Alfonso Peccatiello (@MacroAlf) posted on X today entitled “Macro fragilities outside the US” HERE. It prompted me to draw attention to my interview with him HERE that so accurately portrayed the limited impact that the Silicon Valley bank failure would place on the US banking system and beyond.
The implosion of Silicon Valley Bank (SVB) sent shockwaves through the financial system in March 2023. In a deep dive interview, @MacroAlf dissected the regulatory failures and risk management blunders that led to the bank's dramatic collapse.
At the core was SVB's abuse of regulatory and accounting loopholes. Exempt from key banking rules like the net stable funding ratio due to its size, SVB gorged on risky tech startup deposits while lacking a diversified, sticky base of retail funds. Its $120 billion bond portfolio was dangerously concentrated in mortgage-backed securities without proper hedging for interest rate risk.
Compounding the troubles was SVB's exploitation of the "held-to-maturity" accounting treatment. Rather than hedging interest rate exposure or marking losses, the bonds were effectively treated as risk-free. As rates spiked, gaping unrealized losses mounted undetected until a good old-fashioned bank run exposed the rot.
While SVB's demise appeared an "isolated misstep", @MacroAlf's analysis raised scrutiny over risk exposures lurking at other regional banks. However, his quantitative models suggested systemically crucial megabanks remained relatively insulated. Capital depletion estimates from rising rates ranged from 5-20% for the likes of JPMorgan and Bank of America - hefty, but likely absorbable.
European banks also looked resilient on this interest rate risk front based on ECB stress tests and active hedging practices. The much larger threat, in @MacroAlf's view, was to the faltering U.S. real estate sector amid soaring borrowing costs and crumbling affordability.
The SVB saga underscored the perpetual challenges of properly regulating and risk-managing the complex financial system. Loopholes inevitably open, incentives skew, and obscured fragilities lay exposed in crisis moments. Preserving durable prosperity requires constant vigilance over evolving hazards.
You can find him at: https://www.themacrocompass.com/
And I highly recommend following him on "X": @MacroAlf