Silicon Valley Bank

Silicon Valley Bank had $21bn in available for sale securities. The portfolio consisted of US Treasuries and Agency securities. The weighted average duration of the portfolio is 3.6 years. That would suggest a weighted average maturity of 4yrs for US Treasuries and a higher maturity for agencies of around 6yrs (taking into consideration higher coupons and prepayments). I am making some assumptions to help in my thinking here.

The reported duration is based on the portfolio NOW when the loss on the portfolio has grown to 1.8bn.

Loss on the portfolio of $1.8bn / Portfolio size $21bn = % loss on portfolio of -8.6%.

-8.6% loss / portfolio duration of 3.6yrs = change in yield since the securities were purchased = 2.38%

End of Dec 22, when the accounts were prepared, the yield on a 4yr US Treasury was 4.00%. 4.00% – 2.38% = gives us the assumed yield when the average bond was purchased of 1.62%

Looking at a 4yr US Treasury today, the time when it’s yield was around the 1.62% level was December 2021. Given that Agencies pay a spread over US Treasuries, that would allude to somewhere around late 2020 / 2021 when the bonds were purchased which means a big proportion of the portfolio was in 6yr and 7yr maturities when purchased.

This was probably done in an effort to generate yield on the portfolio to boost the banks interest income given the muted economic activity at that time (COVID).

The purchases of government bonds during that time when interest rates were at all time lows is now having a negative impact on the banks PNL (FYI it was having a positive impact when they bought it). Where was risk management when the bank was building this AFS portfolio?

Areas that risk management should have looked at:
1 – The overall duration of the portfolio.
2 – The duration in each bucket (buckets should be 1yr buckets)
3 – The maturity ladder in those same buckets
4 – How were those decisions made (Treasury / ALM)

Having the right maturity structure in the AFS and HTM portfolio allows a bank to dampen the interest rate impact from changing interest rate environments on its earnings. If it is too skewed one way or the other, then interest rate changes end up impacting interest income faster (if you are skewed to the short term) and slower (if you are skewed to the long term).

f banks link the savings rate they are paying clients to the rate earned on their ‘bond portfolio’ and the savings rate is significantly below the Key Rate, then they have the same issue as Silicon Valley Bank.

The 7 day Tbill in #Mauritius is helping banks deal with some of these problems but it will also hide others.

#mauritianbondmarkets #debtcapitalmarkets