All fair and good, as a noob I ask what else should SVB have done if not invest in Treasury Bonds (which according to OP are lowest risk)?

> what else should SVB have done if not invest in Treasury Bonds

Bought Treasury bills. They’re more liquid and have less interest rate risk. They yield less, however, which is why SVB bought the riskier stuff.

That's the thing I don't get at all, they had what, something like 160b in deposits - they could've kept 150b in bills, ten billion in Treasury bonds, and still made millions to hundreds of millions per year ostensibly risk free - surely enough to keep a ledger balanced. The bet on mbs at historic lows seemed like a pennies in front of steam rollers play

It was. You're not missing anything.

Bob, responsible for risk management, goes to the boss and says "Hey here is the plan that makes us $X and keeps us at acceptable risk of interest rate changes." Jim, the boss says "Jeez $X isn't very much money, our shareholders expect returns! If we changed our portfolio like this we'd make $Y. You are being a debbie downer, bond prices won't collapse and even if they do we just hold them to maturity and we are fine. We simply can't leave this much money on the table."

Didn’t help the chief risk officer quit in April and a new person wasn’t hired until January. So there wasn’t even a Bob in this scenario.

SVB's Chief Administrative Officer, Joseph Gentile, was formerly the CFO for Lehman Brothers' Global Investment Bank.

Gee, it's almost like limiting the liability of these c-suite types let's them do whatever they want and get away with it. Weird.

DFAST is another part of Dodd-Frank, and one part that might have helped catch this issue, I agree - although, I do wonder what potential Federal Reserve interest rates they would have plugged into the calculations…

The 2021 Report https://www.federalreserve.gov/publications/files/2021-dfast... took the baseline scenario to 1.9% in 2024 for 10yr Treasury returns, while the adverse scenario went to 1.5%. Likewise for the previous year: in 2020, baseline took it to 2.7% in 2023 while the adverse scenario went to 2.2%. The 2022 Test variables are quoted at https://www.federalreserve.gov/publications/2022-Stress-Test... saying year 2025 would see 2-1/2 and 1-1/2, for baseline and adverse respectively. For comparison, the actual rate now is close to 4%. So, honestly, I’m not sure if DFAST would have caught it, since this is a full percentage point and a half above the highest values they used in the last three tests. 2019 had 3.6% in baseline for 2022, so maybe it would have, though.

But ignore that, let’s assume DFAST would have clearly highlighted this. If it did, it would be cautioning “you have the potential for significant unrealized losses, make sure you maintain a good position so you can carry those securities to maturity” - which SVB was doing right up until its dwindling liquidity was in reach of a big bank run. The stress test is simply not designed to detect all potential periods where a sudden bank run of significant scale might kill a bank - fundamentally, it’s a capital stress test, not a liquidity stress test.

At best I think we can say DFAST, in some years but not in others, could plausibly have given a moderate to strong indication that more of SVB’s assets would be tied up than usual. From that, you could certainly take a hint and look at liquidity.

But then you have to have enough paranoia to model “The Fed lights a rocket under the interest rate just like they said they wouldn’t” and “our depositors, who all walk around with their burn rates practically tattooed on their foreheads, decide to do a bank run” at the same time to see this coming. And then you have to tell other people this is coming, and grit your teeth listening to them quote the Fed’s forecast that interest rates will stay low. Ultimately they would calculate the cost of your proposal and ask you why they ought to give up that much potential profit to hedge against the chance of these two unlikely events happening together - “that’s like seeing a pair of black swans mating”, they would say to you.

Again, I want to stress I’m not saying Dodd-Frank caused this, I’m not saying Dodd-Frank exemptions for SVB were a good thing, etc. I’m saying that this collapse was mostly out of scope of Dodd-Frank, the parts that were in scope were affected in both directions, and all of this in service of the original point: the article bringing up their exemption lobbying is just airing dirty laundry, not elucidating the cause of the downfall.

If you're subjected to a regulation with periodic reporting, you're just not going to play and look bad on a report if you can avoid it. And you know parameters will be refreshed

SVB did lobby so it could play the game it wanted, it looks like it was a basic game from what I can read in the media.

In Europe the current test is page 5, 2023 10 year interest rate at 4.5% in the stress test, and you see that it's a moving target (nice historical graph):

https://www.eba.europa.eu/sites/default/documents/files/docu...

Incentives matter ... While regulation will not prevent failure, it helps. We already know what happens after deregulation of risk management in banking.

Disclaimer: worked for a decade in finance, including on software used for those report computations...