Your analysis is missing this critical piece: duration risk.
The government requires banks to buy bonds/treasuries, but gives the banks full leeway as to whether they buy short-term, mid-term, or long-term bonds/treasuries.
In a low rate environment, long-term bonds have a higher yield but also suffer from interest rate risk (a risk caused by their long duration).
Even an untrained amateur wealth manager knows to stagger the durations of the bonds you hold, ESPECIALLY if you have any reasons you might need to sell those bonds on the secondary market before maturity. Risk managers and investors working in the finance/risk department of a top-20 bank, managing billions in deposits, should especially know this.
Some banks were simply greedy, lazy, or both (SVB).
It's econ/finance 101 that when interest rates rise, bond values go down. They could have held a much larger percentage of short-term bonds/treasuries, and they would have been fine.
I think the big lesson is that the banking industry isn't nearly as smart and self-regulating as many people think it is. Bank finance departments either chase yield, when they can (2021), or they manufacture it, when they can't (2007-2008).
Exactly. I was speaking with my attorney about this the other day because he also advises numerous banks. He explained to me that balancing short and long term investments to handle withdrawals is a basic aspect of modern banking, and SVB should not be viewed as a signal of a more widespread bank collapse.
The government requires banks to buy bonds/treasuries, but gives the banks full leeway as to whether they buy short-term, mid-term, or long-term bonds/treasuries.
In a low rate environment, long-term bonds have a higher yield but also suffer from interest rate risk (a risk caused by their long duration).
Even an untrained amateur wealth manager knows to stagger the durations of the bonds you hold, ESPECIALLY if you have any reasons you might need to sell those bonds on the secondary market before maturity. Risk managers and investors working in the finance/risk department of a top-20 bank, managing billions in deposits, should especially know this.
Some banks were simply greedy, lazy, or both (SVB).
It's econ/finance 101 that when interest rates rise, bond values go down. They could have held a much larger percentage of short-term bonds/treasuries, and they would have been fine.
I think the big lesson is that the banking industry isn't nearly as smart and self-regulating as many people think it is. Bank finance departments either chase yield, when they can (2021), or they manufacture it, when they can't (2007-2008).