Banking turmoil: deregulation vs. Waste of money (against unforeseen events)
I keep hearing the refrain from people like former Senator Toomey (on Bloomberg TV today) that the 2018 deregulation had nothing to do with the suffering of the SVB; rather, his problems (presumably also those of Credit Suisse) were related to monetary and fiscal extravagance. I thought it would be useful to replicate the trajectory of expected interest rates.
Picture 1: Ten-year Treasury yields (black) and median forecast based on a survey of professional forecasters for February 2023 (red), November 2022 (blue), May 2022 (green), and November 2021 (brown). Q1 2023 observation for March 15 data. Source: Treasury via FRED and SPF Philadelphia Fed (various) and author’s calculations.
Although as of the first quarter of 2023, the 10-year interest rate was at 2.54 p.p. higher than forecast in November 2021 – more than a year ago – about half a percentage point lower than forecast in November 2022.
In other words, even before the Russian invasion, banks should have expected long-term bond yields to rise. Of course, by May 2022, the forecast was such that the surprise in the first quarter was only half a percent.
Of course, if interest rates had not risen so much over the past year, the collapse of the SVB might not have happened so soon. But given the downturn in the tech sector, SVB (not counting annual stress tests and liquidity requirements) would likely face a flight (despite Toomey’s assurances).