Aaaaand it’s gone.” SVB showed how quickly the capital of a bank can dissolve in front of our eyes.

[Shyster]

The losses in SVB's Treasury portfolio—courtesy of the Fed's quick rate hikes, which crashed the bond market last year—amount to billions of dollars in unrealized losses. The accounting rules of "held to maturity" allows banks to ignore mark-to-market losses if the securities are intended to be held until they come due. Of course, holding to maturity requires you to finance the securities in the meantime, something that's pretty much impossible when your customers don't think you'll make it and instead are demanding their deposits back en masse.

If we ignore this accounting trick, Silicon Valley Bank was already "insolvent" by September of last year, when the unrealized bond losses exceeded its equity.

Towards the end of last year, some $25 billion of deposits ran off as SVB's customers drained their bank deposits to withstand the business pressures of inflation and a thriving venture capital industry dying down. Another $10 billion followed in the early months of 2023, and who knows how much managed to escape over the last few days—Fortune reports $42 billion on Thursday alone—before management threw in the towel on Friday and had the bank placed into the Federal Deposit Insurance Corporation's receivership.

Because Treasuries are "risk-free" and therefore carry lower capital requirements for banks to hold against them, banks allocate more of their funds to them. This concentrates banking system risk in a single interest-sensitive security. SVB is just the most extreme and reckless version of a risk present in most American banks. For reference, the rest of the U.S. banking system has unrealized losses amounting to more than $600 billion, some 25 times more than the losses that just brought down SVB.

There's no shortage of blame to place on regulators for having engineered such an unnatural banking market. Far from making banks "safe," the regulatory system concentrates risks, with the alphabet soup of Fed liquidity facilities standing ready to money-print their way out of any trouble.

[tifosi77]

So I fear I'm back to meow's explain-it-like-I'm-a-five-year-old territory........ if this is a policy failure, why is it limited to this one specific institution? What are the unique factors?

[Willie Kool]

I mean, hasn't it been obvious a long that interest rates were going up? How can a bank be this exposed to interest rate increases? and bank runs by holding such a high proportion of non-secured deposits?

https://fortune.com/2023/03/10/silicon- ... k-officer/

the firm’s chief risk officer stepped away from her role early last year, and the bank did not hire a replacement until this past January.

Laura Izurieta stepped down from her role as CRO of SVB Financial Group in April 2022, and formally departed the company in October, according to an SVB proxy filing. The bank appointed her permanent successor as CRO, Kim Olson, in January of this year.

It is unclear how the bank managed risks in the interim period between the departure of one CRO and appointment of another. Representatives at SVB did not return Fortune’s request for comment.

[count2infinity]

I believe the argument is the fed made the environment where this could happen; however many (read: pretty much all) banks weren’t run by dumb dumbs that didn’t put their bank into this kind of situation. Which… okay?

[mac5155]

I guess that's the point I'm trying to make too. A "perfect storm" (for lack of a better term) where the main ingredient was idiocy and the idiocy enabled by regulatory changes. However that didn't get the lead attention when Mr POTUS took a chance to make it a partisan issue, when the regulatory changes in 18 were bipartisan at best. It's a microcosm of why I can't stand "pick a side" politics in this country anymore

[Troy Loney]

I have a hard time believing that the sifi designation would prevent a bank from using its capital to buy 10 year treasuries instead of a one year Treasury

I am mostly unclear on what the stress testing routines would have revealed.

I mean, hasn't it been obvious a long that interest rates were going up? How can a bank be this exposed to interest rate increases? and bank runs by holding such a high proportion of non-secured deposits? Just seems like such a foolish banking strategy, like, do they just not like lending money?

From one of the articles you didn't read:

SVB’s asset base read like the clearest example of the old mantra “Don’t fight the Fed.” SVB made one big mistake: follow exactly the incentives created by loose monetary policy and regulation.

What happened in 2021? Massive success that, unfortunately, was also the first step to demise. The bank’s deposits nearly doubled with the tech boom. Everyone wanted a piece of the unstoppable new tech paradigm. SVB’s assets also rose and almost doubled.

The bank’s assets rose in value. More than 40 percent were long-dated Treasurys and MBS. The rest were seemingly world-conquering new tech and venture capital investments.

Most of those “low risk” bonds and securities were held to maturity. SVB was following the mainstream rulebook: low-risk assets to balance the risk in venture capital investments. When the Federal Reserve raised interest rates, SVB must have been shocked.

