Quote:
Originally Posted by Slava
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.
|
Yeah, I think I agree with what you're saying in a slightly different way. Basically they need to have duration management, and obviously it was insufficient. But probably you wouldn't expect (or even want) perfect asset-liability duration matching in a bank, since that would really reduce net interest margins.
Average duration isn't a good proxy for that either - they'd actually have been better off with a 50/50 mix of tbills/30 year paper than an equivalent duration portfolio of 10-15 year bonds, because they wouldn't have needed to liquidate the long end of the portfolio in that situation, and could have covered withdrawals using the short end and kept the long end as held to maturity.
Obviously lots of ways to have avoided this on either the asset or liability side of the balance sheet, which is why its so egregious a failure for a pretty big institution.