Publication:
The Fed dodges a bullet - for now
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Date
2023
Authors
SDG:
Abstract
What a month March had been. Over a three-week period, four mid-size US banks had to be rescued and one large Swiss bank had to be folded into another. Meanwhile, a German bank had to suffer serious erosion of its equity value. It started with Silicon Valley Bank (SVB) needing to be rescued following a run by its depositors, on news of its loss of some US$2 billion (RM8.8 billion) from the sale of US government bonds it had been holding. It appears that SVB was holding a huge portfolio of long-dated government bonds - a clear case of a serious duration mismatch. Surprisingly, no one, not even the banking regulators, seemed to have been watching interest rate risks, even as the US Federal Reserve had been raising rates rapidly. Rising rates affect the value of items on a bank's balance sheet. Both assets and liabilities are affected, with the impact being determined by the duration of each item. Given the intermediation function of banks, the duration of assets is invariably longer than that of liabilities, a large part of which would be deposits. Thus, a bank holding large amounts of long-dated bonds would have a disproportionately large asset side duration and. accordingly, a large duration gap, making it highly susceptible to even small interest rate rises.
Keywords
Bond , Banks , Economy
Citation
Bacha, O. I. (2023, April 12). The Fed dodges a bullet - for now. The Edge Malaysia.
Publisher
The Edge Communications Sdn. Bhd.
DOI
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The_Fed_dodges_a_bullet_for _now_Obiyathulla.pdf
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