This articles while written by a local news shares a bit about how another industry that wasn’t tech depending on SVB.
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Per our local paper, 1 in every 5-6 wineries in my state was also banking with SVB.
To make money on interest rate spread, banks in general tend to lend longer (30 year mortgages or mortgage backed securities are examples) than they borrow (from depositors). So the vulnerability of banks to rising interest rates reducing the value of their assets is common.
A bank can be well protected against interest rate risk by having only very short term assets like a money market mutual fund. But then it would need higher fee income and likely be uncompetitive on that front.
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Yes, banks all take some interest rate risk. The question is how much of the risk to take and how to hedge the rest away. At the minimum, they need to hedge away the tail risk to make sure they can survive a large swing in interest rates.
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I have gotten at least 15 emails a) explaining what happened to SVB; and b) why they are different than SVB. Financial advisors, banks, insurance firms/brokers, and others (law firms holding webinars on the subject of what happened).
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The Fed was probably going to raise rates to wring out inflation until something broke. Well, something broke. I wonder what that does to the Fed’s approach.
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I think the Fed will move forward with its planned rate increase and will provide a “we shall see” guidance. Maybe 25 instead of 50 this time, but I would not be shocked if it is 50.
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I’m not a fortune teller, but it wouldn’t surprise me to see the Feds wait a cycle over this.
But a bit of the other economic news is good (and good is bad for inflation), so who knows?
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Me too.
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They don’t?
I thought all banks hedged against rate risk. Simple interest rate swaps do that. Banks face floating rate risk, so they hedge with counterparties who create fixed rate positions to swap with the banks.
I assumed every bank did this, and I’ve been under the general impression that some / most of them have to by regulation. Nobody occupying the Treasurer’s or CFO’s chair at a bank should not know this. What am I missing here?
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Unfortunately, it isn’t that simple. They need to know the amounts to hedge at all points in the future (and constantly adjust their hedges). Those amounts themselves also change with interest rates, among other things (i.e. they’re correlated). Take mortgages, for example. Both voluntary prepayment (refi) and involuntary prepayment (default) patterns change as interest rates change. Another huge complication is that the interest rate isn’t a single number. It’s a curve (or what’s called the term structure of interest rates). The curve can change its shape in infinite number of ways as well as moving up or down. Interest rate risks are easily among the hardest financial risks to hedge against correctly.
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Oh, I agree completely with all that. I’m just saying, like the other financial institutions, they attempt to hedge; and I would think any regulated bank would have people on staff who either know or consult with people who know that they have to have a hedging strategy.
I was on a corp fin team in private practice that represented one of the largest banks in the country. They hired a new Treasurer from a then-recent acquisition who then hired me to negotiate ISDAs with as many counterparties and he could bring to me. He wanted a deep reserve of counterparties with which to transact and fill out what he thought was a gross under hedge for that bank at that time with that portfolio.
I just assumed that’s how all banks were staffed. Doesn’t sound like it.
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Large banks with trading operations generally have the expertise. However, few midsize and small banks have the right personnel, as they aren’t trading in the fixed income markets. Remember these hedges need to be dynamic and constantly rebalanced. They may have a mix of swaps, options (caps, floors, swaptions, etc.) and other interest rate derivatives on their books that they have to constantly reevaluate and adjust their hedges. Most CFOs and Treasurers at these firms aren’t really versed in these instruments and their sensitivities either (other than what they learned in business schools at 50,000-foot level).
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Of course, it’s also a gamble on the future, and armchair quarterbacks make the best decisions, far better than those who have to decide things without instant replay.
It’s super easy after the fact to say, “You shouldn’t have done that!” But who knew Covid was coming and would so drastically affect the economy? It didn’t make any of our predictions in 2019. Then add in the Russian war causing issues in 2022.
In real life one has to make their best guess going forward and that’s often based upon past experiences.
The person I know at SVB has already been approached by a headhunter at another bank. Person reports that some other people in same department are biding their time…they think there will be some sort of knight on a white horse to come rescue all of their jobs. 
. It’s a lousy situation.
I’m sure other firms will look to take away some of the venture lending business. My understanding is that the venture lending at SVB was not the issue.
I posted this on the political thread with the same topic and thought it could be beneficial here too (eliminating the politics):
Used Google…
In 2016 5 banks failed.
In 2017 8 banks failed.
In 2018 none failed.
In 2019 and 2020 4 failed each year.
In 2021 and 2022 none failed.
In 2023, so far we’re at two.
Seems there’s not much difference in the last few years.
Maybe, just maybe, it’s what goes on in life? From what I read elsewhere, all of them were bailed out BTW.
Regardless, I’m glad they are reassuring people in order to stop any panic and causing real trouble by the Domino Effect.
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With so many banks (and some very small banks) in the US, a few bank failures each year aren’t surprising. Their failures were typically caused by idiosyncratic reasons. However, the market suspects that the failure of SVB also had a systemic cause, in addition to its idiosyncratic causes. That systemic cause is the rising interest rates.
In a rapidly rising interest rate environment, some interest rate sensitive businesses would fail. Always. Some banks are among the most interest rate sensitive businesses. Last time we had a rapidly rising interest rate environment was in the early 80’s. We had many business failures then. And an S&L crisis. Would this time be different? Hopefully, but…
Which is exactly why I think the gov’t is doing a great job supporting SVB and consumer sentiment. Covid and Russia have changed a lot. We don’t need a banking failure because of them. We need to ride this wave out to a smooth ending.
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