With all due respect to Dean and his fantastic work on the sounding the alarm before the GFC, I think he’s wrong here. The stress test doesn’t really consider sharp changes in Federal Reserve interest rates, it uses one predicted rate for the baseline scenario and a second predicted rate for the adverse scenario. With those rates it calculates the other variables, including bond rates. The highest treasury rate in either scenario in the last three years is like 2.5%, while the current rate right now is almost 4%, so I would argue the interest rate rises considered in the stress test are not quite capturing the pressure SVB was actually under. (There’s room to disagree; the baseline scenario for 2019 does predict 3.6% in 2022, so at least some years might have tested the right amount of stress.)

More fundamentally though, the stress test is testing capital, not liquidity. What actually did in SVB was a bank run during a liquidity crisis. Due to interest rate rises, their liquidity got so bad they had to sell long-term assets at a loss, and when they announced they were raising capital to cover that loss, they triggered a bank run: the ultimate and most cruel test of liquidity there is. The stress test they lobbied their way out of would have indicated poor-but-manageable health, it’s not useless, and they should have been required to do it. But the stress test does not involve simulating a bank run, it would not have predicted this collapse.

I agree that this is not black and white. However as an example, the Europeans are basically saying this situation cannot happen under Basel3 which is exactly what the D-F relaxing allowed SVB to avoid. One thing that will be telling is if another bank collapses under similar circumstances.

I don’t think the stress test is meant to model a collapse. As has been mentioned elsewhere, no bank survives outflows of 40-50% of deposits. I understand Baker’s comment to imply that stress tests are not simply “are you over this minimum bar” but also designed to probe for any weakness in lots of different scenarios so the weaknesses are discovered and can be addressed. I imagine it like the regulator is the parent telling the kid to eat their veggies — they might not force them into your mouth but they’re acting as a third party check on your worst impulses. If that’s the case, the stress test should have prompted a discussion about this risk about nine months ago. That this fell apart so fast implies that risk management failed, that those discussions never happened, and so there will presumably be motion to fix that weakness for next time. So you’re right that the run would still have killed them, but better long term risk management would have prevented the blood in the water that spooked the VCs that caused the run.

PS: I feel like that one meme from it’s always sunny — everything is connected to everything. Have to look past the first-order effects.

Yes, I like this “eating your veggies” metaphor.

For what it’s worth, the most plausible scenario I can see where SVB doesn’t collapse is something like “Their lobbying isn’t successful, they are required to undergo rigorous Dodd-Frank testing, because of this they are forced to get a risk officer, the risk officer armed with the kinda-worrying stress test results convinces SVB management to at least ratify a liquidity strategy even if they don’t really want to act on it, when they go to sell bonds and raise capital they present it as part of this liquidity strategy, the VCs see the strategy and aren’t as spooked, so the wave of withdrawals fizzles out instead of becoming a bank run - but inside SVB it gets way closer to a full-blown run than anyone outside realizes, and this scares management into executing on the liquidity strategy”. That’s an absurdly long chain of events and it’s very easy to step off that path at any point (or just get unlucky) so I still think it’s unlikely, but if I had to give an account of how SVB hypothetically survived, this is what I’d give.

The is the most "smoking gun" explanation that I've seen of how everyday corruption caused this. However, I'd love to see a follow that confirms the law resulted in a change in bond purchases by SVB.

I think that’s fair. I hope we do see that and other details of how this all went sideways come out over the next months and years.

I assume though, that like any black swan there were many things that went wrong together. Lately at work, I have been telling people that one in a million happens eight times per day at just 100 requests per second! Shit is going wrong in small ways all the time. So you design for that — but eventually in a big system enough of those minor failures will line up to cause something you notice. You probably remember that huge facebook outage in 2021? Lots of things went wrong and then they were locked out of their own conference rooms. The financial system is different parts at a different scale but the same theory of failure applies.

Not smoking guns, more like a bad bet here, and a stupid decision there, and one dumbass VC influencer gets jumpy and runs his dumbass mouth in slack and bobs your uncle bye bye SVB.