EC Nebraska | reformedbanker - 2/3/2024 18:53
Seems odd. I've heard discussion that banks were considering this. Taking a one time hit is the same mathematically as leaving low yielding bonds on balance sheet until maturity, assuming they reinvested into market rate bonds at higher yield with similar maturity. The theory is have one bad year and move on. I wouldn't do that, don't want the hit to capital, but I've heard it discussed. It makes me wonder though, if they wanted to get these off balance sheet to more properly align their GAP. Perhaps they reinvested into different duration to be less interest rate sensitive moving forward. Or, perhaps they needed the liquidity... but that seems odd given they could have pledged and borrowed under BTFP.
My gut instinct though... they did the band aid rip. One bad year, then move on. That way execs get their good bonuses again moving forward. Or maybe I'm too cynical.
Is the bank allowed to guess what future rates might do? The reason I ask is that the Fed has signaled that interest rates shouldn't be increasing in the near term, and may go down. If interest rates decline, the bond market goes up, correct? So if rates have topped out, then their "book losses" in the bond market should have maxed out.
If interest rates are expected to decline, you wouldn't want to sell bonds, would you? You would sell bonds if you expect rates to increase? OR do I have any of that backwards?
Or are we being truly cynical? In which case, they sold the bonds to lock in the loss and get it over with, then bought back into the bond market, expecting rates to fall and the "new" investment to perform well and earn bonuses? Even though the new "performance" is only a partial recovery of the realized losses? |
reality check a story about Banks