Its entire asset base was a single bet: low rates and quantitative easing for longer. Tech valuations soared in the period of loose monetary policy, and the best way to “hedge” that risk was with Treasurys and MBS. Why bet on anything else? This is what the Fed was buying in billions every month. These were the lowest-risk assets according to all regulations, and, according to the Fed and all mainstream economists, inflation was purely “transitory,” a base-effect anecdote. What could go wrong?

Inflation was not transitory, and easy money was not endless.

Rate hikes happened. And they caught the bank suffering massive losses everywhere. Goodbye, bonds and MBS prices. Goodbye, “new paradigm” tech valuations. And hello, panic. A good old bank run, despite the strong recovery of SVB shares in January. Mark-to-market unrealized losses of $15 billion were almost 100 percent of the bank’s market capitalization. Wipeout.

As the bank manager said in the famous South Park episode: “Aaaaand it’s gone.” SVB showed how quickly the capital of a bank can dissolve in front of our eyes.

I mean, the article answers none of the questions I posed.

Basically the question is, what stress test requirements were removed with the Sifi designation change. And what would have happened if the bank failed a stress test. Cause obviously this balance sheet would obviously show over exposure to interest rate risk.

[Troy Loney]

I guess that's the point I'm trying to make too. A "perfect storm" (for lack of a better term) where the main ingredient was idiocy and the idiocy enabled by regulatory changes. However that didn't get the lead attention when Mr POTUS took a chance to make it a partisan issue, when the regulatory changes in 18 were bipartisan at best. It's a microcosm of why I can't stand "pick a side" politics in this country anymore

Kind of irreverent, no? Republicans are blaming wokeism, democrats are blaming trump reg rollbacks, libretarians blaming the fed. sounds like everyone is in their camp.

[count2infinity]

I, for one, am not blaming any of those three. But I’m a registered independent, so there’s that.

[NTP66]

Listen, it’s best we just blame the Fed for everything.

[tifosi77]

S**t salad

[Troy Loney]

I, for one, am not blaming any of those three. But I’m a registered independent, so there’s that.

None of them caused the collapse. I’d say the fed incentivized poor decisions, the reg roll back removed some safeguards, but would not have prevented anything. And…others have brain damage from the internet.

[nocera]

I was just thinking “I wonder what the libertarian magazine Reason thinks of all of this.”

[faftorial]

Tucker is all in with Shyster on blaming the fed for these bank failures.

[mikey]

Yeah, the interest in echo chambers is through the roof these days...

[Shyster]

I mean, the article answers none of the questions I posed.

Basically the question is, what stress test requirements were removed with the Sifi designation change. And what would have happened if the bank failed a stress test. Cause obviously this balance sheet would obviously show over exposure to interest rate risk.

Would it? As explained by Reason, "The accounting rules of "held to maturity" allows banks to ignore mark-to-market losses if the securities are intended to be held until they come due." The problem with SVB is that it had a lot of assets in longer-term US treasuries that lost market value as interest rates rose. But banks do not have to use the actual market values of those treasuries when considering their reserves. Rather, they can count the values as if they held the treasuries for their full term. It may be the case that if we looked solely at the "held to maturity" values, SVB would have passed the stress tests.

Saying, "this was a failure of government oversight" may be true, but it's also is like arguing that the fox did not diligently guard the henhouse when placed into that role. The Fed and Treasury are run by the banks, for the benefit of the banks.

[MrKennethTKangaroo]

I have a hard time believing that the sifi designation would prevent a bank from using its capital to buy 10 year treasuries instead of a one year Treasury

I am mostly unclear on what the stress testing routines would have revealed.

I mean, hasn't it been obvious a long that interest rates were going up? How can a bank be this exposed to interest rate increases? and bank runs by holding such a high proportion of non-secured deposits? Just seems like such a foolish banking strategy, like, do they just not like lending money?

I don't have answers to most of those questions. But I will say this:

Id like to know how much time regulators and risk managers are REQUIRED spend duration risk. My gut tells me it's not that much time. With that in mind, someone inside the bank has to ask "what happens if our depositors spend the money at the faster rate than they can raise money in the IPO market?". Obviously no one did.

As for the why didn't they just lend it? Lots of reasons why. They added $100 billion in deposits in a year. A bank of that size probably can't commit more than $50 million to most deals. It's impossible to lend $100 billion in traditional loans. Plus. It's way way waaaaay more risky to lend than it is to buy Treasury's and mortgage backed securities

[mac5155]

Wasn't a main issue that they bought treasuries with a huge long term too? Foolish to have everything tied up for that long.

[mikey]

Being bad at the business of banking = bad.