Weird part about this whole thing is, we have been repeatedly told that banks are good and they learned a lesson in 08. Now both tech and banking are in trouble again.
> we have been repeatedly told that banks are good and they learned a lesson in 08
This is a wholly different lesson.
In 2008, banks were making bad investments.
In 2023, the changing interest rate environment caused good investments to become worth less than their original value. If held to term, things would be fine, but liquidity issues put stress on the system.
These are not the same, and we have better means of dealing with this problem. SVB and First Republic were handled appropriately. Investors written down to zero, depositors made whole.
The future banking system will be even more robust after having learned this new lesson. I've no doubt that we'll have regulations that demand a better mix of investments that are regularly audited and stress tested.
We as a society also have to stop thinking of banks as a means to earn interest on deposits. Chasing the best rate has led to this problem. Deposits are liabilities.
Every time someone says "stress test", I will point out that the stress tests did not model for interest rates rising like they did, which triggered the current problems we're having (or, really, interest rates being so low for so long was the actual problem IMO, but that's a whole separate conversation). Stress tests as currently implemented would not resolve the issue, and even if they were so wise to reactively throw in more aggressive changes to interest rates to these stress tests, would that be enough to catch the next problem?
See Tables 2.A and 3.A in 2022 Stress Test Scenarios (PDF), covering a 3-year period starting in Q1 2022. Look at the 3-month Treasury rate. In 2.A, rates go up to 1.5 by Q1 2024 and sit there. In 3.A, rates sit at 0.1 for three years.
Rates are not the only variables, but the point remains that the interest rate changes that triggered these problems do not appear in the stress tests.
I strongly disagree, the current mess is largely caused because some banks didn’t anticipate interest rates going up from historic lows. That’s profoundly bad risk management. A child could have done better.
Well, yes. But it's also bad economic policy. The banking sector just happened to have adapted to a decade of low interest rates. Then during the Covid crisis of 2020 the FED pumped dollars like crazy into the markets [1] -- adding fuel to the fire. If you set bad incentives you'll harvest bad behavior. That is the tragedy of FED-style economic planning in a nutshell.
What lesson are they going to learn? Go big or go home? I don't foresee any kind of legislature becoming law over this, especially with our divided government.
However, this time it looks like the government failed, not the banks. If you look at the US government (bonds) as just another business the bank can invest in, you can't help but notice that the business had not been very well managed.
It promised that bonds will keep their value, but they did not (currently at market price and in the future, due to their yield suffering from inflation). We still don't have a clear message on the situation with government debt as well, but we are probably headed towards more inflation and/or some (hopefully soft) default(s). And as always, fewer people will have more assets/control and the rest of us will pay the bill.
The issuer of a bond only promises that they will pay the principal of the bond back with interest. They don't promise that the bond will hold its value in the market.
Yes, but here the issuer is strongly related to the levers of interest rates and money supply which directly impact the long term value of the issued bonds.
