On today's episode of The Macro Trading Floor, Alfonso & Andreas walk through the collapse of Silicon Valley Bank. On a historic week where we saw the collapse of the largest bank since 2008, we walk through the dynamics throughout 2020 - 2023 that caused SVB to fail, what risks lie ahead and if we should expect spillovers into the broader banking system.
I understand their points, which are very good. I am a big fan of Alf and have followed this podcast for some time. Also, I hope SVB is a contained and somewhat unique issue despite the fact that all commercial banking businesses feel the pain during inverted yield curve environments.
All that said I do have some thought provoking questions swimming in my head:
Who holds the other side of the derivatives that banks are hedging their interest rate risk with? Other banks are certainly some portion. Even if we say they are the minority we better hope counterparty risk does come into play.
How many banks are hedging this risk but still trying to classify bonds at HTM? Derivatives and any hedged bonds are usually classified as AFS with the financials being MTM net of hedges. Are banks applying this concept appropriately or are they trying to recognize the gains in AFS and the not the losses via HTM?
Funny enough, it seems possible to me that the banks may have to actually realize losses on the bonds and never realize the gains on the derivatives if there is some sort of counterparty issue.
Signature bank is now identified as another casualty and GS feels strongly that the Fed will stop hiking rates due to the financial pressure banks are under... Makes me wonder if SVB is really so unique or just the weakest bank in the inverted yield curve desert right now...
On the positive side officials are claiming this will be handled via a bail-in but I wonder what the repercussions will be of making depositors whole.