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Bank Run

DeacMan said:
Not if the stress testing doesn't mark the value of the bonds to market. That's what baffles me. The accounting rules don't provide the bonds be marked to market and never have. Not sure if the stress testing would have done so.
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Yeah I’m not sure on that either. Seems reasonable to have to add that in if not.
 
JuiceCrewAllStar said:
I don't know enough to really weigh in here, but I do notice you keep calling SVB a "regulated bank" and then you also make this statement.
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Probably meant that what got them in trouble was poor business decision making, not something that was illegal/against regulation.

Part of what folks have been saying is that bringing smaller banks as well as investments classified as held to maturity INTO the scope of existing banking capital requirement and “stress testing” regulations that generally pertain to larger banks could help going forward.
 
06deacon said:
Probably meant that what got them in trouble was poor business decision making, not something that was illegal/against regulation.

Part of what folks have been saying is that bringing smaller banks as well as investments classified as held to maturity INTO the scope of existing banking capital requirement and “stress testing” regulations that generally pertain to larger banks could help going forward.
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Been a few years since I was involved in stress testing but for the big boys I’m pretty positive the HTM market value changes and impacts on liquidity and capital in the event of interest rate shocks is part of stress testing even if there’s no accounting MTM on that portfolio.
 
bmoneydeac said:
Been a few years since I was involved in stress testing but for the big boys I’m pretty positive the HTM market value changes and impacts on liquidity and capital in the event of interest rate shocks is part of stress testing even if there’s no accounting MTM on that portfolio.
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Ah gotcha, I’m not part of the stress testing process so didn’t know those were considered.
 
DeacMan said:
Not if the stress testing doesn't mark the value of the bonds to market. That's what baffles me. The accounting rules don't provide the bonds be marked to market and never have. Not sure if the stress testing would have done so.
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Idk man, if you look at the scenarios banks face in these tests, tell me that SVB wouldn’t have benefitted from exposing results of such kinds of testing to shareholders before the fuckin run:

Federal Reserve Board releases hypothetical scenarios for its 2023 bank stress tests

The Federal Reserve Board on Thursday released the hypothetical scenarios for its annual stress test, which helps ensure that large banks are able to lend to h
www.federalreserve.gov

Instead you see the presidents of these banks lobbying to exempt themselves from these tests, and I’m left entirely unsympathetic.
 
First republic bank stock down about 70% today, very prominent bank here in LA.
 
TownieDeac said:
Idk man, if you look at the scenarios banks face in these tests, tell me that SVB wouldn’t have benefitted from exposing results of such kinds of testing to shareholders before the fuckin run:

Federal Reserve Board releases hypothetical scenarios for its 2023 bank stress tests

The Federal Reserve Board on Thursday released the hypothetical scenarios for its annual stress test, which helps ensure that large banks are able to lend to h
www.federalreserve.gov

Instead you see the presidents of these banks lobbying to exempt themselves from these tests, and I’m left entirely unsympathetic.
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If the test does not expose the issue it doesn't matter. The issue is the banks have never been required to mark these bond investments to market. So if the stress test doesn't test the right thing it is pointless. If the banks were required to mark investments to market the shortfall in value would have been evident for the world to see without ever doing a test in the first place bc their quarterly financials would have laid this bare. I don't know if the stress tests would have uncovered this or not. The accounting rules didn't.
 
DeacMan said:
If the test does not expose the issue it doesn't matter. The issue is the banks have never been required to mark these bond investments to market. So if the stress test doesn't test the right thing it is pointless. If the banks were required to mark investments to market the shortfall in value would have been evident for the world to see without ever doing a test in the first place bc their quarterly financials would have laid this bare. I don't know if the stress tests would have uncovered this or not. The accounting rules didn't.
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“Made evident for the world to see” fine but their quarterly financials should “have laid this bare to them” internally before now, surely. They made this bet on bonds when nobody thought interest rates were going anywhere. But they effectively created the trap they fell into, and surely the sheer act of being forced to stress test every year applies additional internal scrutiny to practices banks are making, no? Like to your point you don’t need stress tests to look at q4 results of mark to market losses of $15.2bn lost against $16bn in equity to think things are in bad shape, right? Feels like the companies getting caught up in this are all companies underneath the threshold of the Fed’s regulatory arm is all, but maybe the whole thing is tenuous hinging on this bad accounting practice.
 
TownieDeac said:
“Made evident for the world to see” fine but their quarterly financials should “have laid this bare to them” internally before now, surely. They made this bet on bonds when nobody thought interest rates were going anywhere. But they effectively created the trap they fell into, and surely the sheer act of being forced to stress test every year applies additional internal scrutiny to practices banks are making, no? Like to your point you don’t need stress tests to look at q4 results of mark to market losses of $15.2bn lost against $16bn in equity to think things are in bad shape, right? Feels like the companies getting caught up in this are all companies underneath the threshold of the Fed’s regulatory arm is all, but maybe the whole thing is tenuous hinging on this bad accounting practice.
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The accounting practice is fine and correct, it was a bad business practice and one that they and others were likely well aware of based on existing financial info. So like other businesses that have bad business practices, the owners (shareholders) are getting wiped out.

The stress test will basically force compliance, meaning if the results of the test indicate you’re undercapitalized, you have to take action to correct that.

In this case if
1. those sorts of bond purchases need to be marked to market for purposes of that stress test (not for accounting purposes) and
2. this bank actually had to do the stress testing program;

maybe they would have made a different decision in buying a bunch of long term bonds in that fashion.
 
TownieDeac said:
“Made evident for the world to see” fine but their quarterly financials should “have laid this bare to them” internally before now, surely. They made this bet on bonds when nobody thought interest rates were going anywhere. But they effectively created the trap they fell into, and surely the sheer act of being forced to stress test every year applies additional internal scrutiny to practices banks are making, no? Like to your point you don’t need stress tests to look at q4 results of mark to market losses of $15.2bn lost against $16bn in equity to think things are in bad shape, right? Feels like the companies getting caught up in this are all companies underneath the threshold of the Fed’s regulatory arm is all, but maybe the whole thing is tenuous hinging on this bad accounting practice.
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Nobody is saying it was a sound business decision to not match your potential cash flow needs with your investment hypothesis. These are not per se risky bets in and of themselves. Investing in a 10 year bond yielding 1% is hardly the definition of "risk" if you can hold that bond to maturity. But it was a shitty business practice.
And no, you wouldn't know looking at a quarterly financial statement what percentage of the investments were mismatched because the accounting statements would lump these investments in at a higher value than mark to market. You'd have to dig deeper.

Maybe stress testing would have used a different standard than the accounting rules. Maybe not. But if the accounting rules marked these fucking things to market the problem would have been laid bare earlier (if the bank was publicly traded). Let's also keep in mind there are hundreds upon hundreds of smaller banks out there that aren't publicly traded. Which makes the true potential scale of this problem (and the types of everyday people it can impact) a bit scary. Like who knows whether Williams County Bank in podunk Iowa has a risk?
 
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