SVB's portfolio choices were not risky because directors assumed the EFFR would remain low? Buying a lottery ticket is not risky if you assume your number will come up. :)
Inflation is not "cockroaches." There is an optimal amount of inflation. It's the Fed's job to produce it.
The Fed should not depart from FAIT becase federal deficits are greater or smaller. Conceptually -- I'm not sure this has ever happened except maybe WW2 -- a change in federal spending and taxation could have the same effect as a sectoral shock like COVID/Putin and therefore temporarily change what that optimal rate of inflation is. But this fiscal shock could occur with no change in the deficit
When your bond losses exceed your capital and you have no income stream to absorb those losses over time (because so much of your income was carry on the bonds, requiring zero percent deposit costs), no depositor will give you money.
20 percent underwater is 20 percent underwater- HTM or MTM makes no difference. Go back and look at SVB’s 10-Qs
SVB bet the ranch and lost. Seems to me the whole thing was a scheme to boost the stock price. So strange there wasn’t a criminal investigation of those large political donors. Then again, they were doing exactly what the Fed and Yellen wanted them to do- take stupid risks.
Had nothing to do with “held to maturity” vs MTM. The fundamental issue was buying 15-20 year bonds paying 1.75 pct and funding them with large, uninsured, overnight and short term deposits.
Actually, that has the process backwards. It started with a deliberate strategy to seek deposits (I think they doubled their balance sheet) because the equity analysts were awarding higher multiples to banks with rapid deposit growth- seen as a sign of a growing underlying client base (rather, in this case, as simply larger deposits from pre-existing clients flush with cash and also from entities like SPACs).
The sponsors and SPACs had cash due to the speculative environment the Fed engineered, and perhaps forward guidance gave SVB confidence that long rates would never go up - so why not buy negative convexity 20 year MBS with overnight money?
It did not matter at all how the bonds were classified - the losses would have been the same either MTM or HTM- the deposit flight and insolvency process would have simply started a few months earlier.
Nearly every regional bank had this issue- long-term MBS portfolios paying 2 pct with market yields suddenly rising to double that and deposit costs eventually rising to 5 percent.
If it costs you negative carry of 2 or 3 pct for the 15 year life of the bond, you have to be able to absorb that compression in NII Or, if you mark to market, that 2 pct for 15 year loss instead of being amortized, becomes the PV of that amount (say, a 20 percent loss) that needs to be absorbed by capital (requiring a capital raise or balance sheet shrinkage or bankruptcy).
Fortunately, most regional banks hadn’t bet the whole ranch on this reckless carry trade - it is a fairly moderate portion of most banks’ balance sheet and they could absorb the amortized losses.
SVB had grossly inflated its balance sheet with mobile, large, uninsured deposits and effectively bet that ranch on the Fed being right in its forward guidance- this was really a way to goose the stock price and make management rich. You indicate that SVB could have been prescient and unwound the bonds before rates went up- but putting all those deposits equity analysts loved into zero percent shorter-dated assets kills earnings, while jettisoning the new deposits (a huge percentage of the balance sheet) would kill the fraudulent story SVB’s management was spinning. Management would lose their jobs and see the stock value fall. Why not stand pat instead and bet the ranch the Fed forward guidance is right? Heads I win, tails the FDIC loses.
A competent regulator would have questioned a carry trade strategy being executed on such a monumental scale dependent upon short term money staying at zero for 20 years or l.t. Bond yields staying below 2 pct.
I’m sure that SVBs execs being large bundlers for Biden and tbe Dems had nothing to do with the regulatory oversight and the Fed no doubt went back and did a thorough after action report reviewing all communications and decisions with full transparency and holding transgressors accountable. 😊
Or maybe they instead focused on sneaky ways to prevent credit from flowing to industries political donors dislike?
Good comments on a good statement. I wish the statement had just come right out and said the Fed has no business doing prudential supervision of banks and less promoting reduction in net CO2 emissions. It has one job: outputting the lowest inflation rate that maximizes real income ("employment").
Many elements of the capital rules implemented by the Fed are very arbitrary to say the least. The Fed has never substantiated why it needs its own "gold-plated" U.S. version of the GSIB surcharge, it has never recalibrated it to the current data since it was initially done in 2015 (almost 10yrs ago!). And the Supplementary Leverage Ratio rule was so problematic that the Fed and OCC were basically forced to suspend it during COVID...
