About Those ‘Safe’ Silicon Valley Bank Treasurys

Any asset can blow up a bank if monetary policy is bad enough

WSJ editorial. Excerpts:

"it didn’t hold exotic derivatives, structured debt products or other horrors that caused so much financial carnage 15 years ago."

"SVB held boring Treasurys and highly rated mortgage-backed securities in large quantities."

"The banking rules they introduced after 2008 made sovereign bonds such as Treasurys and the mortgage securities of Fannie Mae and Freddie Mac the coin of the realm for bank capital standards."

"Banks, especially the largest, now are required to hold a larger quantity of highly liquid assets to avoid panics, as well as larger capital buffers"

"regulators put sovereign bonds of various durations on the preferred list for each type of buffer."

"sovereign bond markets tend to be highly liquid."

"But what about interest-rate risk? For at least 15 years the Fed and other central banks have downplayed this risk"

"Their promises to suppress interest rates to abnormally low levels for extended periods encouraged banks and others to believe sovereign bonds would hold their market value."

"Unrealized losses for securities held by U.S. banks stood at $620 billion as of December 2022"

"U.S. accounting rules allow banks to avoid recognizing losses on assets they declare they’re holding to maturity, while they must mark-to-market assets they designate as “available for sale” in case of distress."

"it creates an incentive for banks to shift more assets into the hold-to-maturity pool as interest rates rise."

"No law, rule or regulation can spare the economy from the consequences of bad policies, especially bad monetary policies"