Hedging Securities and Silicon Valley Bank Idiosyncrasies

Abstract

Hedging requires adequacy and timing. This paper finds that banks did not systematically
ignore balance sheet risks like Silicon Valley Bank, and instead exercised risk management by asymmetrically increasing hedging activity when security losses increase and scaling back hedging activity as security losses reverse. Banks also hedge against bank runs when risk increases due to a combination of security losses and funding risks from unsecured deposits. Findings suggest Silicon Valley Bank’s mistakes are idiosyncratic. Results suggest that non-stress test banks target balance-sheet risks when hedging, stabilizing themselves from interest rate shocks transmitted through fixed-income securities. Scrutiny of rules-based outliers like SVB is preferable to increased regulatory burden for all non-stress test banks.

Keywords: Silicon Valley Bank, Hedging, Securities, Fixed Income, Interest Rate Derivatives, Interest Rate Risk, Held to Maturity, Available for Sale, Treasuries, Banks

JEL Classification: G21, G24, E43, G32