Fifth Avenue Forum

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.

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

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 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?

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.

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.

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?

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.

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 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

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

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.

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?