???
He says “likely”, he does not say “certainly.” The linked document describes the test parameters, but doesn’t go into details of what it means to “pass” or “fail” a stress test. Not that I could find anyway. Leads me to believe that the author doesn’t actually know whether SVB’s portfolio would have passed any stress tests. I’m sure it would have passed some, but the test parameters do include low interest long-term treasuries, which would have certainly indicated massive paper losses for SVB.
Long story short, this is just some rando expressing his opinion without offering actual proof.
No offense, but as opposed to ???
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Fighting the last war, accounting style. They were looking for bad debts ala 2008, not interest rate risks.
https://www.wsj.com/articles/auditors-didnt-flag-risks-building-up-in-banks-6506585c
The Journal reviewed the audit opinions for the 10 small to midsize U.S. banks that last year reported the highest losses on held-to-maturity securities as a proportion of their shareholder equity, based on data from research-firm Calcbench. Silicon Valley Bank ranked second on the list.
None of the auditors included a critical audit matter related to the bank’s treatment of the bonds. Instead, nine of the 10 reported a critical audit matter for estimated losses from loans or other bad debts. That is the risk that brought down banks in the 2008 financial crisis. Auditors didn’t report any critical audit matter for one of the banks, the analysis found.
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As opposed to everyone else who suggested that SVB might have failed the stress tests.
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The “they” in this case are private accounting firm auditors, and they certainly failed their job. This doesn’t say anything about the Federal Reserve stress tests applicable to “large” banks.
Got it. Did the other randos provide actual proof?
No, they’re just a little less random (as in, people you’ve probably heard of who work in that sphere; as opposed to people you’ve probably never heard of who are, or possibly pretend to be, journalists).
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You mean like the guy who wrote the actual regulations?
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Don’t take my word for it. Here’s the 2nd in charge of the FDIC in a recent speech.
—-
I have talked about the SVB failure, its causes, and a few lessons learned. Now I am going to talk about something that is none of those things. In Washington, D.C., a town where people tend to criticize and blame first, and learn and understand later… or never, there has been an effort to blame the SVB failure on S. 2155, the bipartisan banking law passed in 2018. And so we have people searching under the couch cushions… under the carpets… under the mattress… in the storage closet… hoping to find something somewhere tying the SVB failure to that law and its implementing rules.
I think it is quite obvious that S. 2155 had nothing to do with it. The rule changes did not change the stringency of capital standards for a bank of SVB’s size, the stress tests did not test for rapidly rising rates, and the exact thing that got SVB in trouble – investing in government bonds – is exactly what the liquidity coverage ratio is designed to require. The reasons for SVB’s failure are quite straightforward and easy to explain, and those rule changes had nothing to do with them.
When it comes to something like this, I encourage people to first look at the facts, and then arrive at conclusions, rather than starting with a conclusion you hope to be true, and grasping around for facts in support. And I urge policymakers to propose policy changes based on where we find evident holes in our framework, rather than just trying to undo policies of the past.
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It’s a different story when it comes from someone who (probably) knows what he’s talking about. This I’m inclined to believe.
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Howard Marks writes a good letter.
https://www.oaktreecapital.com/insights/memo/lessons-from-silicon-valley-bank
What - me worry? Nearly all banks aren’t hedging their interest rate risk, the main risk that triggered the losses and subsequent run on SIVB.
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Dumb and greedy as was discussed earlier…
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Doesnt hedging costs negate most of the profits, leaving them with little reason to play the interest rate arbitrage game to begin with? I know the markets arent perfect so there are opportunities to hedge a nice gain, but this is the bank’s ongoing operation not some special circumstances they’re trying to pick and choose.
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Most being the operative word. Just like insurance companies, banks aren’t supposed to be high yield/profit, volatile, profit centers. Sadly, they’ve forgotten that, as @ArthurDent mentioned a couple of posts up.
Banks, utilities, insurance companies, large conglomerates - widows and orphan stocks.
ETA: For those that don’t know what a widow, orphan, or their stocks means … stable, steady, slow, positive growth.
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FRC reported earnings and promptly dropped 20% on the news they’re still screwed. Large layoffs expected, asset sales to pay down high cost federal borrowings, and, not counting the $30B worth of federally incentivized deposits from many other stable banks to prop them up, something like 60% of their deposit base has left.
Here’s a blog on the current banking issues and troubled companies.
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FRC a couple good articles on their unfortunate state
https://www.bloomberg.com/opinion/articles/2023-04-27/first-republic-is-in-limbo
backup link
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Sounds like the FDIC a might be working the weekend.
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Any idea which bank could be next after First Republic?
On other news, 25 basis points still on deck for Wednesday’s FED decision.
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