They bought the greediest ones and ignored TIPS. They wanted profit.

Imagine you run a small regional bank. You have marketing and operational expenses you need to cover, and you also need to be attractive enough to depositors to keep them from leaving to your giant to big to fail competitors who have explicit state backing. You’re required to buy from a very limited selection of assets that have government approval, especially government debt.

Interest rates for short term debt are at 0%, at these rates you will run at a loss. Your only choice to keep your bank competitive is to find any yield at all, so you buy long duration treasuries. Yes you take interest rate risk, but your bank is able to operate for another day.

Of course the flaw in this story is that the interest rate risk should have been hedged, and it wasn’t. But viewing this as a straightforward story of “banks greedy, government good” is not reflecting the realities for regional banks.

> Of course the flaw in this story is that the interest rate risk should have been hedged, and it wasn’t.

How does the banking sector in aggregate hedge its interest rate risk exactly? They have to find a net counterparty outside the sector who wants exposure to interest rate risk. Who exactly would that be at sufficient scale to protect trillions in deposits?

I'm also interested in this answer. I've seen running credit cards?

Speculators aka hedge funds.

Damn is no one gonna pay for the free lunch?

It’s probably easier to think of who wants long duration risk, and I think the answer is 1. Speculators (who like the volatility/convexity) 2. Pension funds (they have very long dated liabilities, and so potentially want to increase the duration of their portfolio)

Ok but the fact is a lot of regional banks didn’t buy very long-dated treasuries

But small regional banks had not done that in general.

> Interest rates for short term debt are at 0%, at these rates you will run at a loss. Your only choice to keep your bank competitive is to find any yield at all […] Of course the flaw in this story is that the interest rate risk should have been hedged, and it wasn’t.

If you buy long-term Treasuries for the high yield with and you hedge the interest risk rate… what you get is the yield of the short-term treasuries. Why buy them in the first place then? (There is no credit risk in this case - if you neutralize the interest rate risk there is nothing left.)

>Of course the flaw in this story is that the interest rate risk should have been hedged, and it wasn’t.

Oh, so the thing that could have prevented the bank from failing (but, unsurprisingly, costs them money to do), didn't happen? But it's the governments fault?

> Does the government require banks to buy long-term treasuries?

Yes, there are a number of banks that have "Primary Dealer" [1] status which confers to them some benefits, but also makes them legally obligated to make some minimum number of winning bids on government treasury auctions. See the section under "Expectations & Requirements" in the link. Probably the most quantifiable requirement is they have to maintain a minimum of 0.25% market share in winning Treasury bids: "Maintain a share of Treasury market making activity of at least 0.25 percent."

[1]: https://www.newyorkfed.org/markets/primarydealers

Of the over 4000 banks in the US, only around 20 are Primary Dealers.

The answer to the parents question is no. While most of the primary dealers are banks these days, they have nothing to do with the conversation at hand, or SVB and it’s problems

There are a number of banks that are Primary Dealers, but it's a fairly small list. SVB wasn't on it. So SVB, in particular, was not required to buy long-term treasuries.