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My speculation is SVB thinks rate should start declining in 2024 and bond prices would re-bounce so no need to buy expensive hedging vs the rise of rising rate. It should work if not for the bank run.
The reason for buying long duration bonds is because then the interest rate is higher than the shorter duration bonds. Buying hedges would diminish the higher interest.
Just my wild speculation.
I read this some blog:
Since FED has given rate hikes transparency, whatever they can, hedging becomes expensive overall as demand was high, in some cases cost of hedging is over the loss over many years (2-3 years).
The big banks, by virtue of being big, paid expensive softwares+analysts, hedged long before others and the almost matched āunrecognized gain for unrecognized lossā
It is not easy to hedge multi-billions without proper tools or analysis and small regional banks struggled (and CFO+CEO management issues) to hedge.
Now, FED+Congress+FDIC will enact some bills/laws to make it work.
Today, I listened the FED Vice Chair testimony, everyone is beating around the bush now!
They finally said =>
Senate committee squarely blamed Banking failures on 3 counts:
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I agree with all three countsš¤
Blaming failure to hedge is a pretty generic complaint. How much should they have hedged? What should be the duration? What would have been the cost of the hedge? Itās easy to armchair it now. The truth is almost every bank would fail if it had that percent of deposits withdrawn that rapidly.
The fed deserves plenty of blame for failing to increase rates earlier. That caused having to increase them so rapidly in an attempt to get inflation under control.
I donāt think itās a failure of regulation or supervision. How many times has a bank had 25% of deposits withdrawn within 2 days? The regulation is 10% of deposits in cash on hand. They were compliant. Maybe the threshold should be higher than 10%, but thatās a different conversation.
This is really tough to decide, cost of the hedge exceeds loss if the term is extended to 2-3 years using āInterest rate swapā
Today, Barr stated SVB had 42B (after selling 20B securities in the market), that is almost 20% of deposit.
First day, thursday - it seems, withdrew entire 42B (20%) by transfer to big banks (heard JPM & BAC), next day transfer came $100B (50%) which made regulators to take over bank!
Today, no one (in Senate) talked about this huge withdrawal/cash flow out or regulation to stop such huge withdrawal in future. Unless Rules are made for this, even if hedged, banks can go insolvent.
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No need to think for them. They are professional, period. I donāt accept any reasons for failures. Hedging is part of the business strategy with other decisions. Hedging is not a standalone decision! No excuses, fail means fail.
Speculation: Previous Chief Risk Officer could have quitted because of the risky business decisions made by CEO/ CFO. May be, impossible to hedge the risk of those business decisions. SVB swam naked and got caught. No ifs, no buts, etc.
Observation: Those concerns mentioned seem to be similar to hedging in stocks. If youāre so worried and felt hedging is too expensive, you can choose to sell the entire position or swim naked by holding on to the position (with little or no hedging) and hope for no ābank runā.
Hedging isnāt free though. It costs money. Iām sure they could argue thereās no need to hedge based on statistical models, historical max withdrawals, etc. Thereās probably not a bank in the world thatād survive that pace of withdrawals. Even if the bonds hadnāt lost value, thereās no way they could sell them and get cash fast though. Those transactions take days to settle. Thatād cause withdrawals to fail, because the bank doesnāt have the money.
Do you really think holding US treasuries and MBS which are backed by the US government via Freddie and Fannie are risky business decisions? They needed to do something with the cash. Their error was picking the wrong duration, but the plan was to hold-to-maturity which is why they were classified as HTM. Thereās no way they could have predicted such a rapid withdrawal of deposits.
If you think your bank is safer in a situation with that place of withdrawals, then youāre fooling yourself.
Somehow I think you are mixing cause-effect. Bank run is a consequence of their bad business decisions. No banks can withstand such fast withdrawals is not the root of the problem, is the outcome of what the bank did. The question is why do people made such fast withdrawals.
This is right, if the same happens to JPM or BAC, appx 20% withdrwal first day and 50% withdrawal second day, they also can not withstand such pressure!
Even if they hedged, they can not supply such money flow.
What happened was Cash Out Sunami, no bank can withstand such pressure !
Appx 97% of depositors are above FDIC insurance level. Multiple VCs sent messages to their contacts/associates/funded companies, everything spread over internet light speed. All those CFOs went to big banks, like JPM & BAC, made a horizontal transfer (closure of accounts). With billions of fund inflow, big banks sent the transfers through clearence house.
First day, 42B, Second day 100B but no cash at bank and became cash flow insolvency. This can happen easily any regional bank or community bank.
FED+FDIC+Treasury (then congress for extending FDIC insurance) have to come up, May 1, 2023, with proper solution to check the system, across the banking operations.
Remember " 2010 flash crash on stock market". This is exactly like that. Now, government needs to come out with āCircuit Breakerā for such banking operations
The bank was in zero danger of failing without the run. If any bank suffers that much of a run, then it will fail. Thatās the reality of the banking system. Itās literally impossible to sell assets fast enough to get the cash. The run was based on emotion. Humans can reaction emotionally and illogically at any time.
itās actually over 80% in 2 days.
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So? Is not an explanation of why do people make fast withdrawals.
WHY. Not how, what, where, who, when.
Donāt keep harping on fast withdrawals bring down SVB. Bank run is the last domino. Which are the earlier ones.
First domino can be arbitrary. Let use āFed starts hike ratesā as the first domino/ event. There are many events occurred/ decisions made before the last domino/ event. What are these events/ decisions?
I read completely in and out last Saturday and Sunday, but there is no point in discussing over the spoilt milk anymore.
However, it gave me good opportunity to get some retail banks at lowest price like NYCB when it dropped $6, now jumped 50% and will also give me everlasting dividends more than highest yield of treasury as long as I hold.
Additionally, I have purchased maximum KRE which is too good to hold until another 25% jump minimum,
I made another logic last 7 days and found lot of missed opportunities in the past. Created alerts which such complex opportunity is available for me in future.
I will show you when such new opportunity comes again.
As if now, this is more than enough for me.
It was emotional and irrational panic. Good luck trying to control that or predict it.
This issue has resolved, indirectly, FED rate hikes as they need to focus on regulations to protect banking operations. In addition, that sent shocks to congress, president etc, finally coming to economic normalization.
IMO, once yield curve is inverted, adding more rate hikes increase pressure on economical recovery.
Lots of outflows from banks to MM but Iām surprised this hasnāt put more pressure on banks to raise their savings rates.
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Because many people didnāt panic. I am one of those. Satisfied in earning those meagre interest. Donāt have to optimize every cent (local optimization). Just need to optimize at NW level (global optimization).
Less than 1% versus more than 4% is a large spread. More than pennies left on the table.
Quite often, price fluctuations of many stocks are higher than that.
You can go on Treasury Direct and get more than 4.5%, with the full faith and credit of Uncle Sam. No bank run possible there.
