Quote:
Originally Posted by bizaro86
Every bank in the history of banking has a duration mismatch though. Borrow short lend long is the business model, and generally it works fine. The issue here (imo) is the scale - the liquid part of their balance sheet that was supporting the short term deposits shouldn't have been in 10 year paper. Having their equity in 10 year paper (or even 30 year loans) isn't an issue, but having demand deposits backing long duration assets is an issue, especially given the lack of stickiness in their deposit base. If they had sold a few $B in 5 year CDs when they bought those bonds this would probably also have worked out.
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And that’s duration management? Like it’s one thing for a retail investor last January to think “I’ve got this bond index, and it’s cheap so I’m good”, not realizing the duration was something like 8.1 or whatever. And frankly, probably not understanding what that means in the first place. That’s not acceptable for a bank and surely not for the 16th largest bank in the US!
I get that they weren’t just holding a bond index, but it’s the same effect.