SIVBQ
🚨 Silicon Valley Bank failed due to a mismatch between its assets and liabilities, highlighting the critical difference between credit risk and duration risk.
📉 The bank invested heavily in long-duration U.S. Treasury bonds, which plummeted in value as the Federal Reserve aggressively raised interest rates.
🏦 This situation led to massive losses and insolvency as depositors withdrew their funds, demonstrating the dangers of ignoring duration risk in banking.
@Javierlinares:
“Silicon Valley learned very quickly the difference between credit risk and duration risk. So, what is credit risk? Credit risk is the risk of the issuer of the bond. So, who issued the bonds that Silicon Valley bought? The U.S. Treasury. There is no better credit risk than that. So, one would think, you go to university, your professors will tell you, ‘In banking, the deposits you collect from clients have to be matched with very liquid and very safe assets, so that the mismatch does not go against you.’ So, at that time, what happened with Silicon Valley was that it received huge deposits from clients, from venture capital and private equity, from the technology sector. It received a lot of deposits, which are liabilities for the bank, and what it said was, ‘Okay, the theory taught me that these deposits I am going to match with an ultra-liquid and safe asset.’ It bought U.S. Treasury bonds of high duration, because, also, at that time, you had the Federal Reserve saying, ‘Rates are going to be zero for many more years.’ So, having already learned what duration is, the bank said, ‘It makes sense. I pay little for these deposits. I buy a bond that yields me more than my deposits. I am mismatched in time, but it doesn’t matter, because they are very safe assets, and I know that the U.S. Treasury is going to pay me. There is not going to be a default there.’ Great. What happens? The Federal Reserve enters the most aggressive rate hike cycle in history, and bonds begin to fall in price, as we have already seen, due to the relationship between price and yield. So, rates went up, bonds began to fall, and that is duration risk, price risk. So, Silicon Valley suddenly started to have brutal losses in its bond portfolio, and add to that that depositors began to withdraw their money. That is the worst of worlds for a bank, where your asset is deteriorating and your liability is being debited. So, Silicon Valley said, ‘I have a problem, because if I sell these bonds that already have a loss, I will realize it.’ And by realizing losses on bonds in banks, you eat up your capital. But at the same time, they said, ‘But I need liquidity for these depositors who are asking for their money back. What do I do?’ And what happened was what we all already know. They became insolvent, right? And it was simply because of that mismatch between the deposits leaving and some safe assets, in the form of bonds, that were what triggered the problem in their capital, because they had losses and losses and losses and losses. And that bank obviously did not enter into hedges for that risk in the bonds, and the story we already know today. That bank no longer exists, right? So, maybe the lesson I want to tell you is that if 10 years ago someone had told me, ‘If a bank receives deposits and buys U.S. Treasury bonds, that will lead it to bankruptcy,’ I would have said, ‘Ah, what is this guy talking about?’ But, such is the case.”
Javier Linares presents the case of Silicon Valley Bank here:
View the video on YouTube.
Read more articles by the world’s top 100 analysts on Silicon Valley Bank (SIVBQ) at the following link. SIVBQ stock.
