Hacker News Board Hacker News, browsed like a classic message board
Live data from Hacker News

America’s banks are missing hundreds of billions of dollars

economist.com

Post reply on HN
Print view View original

181–190 of 450 posts

Re: America’s banks are missing hundreds of billions of dollars

#181

Post by NhanH »

harry8 wrote: post #171
mnd999 wrote: post #104

Earlier quoted context omitted.

Interest rate swaps exist to manage this risk no?

No. You /can/ manage short term liability mismatch against long term assets in one sense but it's actually useless when you think about why you have long term assets at all. Just like you can manage the risk by selling your long term assets and buy short term to make the mismatch not exist. The cost of managing using swaps will be about the same as selling your long term assets and buying t-bills. If it isn't, you hi…

You hedge the existential risk away, while taking on the smaller risk for potential profits.

SVB shouldn’t need to hedge the interest rate increasing by .5 or 1%, but they definitely should have hedge the risk of it jumping 4% and more.

Re: America’s banks are missing hundreds of billions of dollars

#182

Post by okeuro49 »

dageshi wrote: post #164
okeuro49 wrote: post #137

Earlier quoted context omitted.

Put a shield around the most vulnerable and their carers, until there was a vaccine for them and leave everyone else, especially the young, to continue their lives as normal. Easily said now, however.

Can't see that as ever working. There'd be no practical way to shield the vulnerable or the carers and beyond that if it's left to run rampant in the wider population eventually the medical system is overwhelmed and collapses.

> There'd be no practical way to shield the vulnerable or the carers

The shielding system was an official policy in the UK

https://www.local.gov.uk/sites/default/files/documents/SHIEL...

> left to run rampant in the wider population eventually the medical system is overwhelmed and collapses.

The risk of hospitalisation was low around the 30s and younger.

Re: America’s banks are missing hundreds of billions of dollars

#183

Post by zarzavat »

Dwolb wrote: post #169
misja111 wrote: post #130

Earlier quoted context omitted.

> I honestly was thinking we will stay in this zero-rate regime for the next decade or more. I suspect the people at SVB thought in a similar fashion and plan accordingly I have been working in several trading companies, both as trader and in IT, and the first thing they teach you when trading, is that the market always knows better than you. So hedge your risks and don't trust that you have some kind of vision that…

There’s interest rate risk, credit risk, and prepayment risk with the securities they buy. On a Treasury or guaranteed bond, there is no credit risk. On a Treasury there is no prepayment risk. Therefore if you hedge out the interest rate risk, you’re essentially left with 0 risk. 0 risk = 0 or near 0 premium. e.g. there’s no point in doing the trade if you hedge.

Yes that’s the point. Treasuries are cash, they are not meant to make money for banks, they are meant to be a place for banks to put money when they don’t have anything else to do with it. Banks are supposed to make money from the premium between the base interest rate and the rate on the loans they make. The implied contract when you deposit money in a bank is that the bank has a dependable business model as a lender. They are not supposed to be gambling.

SVB got greedy. They thought that zirp would continue forever and they made long term bets on that basis and lost. Banks should not be making long bets on macroeconomic conditions: that’s not a bank, that’s a hedge fund.

Re: America’s banks are missing hundreds of billions of dollars

#184

Post by misja111 »

kriro wrote: post #176
misja111 wrote: post #130

Earlier quoted context omitted.

> I honestly was thinking we will stay in this zero-rate regime for the next decade or more. I suspect the people at SVB thought in a similar fashion and plan accordingly I have been working in several trading companies, both as trader and in IT, and the first thing they teach you when trading, is that the market always knows better than you. So hedge your risks and don't trust that you have some kind of vision that…

If the market always knows best then why do I need traders except for market making purposes? Shouldn't everyone just buy the lowest cost passive ETF of a big enough index like S&P 500 then? I think "the market always knows best" is correct in most cases and if you think you know better you are probably wrong but there are empirical counterexamples like the Buffets of the world (unless one would claim that his gains…

> Shouldn't everyone just buy the lowest cost passive ETF of a big enough index like S&P 500 then?

Yes, this is very best the advise to invest your money (except if your name is Warren Buffet). Buy it and hold it. There have been so many papers published that show this. You cannot predict the market, what you can do is save yourself some risk and some transaction costs. Any investment advisor that tells you different is plain wrong and probably has a second agenda.

