America’s banks are missing hundreds of billions of dollars

Re:America’s banks are missing hundreds of billions of dollars by simple-thoughts on Tuesday March 21, 2023 @10:48PM (#35256167)

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.

[ Parent | on HN ]

Re:America’s banks are missing hundreds of billions of dollars by User23 on Wednesday March 22, 2023 @01:42AM (#35257255)

> 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?

[ Parent | on HN ]

Re:America’s banks are missing hundreds of billions of dollars by taeric on Wednesday March 22, 2023 @02:42AM (#35257608)

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

[ Parent | on HN ]

Re:America’s banks are missing hundreds of billions of dollars by lordnacho on Wednesday March 22, 2023 @02:54AM (#35257693)

Speculators aka hedge funds.

[ Parent | on HN ]

Re:America’s banks are missing hundreds of billions of dollars by quickthrower2 on Wednesday March 22, 2023 @02:57AM (#35257706)

Damn is no one gonna pay for the free lunch?

[ Parent | on HN ]

Re:America’s banks are missing hundreds of billions of dollars by balderdash on Wednesday March 22, 2023 @10:22AM (#35261443)

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)

[ Parent | on HN ]

Re:America’s banks are missing hundreds of billions of dollars by xadhominemx on Wednesday March 22, 2023 @02:32AM (#35257544)

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

[ Parent | on HN ]

Re:America’s banks are missing hundreds of billions of dollars by watwut on Wednesday March 22, 2023 @02:56AM (#35257698)

But small regional banks had not done that in general.

[ Parent | on HN ]

Re:America’s banks are missing hundreds of billions of dollars by kgwgk on Wednesday March 22, 2023 @02:57AM (#35257705)

> 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.)

[ Parent | on HN ]

Re:America’s banks are missing hundreds of billions of dollars by itsoktocry on Wednesday March 22, 2023 @06:50AM (#35259231)

>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?

[ Parent | on HN ]