Interest rate risk: Silicon Valley Bank's nemesis a well-known foe in banking

Among the mysteries surrounding the collapse of Silicon Valley Bank (SVB), finance experts have fixated on the California lender's failure to practice basic risk management.

A catalyst for SVB's demise was the Federal Reserve's shift from near-zero interest rates to large interest rate increases to counter inflation, a reversal that immediately lowered the value of Silicon Valley Bank 's holdings linked to long-term US Treasury bonds. FILE PHOTO

Banks manage this risk by hedging, purchasing futures contracts or other financial vehicles that rise in value in case a bank's holdings are devalued due to policy changes. "Why management chose not to is a mystery thus far," Mitchener told AFP. "This is something we teach to undergraduates." Gruenberg noted that banks held about $620 billion in "unrealized losses" at the end of 2022, characterizing the matter as an "ongoing supervisory focus."

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