SVB's portfolio choices were not risky because directors assumed the EFFR would remain low? Buying a lottery ticket is not risky if you assume your number will come up. :)
Inflation is not "cockroaches." There is an optimal amount of inflation. It's the Fed's job to produce it.
The Fed should not depart from FAIT becase federal deficits are greater or smaller. Conceptually -- I'm not sure this has ever happened except maybe WW2 -- a change in federal spending and taxation could have the same effect as a sectoral shock like COVID/Putin and therefore temporarily change what that optimal rate of inflation is. But this fiscal shock could occur with no change in the deficit
When your bond losses exceed your capital and you have no income stream to absorb those losses over time (because so much of your income was carry on the bonds, requiring zero percent deposit costs), no depositor will give you money.
20 percent underwater is 20 percent underwater- HTM or MTM makes no difference. Go back and look at SVB’s 10-Qs
SVB bet the ranch and lost. Seems to me the whole thing was a scheme to boost the stock price. So strange there wasn’t a criminal investigation of those large political donors. Then again, they were doing exactly what the Fed and Yellen wanted them to do- take stupid risks.
The means-of-payment money supply hit ath in November 2020.
re: "key data is often not available or if available is not exact or timely."
The distributed lag effect of money flows, the volume and velocity of money, are mathematical constants.
Had nothing to do with “held to maturity” vs MTM. The fundamental issue was buying 15-20 year bonds paying 1.75 pct and funding them with large, uninsured, overnight and short term deposits.
Actually, that has the process backwards. It started with a deliberate strategy to seek deposits (I think they doubled their balance sheet) because the equity analysts were awarding higher multiples to banks with rapid deposit growth- seen as a sign of a growing underlying client base (rather, in this case, as simply larger deposits from pre-existing clients flush with cash and also from entities like SPACs).
The sponsors and SPACs had cash due to the speculative environment the Fed engineered, and perhaps forward guidance gave SVB confidence that long rates would never go up - so why not buy negative convexity 20 year MBS with overnight money?
It did not matter at all how the bonds were classified - the losses would have been the same either MTM or HTM- the deposit flight and insolvency process would have simply started a few months earlier.
Nearly every regional bank had this issue- long-term MBS portfolios paying 2 pct with market yields suddenly rising to double that and deposit costs eventually rising to 5 percent.
If it costs you negative carry of 2 or 3 pct for the 15 year life of the bond, you have to be able to absorb that compression in NII Or, if you mark to market, that 2 pct for 15 year loss instead of being amortized, becomes the PV of that amount (say, a 20 percent loss) that needs to be absorbed by capital (requiring a capital raise or balance sheet shrinkage or bankruptcy).
Fortunately, most regional banks hadn’t bet the whole ranch on this reckless carry trade - it is a fairly moderate portion of most banks’ balance sheet and they could absorb the amortized losses.
SVB had grossly inflated its balance sheet with mobile, large, uninsured deposits and effectively bet that ranch on the Fed being right in its forward guidance- this was really a way to goose the stock price and make management rich. You indicate that SVB could have been prescient and unwound the bonds before rates went up- but putting all those deposits equity analysts loved into zero percent shorter-dated assets kills earnings, while jettisoning the new deposits (a huge percentage of the balance sheet) would kill the fraudulent story SVB’s management was spinning. Management would lose their jobs and see the stock value fall. Why not stand pat instead and bet the ranch the Fed forward guidance is right? Heads I win, tails the FDIC loses.
A competent regulator would have questioned a carry trade strategy being executed on such a monumental scale dependent upon short term money staying at zero for 20 years or l.t. Bond yields staying below 2 pct.
I’m sure that SVBs execs being large bundlers for Biden and tbe Dems had nothing to do with the regulatory oversight and the Fed no doubt went back and did a thorough after action report reviewing all communications and decisions with full transparency and holding transgressors accountable. 😊
Or maybe they instead focused on sneaky ways to prevent credit from flowing to industries political donors dislike?
"banking sector climate change related regulation comes to mind?"
Good comments on a good statement. I wish the statement had just come right out and said the Fed has no business doing prudential supervision of banks and less promoting reduction in net CO2 emissions. It has one job: outputting the lowest inflation rate that maximizes real income ("employment").
Many elements of the capital rules implemented by the Fed are very arbitrary to say the least. The Fed has never substantiated why it needs its own "gold-plated" U.S. version of the GSIB surcharge, it has never recalibrated it to the current data since it was initially done in 2015 (almost 10yrs ago!). And the Supplementary Leverage Ratio rule was so problematic that the Fed and OCC were basically forced to suspend it during COVID...