They would have had to recapitalize way earlier if that was the case.
This is the kind of thing you could get a Nobel prize for, if it was backed with data and people agreed with the conclusion.
Of course Bank of England had to bail out their pension funds for very similar reasons so it's not like this is something they're unaware of.
My guess is that come Monday they backstop all of this and only the shareholders of SVB get wiped out, sort of like the reverse of Bear Sterns (bailed out early) vs Lehman (allowed to fail). It's not "fair", it's just risk.
They absolutely deserved to fail.
The government allowing them to fail is actually a sign of the system working.
You would think that they should prevent such risks, right? If the bank loses their collective shirt on a bad bet, they will eventually fail to meet their reserve requirements, right? I don't see how you create a stronger incentive without specifically telling bankers how to do their jobs.
Is this one possibly one of the 'the Fed broke something' scenarios that might lead to quicker rate cuts ?
SVB had plenty of warning to sell securities. They didn't even have to do it overnight. They had plenty of time to slowly roll-over their bonds and sell MBS. This wasn't a surprise "gotcha" by the fed.
SVB probably should have realized that continued interest rate cuts were gonna nuke their MBS, and sold them at a loss earlier, so they could recapitalize in safer instruments like short term treasuries.
What I’m learning about reserve requirements is that this would have actually reduced their “assets in reserve” though because they were allowed to use the maturity price of the MBS for that accounting. So selling them at a loss and buying short term treasuries would have reduced the amount of assets in reserve by that calculation, even though it would have been the same amount of assets (at the time of the transaction) in mark-to-market value AND safer against further interest rate increases.
I’m guessing this dilemma at some point got so bad that they literally could not recapitalize anymore without becoming insolvent, at which point their only option was to hold the MBS through further losses
It would be very damaging for their credibility if they hiked by 50bps after already doing 25. Of course it depends on what’s the CPI next week but if it’s good/as-expected 50bps would be very surprising
If they wanted 0.5 they could just hike it by 0.25 and add another 0.25 later. Exactly the same outcome, less turmoil in the financial markets. Powell’s rhetoric seems to have staid about the same for the last 6 months.
Also the fact that their rapid rates hikes were the direct reason behind the second largest bank collapse in US history adds another dimension. Obviously I’m not saying it’s their fault. But well if bond prices go down even more than expected more banks might end up in the same situation.
Instead, they waited until it was way too late (by most accounts, the fed is going to do another 50bps hike next) and all it took was some fear for the house of cards to come crumbling down.
This does feel like a regulatory failure though. Reserve requirements don't quite prevent a bank taking on massive undiversified risk like this.