Re: America’s banks are missing hundreds of billions of dollars

#185

Post by sanp »

Dwolb wrote: post #169
misja111 wrote: post #130

Earlier quoted context omitted.

> I honestly was thinking we will stay in this zero-rate regime for the next decade or more. I suspect the people at SVB thought in a similar fashion and plan accordingly I have been working in several trading companies, both as trader and in IT, and the first thing they teach you when trading, is that the market always knows better than you. So hedge your risks and don't trust that you have some kind of vision that…

There’s interest rate risk, credit risk, and prepayment risk with the securities they buy. On a Treasury or guaranteed bond, there is no credit risk. On a Treasury there is no prepayment risk. Therefore if you hedge out the interest rate risk, you’re essentially left with 0 risk. 0 risk = 0 or near 0 premium. e.g. there’s no point in doing the trade if you hedge.

Would pre-2018 regulations (when they were eased for banks with deposits less than $250B) have prevented this?

Re: America’s banks are missing hundreds of billions of dollars

#186

Post by iSnow »

nostromo wrote: post #31

1. The government requires banks buy their debt and hold it as reserves because it's considered the safest investment. 2. The government decides that, oops, it printed too much money in 2020/21 and is causing inflation, so it raises rates very quickly. 3. New treasuries yield 4 or 5 times as much in interest as the ones from 1-2 years ago. Why would anyone want to buy those old treasuries near face value now? 4. The…

Well, it points to abysmal risk-management by SVB. The rate rise was announced in late 2021, so banks should have taken some losses and sold the low-yield treasuries and increasingly bought higher yielding ones.

It also seems to me SVB used an exemption from Basel III(). Basel III was introduced to force banks to be more conservative, and thus more safe. Downside: this also means bank is going to be less profitable, which is why SVG opted out.

So they are now in the "find out" phase of fuck around and find out. I really have no sympathy for the way the US banking lobby bribes politics to get exemptions and the cowboy attitude of their "regional banks". Now, everybody is very sorry and promises to improve and once the storm has died down, they will continue to work like that.

https://on.ft.com/3ywMURD (google for "Silicon Valley Bank is a very American mess" to sidestep their paywall)

Re: America’s banks are missing hundreds of billions of dollars

#188

Post by harry8 »

NhanH wrote: post #181
harry8 wrote: post #171

Earlier quoted context omitted.

No. You /can/ manage short term liability mismatch against long term assets in one sense but it's actually useless when you think about why you have long term assets at all. Just like you can manage the risk by selling your long term assets and buy short term to make the mismatch not exist. The cost of managing using swaps will be about the same as selling your long term assets and buying t-bills. If it isn't, you hi…

You hedge the existential risk away, while taking on the smaller risk for potential profits. SVB shouldn’t need to hedge the interest rate increasing by .5 or 1%, but they definitely should have hedge the risk of it jumping 4% and more.

Take on /less/ long term assets (sell them and buy t-bills) to remove the existential risk.

It's not going to be much different in cost. You see it? Derivatives aren't magic pixie-dust insurance. They will cost about the same as a rebalance on that scale or you hit them as hard as you can because they're mispriced and represent free money.

Re: America’s banks are missing hundreds of billions of dollars

#190

Post by DebtDeflation »

nostromo wrote: post #31

1. The government requires banks buy their debt and hold it as reserves because it's considered the safest investment. 2. The government decides that, oops, it printed too much money in 2020/21 and is causing inflation, so it raises rates very quickly. 3. New treasuries yield 4 or 5 times as much in interest as the ones from 1-2 years ago. Why would anyone want to buy those old treasuries near face value now? 4. The…

I'm getting tired of the "those Treasury bonds they bought are completely safe, if they just wait 10+ years until maturity, they will get 100% of their principal back" narrative. There are MANY different types of risk. Credit risk is but one type, and that narrative tries to convince people that it is the ONLY type of risk. In this example, you have both interest rate risk (price of an existing bond moves inversely to interest rates) and maturity risk (long term assets funded by short term liabilities). Risk can be hedged, and it is prudent to do so, but hedging costs money which eats into profit, so in the case of SVB they made a conscious decision to abandon most of their hedges a year or so ago. I suspect that over the course of the next year we'll see more cracks emerge in the financial system, additional financial institutions fail, and a new narrative that will have to be created.
Post reply on HN