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Why the SVB Bank in America Failed by Investing in Government Bonds It is a question that many people may be wondering. I would like to write another aspect of financial management in the ALM (Asset Liability Management) aspect of banks to share my experiences during my time working in Hong Kong. And used to be in a company that was affiliated with AIG in those days, showing the afterimage of a financial institution that has gradually seen signs Falling away from the first day until the entire board was followed by dominoes in those days
Banks usually receive money only when someone deposits money with the bank. The nature of the bank’s financial products will range from savings that can be withdrawn at any time. with another feature that is a fixed deposit that has a longer term And if you withdraw before the deadline, you may not receive the full amount of interest to prevent the withdrawal of money.
Customer deposits received by the bank are will be treated as a creditor to the bank. which the bank must set up as a liability Because there is an obligation to pay back to customers in the future, and of course, the duty of the bank is not just having to reserve money to pay back to customers in case of emergency. But the money received must be invested to generate interest. to nurture that bank to survive
in the investment of that bank Banks can do many things. Most of which will be credit lending. The credit lending period has different periods. depending on the type of loan or if the bank’s business is not for the purpose of lending The bank may choose to use the proceeds to invest in other financial assets as well. The government bonds are considered the least risky assets. (but in reality There are still many hidden risks), but the bank has the right to choose to invest in other risky assets as well.
But the important point seen in the banking business is ‘Assets that banks can choose to invest in (lending loans Or invest in debt instruments) will have a nature of contract duration that is longer than the debt side. (Deposits from bank customers)’ which in normal circumstances does not seem to be a problem. In regard to the valuation of assets and liabilities Normally, the interest factor will be calculated as the main factor as well. If the interest rate is high, it means that the money we will receive in the future will be impaired. (Because the money now will look more important than the money in the future) causing higher interest time. There will always be a declining valuation result. and the more time we evaluate something that is very long term Interest rate factor (Financial language is called the discount rate or Discount Rate), it will have a multiplier effect.
That means if we hold assets that are debt instruments for 10 years, then the higher the interest rate time. The value of bonds will only decrease exponentially. And if we compare 10-year bonds with 5-year bonds, we can understand that 10-year bonds are more volatile and have a greater impact on interest rates. (if the interest rate increases 10-year bonds will decrease in value. and has a greater impact than 5-year bonds). causing the value of assets to be revalued to decrease rapidly (Due to the longer contract period) The interest rate has been raised to a high level. causing the value of the liabilities to be revalued to decrease as well (but because the deposit has a shorter period The impact on the debt side is therefore not much). The result is when interest rates rise The bank itself will have an effect that will reduce the retained earnings. which in that accounting If the debt instrument is intended to be held in the long run to pay off debt. (deposits that customers come to withdraw) in normal circumstances When the value of bonds fluctuates will not be considered profit or loss at that time Unless it’s actually sold out. (Unable to complete the objective at first. that want to hold in the long term until the contract maturity) even if the difference from the fluctuation of interest rates is taken into account as a loss at that time
If we understand all the above principles. brought to the case study of SVB Bank in America that just collapsed I can summarize as follows:
1. The objectives of SVB that are different from other banks are It was established to raise funds from customers who have the nature of Start-up businesses. Initially, the intention was to set up to diversify the risks of SStart-up businesses among themselves, both accepting deposits and lending, therefore being in the Start group. -up together
2. SVB does not intend to be a bank to provide loans to the general public. Therefore, the remaining money from lending to Start-up will be invested in the least risky assets. But it still bears fruit. That is government bonds.
3. SVB’s customers are more difficult to raise funds and cost more. And as a result, there is a need to withdraw deposits at SVB for continued business operations, causing SVB to sell debt instruments at new appraised prices. (low value due to higher interest rate adjustment)
4. When people are shocked by the news There are more people flocking to withdraw money. (Financial language is called Bank Run), the bank will have to be forced to sell bonds at that time. to bring cash to pay to people withdrawing money And even more causing the price of the bonds sold to fall even harder. And must recognize the loss at that time as well (Unable to meet the initial objectives that want to hold in the long term until the contract maturity)
5. When Bank Run occurs, no matter which bank, it will fail. In which case SVB is no exception.
In fact, how to prevent these things? It’s already all in the risk management subject. You can find an article about Asset Liability Management (ALM) that I’ve written. It’s just that many people may overlook it. Once in a while, they come back to pay attention to ALM. But at this point, I think that the cows are not surrounded by the stall. Every business can return their attention to ALM to prevent such cases from happening again without difficulty. But it requires a good understanding and experience in ALM of financial institutions.
P.S. Silicon Valley Bank (SVB) is America’s 16th largest bank. It focuses on lending to tech start-ups and venture capital funds. Times of life insurance companies and non-life insurance companies in Thailand combined
Article by Pichet Jiaramaneethaweesin
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