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The Economy (2020/21)

Jm_

Jm_

sled dog's bollocks
Jan 14, 2002
18,972
9,637
AK
Friend posted this:

I am on vacation and on a Saturday, yet here I am nerding out the Silicon Valley Bank (SVB) failure. Just when you thought I was already a big dork and then I come in with an even dorkier post like this. Ahahahahaha. I am not crapping on credit unions or trying to create distrust (I have been in the CU industry since 1994), but just to give you some insight on what I do and what I know.

I actually look at a bunch of CU balance sheets, and the few minutes I spent looking at SVB’s balance sheet doesn’t look all that much different than a CU. What I mean is the types of assets they have on their balance sheet are very similar to what I see with a credit union. They had a ton of securities, but all these securities were pretty much plain vanilla like what a credit union would purchase (their portfolio was agency/treasury bullets and agency MBS/CMOs).

At this point I see SVB had two major risks they didn’t manage correctly. 1) was the deposit withdrawal risk (they had a high concentration of big dollar accounts - a few big accounts leaving the credit union created a liquidity issue) 2) their interest rate risk was not managed appropriately (their balance sheet had too much in long-term investments that were fixed rate). Once the big dollar accounts started leaving recently, SVB had to sell their securities for liquidity. The sale of these securities were at a big loss.

Credit unions usually don’t have the big dollar accounts concentration risk SVB had, but there are some that do. As an example, I know of a credit union with about 20% of their deposits in marijuana related business accounts (not the same as big dollar accounts buy have similar risk exposure of deposits leaving), and this credit union is aware if there is a regulatory change to how marijuana accounts are treated by the federal government (the govt relaxes regulations) those deposits will walk out the door. As for interest rate risk, there are a ton of credit unions with a similar amount of volatility SVB had.

Once SVB added all the long-term investments, I think they should maintained a large portion in overnight funds and could have also hedged the interest rate risk (12 months ago) with a derivative swap (or cap). I realize the word “derivative” can be kind of a trigger, but some complex credit unions can and do have derivative instruments to hedge against interest rate risk.

It will be interesting to see the autopsy of how the regulators looked at what Dodd-Frank (DFAST) stress tests were run and how SVB got a pass. Note credit unions with an asset size over $10 billion need to run the DFAST stress tests.

Thanks for reading…
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kidwoo

kidwoo

Artisanal Tweet Curator
Aug 25, 2003
42,146
13,340
Squirtin ketchup n' mustard on charred flesh
6thElement

6thElement

Schrodinger's Immigrant
Jul 29, 2008
15,940
13,189
Pretty sure we're getting pretty close to these Sci-Fi scenarios at this point...

Economy
Climate
War

Which one kills us all first!

 
mandown

mandown

Poopdeck Repost
Jun 1, 2004
20,243
7,773
Transylvania 90210
I was gonna PM @Pesqueeb but decided to share with the class.
"Cloud Capitalism" or a "fief in the cloud" is an interesting concept.
I'm about 25 mins...

I read this a while back, though I don't recall the specifics but I did think it was good.
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