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The banks finally got out of collateral and holdings that had credit risk, but they neglected to remember that just because Treasuries have AAA credit doesn't mean they're safe from duration risk. And given how little the benefit had to have been to them amid the bottomed out interest rate environment, it's amazing that they'd have subjected themselves to this risk...because sure, 1.5% on a 10 year instead of .5% on a 6 month bill is 100 bps, but at the immense duration risk of rates that had to go up eventually? Bananas if you ask me. And then not to hedge this risk with derivatives, just makes you wonder if they actually thought they were invincible.
As for it not being Lehman, that may be true, but they DID have Lehman's CFO in their C-suite.
As for the aftermath, I'm immensely curious to see how the Fed hopes to both steepen the yield curve with higher rates while simultaneously artificially propping up long term treasury securities by allowing them to be used as collateral for short term repo at par. Guess we're just throwing out Time Value of Money altogether these days. The cure almost seems worse than the disease, but I suppose I'm just continuing to digest data like everyone else is at this point. Interesting times, that's for sure.
I doubt it would have made a difference if they had hedged the duration risk. Likely that would have made the problem worse - because that hedge is expensive.
The issue is that their 'loans' (the bonds) didn't pay enough income, which meant that when the cheap money left they couldn't meet the terms of the cash letter from the Fed. They didn't have the income to pay the interest.
They paid too much for the bonds and assumed they'd always have non-interest bearing deposits. Schoolboy error.
I don't think it was obvious that rates had to go up /faster than they had ever increased in history/.
And what were banks supposed to do? They make money by taking deposits and owning debt. Are they supposed to just shut down because there's no zero risk interest earning debt out there? Or charge depositors for holding their money?
This is entirely the Fed's fault if you ask me.
There was duration risk, but this risk was amplified because newly issued bonds made up a huge percentage of the bank's holdings. This was because of the massive amount of stimulus during the pandemic.
Oh God, Brian Stelter is writing articles now.
If our banking system is not resilient enough to survive some overhyped panic from journalists (or "journalists" in the case of Stelter), then we have much bigger problems than censoring some alarmist writers.
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“Reporters who can provide historical context—explaining why 2023 is not 2008, and why SVB is not Lehman—perform a tremendous public service,” Grueskin said. “As do those who can dissect what regulatory or legislative changes enabled this collapse, and what would be required—politically as well as legislatively—to prevent a similar one from happening anytime soon.”
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