In the grand scheme of things the failure of SVB seems due to inflation. It’s the basic cause of SVB’s rapidly expanding balance sheet, and then it’s rapidly shrinking one a year later. Literally… SV nerds get bundles of cash and put it in the bank. SVB secures their deposits with treasuries. Inflation wipes out the value of the treasuries at the same time as the end of the inflationary gravy train requires these SV nerds to withdraw more of this money to meet ongoing obligations.
Not all Treasury assets are the same! 1 year vs 10 year. SVB chose 1 year, even after Biden reduced US energy supply and Russia was invading Ukraine , making price increases inevitable. This choice resulted in some 18% market value loss, with little diversification. The risky choice plus the actual inflation is the main cause. Betting the bank on the “no inflation “ scenario is dumb, but it becomes (almost?) criminally negligent if the decision makers don’t even know they’re betting the bank.
Regulators allowing such bets are somewhat to blame because their existence and job is to not allow bank betting, leading bank execs to assume that if it was too risky it would not be allowed. There should be a phrase for reg-based increased risk hazard, similar to moral hazard.
The SVP failure
Not all Treasury assets are the same! 1 year vs 10 year. SVB chose 1 year, even after Biden reduced US energy supply and Russia was invading Ukraine , making price increases inevitable. This choice resulted in some 18% market value loss, with little diversification. The risky choice plus the actual inflation is the main cause. Betting the bank on the “no inflation “ scenario is dumb, but it becomes (almost?) criminally negligent if the decision makers don’t even know they’re betting the bank.
Regulators allowing such bets are somewhat to blame because their existence and job is to not allow bank betting, leading bank execs to assume that if it was too risky it would not be allowed. There should be a phrase for reg-based increased risk hazard, similar to moral hazard.