Was SVB bankruptcy a failure of regulation?
As most people not living in California I never heard of Silicon Valley Bank (SVB) before it became the global news couple weeks back. And then all of a sudden a lot of people talking about a lot of terrifying scenarios. Naturally, I wanted to read and listen, and understand what was going on and why.
And boy oh boy, was it illuminating! I won’t go into details and bore you with the difference between “available for sales” bonds and “held to maturity”, as there are hundreds of publications focusing on step-by-step development of the crisis. Let’s cut to the chase, shall we?
We’ll just look at the high level view of a bank’s balance sheet. On the liability side we have a lot of pretend companies with fake business models, otherwise known as “business disruptors in cryptocurrency space”. They are only possible when someone else is throwing metric tons of money out of helicopter. As soon as it stops — they go extinct.
On the asset side you have a long term low coupon rate bonds. They have a very important feature: when rates go down, previously issued bonds become more valuable. When rates go up — bonds devalue.
In a summary — both assets and liabilities will be crushed if interest rates go up. Interest rates are currently at zero, and can ONLY go up. Any decent 10 year old can figure out a problem: current “strategy” holds as long as absolutely nothing happens. Any decent 16 year old armed by “financial education tik-toks” can devise a course of action to remedy the problem. And it will work 1000 times better that the strategy SVB had. Or should we rather say “didn’t have” — their “portfolio duration” and “hedge adjusted portfolio duration” were exactly the same, which means they had exactly ZERO hedges in place (duration was 5.6 years, if you were wondering).
Some people say SVB was a failure of regulation. When some alternatively gifted victim of evolution jumps from the forth floor into a bonfire — it is not a failure of regulation, even if there were no sign explicitly prohibiting from jumping. It is a DNA defect turning off survival instinct. Hedging against interest rate risks was the only sane choice for SVB. Regardless of whether it was required by regulation or not. SVB bankruptcy is failure of survival instinct, not regulation.
I will be surprised if this exemplary case of criminal incompetence provokes a financial crisis. It will be mildly amusing, though very unflattering to modern finance system.
P.S. In all this yelling at clouds we should have a constructive paragraph. So here it is: if your bank has risk management system on par with the bank number 16 in US of A, I can improve it’s efficiency 1000 times. I still have a 15 minutes window every third Thursday of a month, it should be more than enough. Send your 7-digit bids through the feedback form.
