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.
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.
> That’s profoundly bad risk management.
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.
[1] https://www.federalreserve.gov/monetarypolicy/bst_recenttren...
They were not good investments
https://www.federalreserve.gov/supervisionreg/dfa-stress-tes...
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.