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Comment by thecyborganizer | Hacker News Reader

The customers who deposited $150 million expect some rate of return on their deposits - in fact, you promised it to them. In a year that $150 million needs to turn into $155 million or whatever.

So you need to lend it out, and charge interest, and use that interest income on your loans to pay the interest on your deposits.

Sounds like SVB made a lot of loans or investment purchases quickly, and then some of those went bad.

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Is this not what bonds are for? Savings accounts earn less than just buying bonds, and the bank pockets the delta.

They got greedy.

The bank has short-term liabilities to their customers, and decided to lend out the customers funds to someone else for the long term.

Total non-sense and greediness.

That's exactly what the bank did - they bought bonds. The type of bond they bought doesn't matter, what matters is that in a rising interest rate environment, the face value of the bonds fall and they are no longer producing higher yields than the saving account rates.

They didn't get greedy, they failed to anticipate the speed and amount that interest rates would rise.

Yeah, but they bought bonds to make their numbers work. They had a choice of getting like 0.08% in overnight funds or 0.36% in short term T-bills or locking it up and getting ~3% in MBS. They chose the latter to make more money. If they had chosen the former things would have been far less critical.

In retrospect this was a huge risk. They locked up way too much money in long term securities for how flighty their deposits could be.

They too, thought that the world had fundamentally changed as a result of the pandemic.

3% MBS, that's a good one. Try more like 1.25% coupon rate with the crazy low mortgage rates were at when SVB got the inrush of deposits (the banks and the GSEs gotta make their money too, with mortgage rates near 7% UMBS coupons are only at 5.5%).

The type of bond would matter if default risk was a meaningful piece of the puzzle here, but in this case it isn't (IIUC).

They did not get greedy. They bought bonds, and those bonds turned into a liability. Because the bonds were bought when interest rates were extremely low, they are worth less than bonds at current rates and had to be sold at a loss in order to shore up liquidity. That spooked investors and prompted a run on the bank.

> They did not get greedy. They bought bonds

they got some bonds which had an interest rate risk, in order to earn a higher interest. This is "greedy", but it would've been fine under normal circumstances, since they did not break any banking regulations.

You said they didn't get greedy but the next sentence is the description of an extremely greedy act. They did not need to buy 10 year bonds. They could've bought 1 year bonds, or any other length shorter than 10 years. Or just less 10 year bonds.

Bonds have a duration until maturity. Savings accounts can be withdrawn at any time. The bank normally pockets the delta by taking up the risk of this mismatch. In this case the risk became too much.

Think about it from the other end. You have a mortgage. But the bank needs money now and asks you to prepay your mortgage. What do you do?

I can't edit this anymore, but: there are multiple articles explaining that SVB owned mortgage-backed-securities, which is what I meant by "getting greedy".

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