Bank Risk Mgt.
Terry,
Today 4/5/2023 I heard you say (WGN) that the government “told banks to invest in US Govn’t securities thereby contributing to “the problem”.
I’m not aware of any such encouragement.
Which agency – government official did that? If not explicit, are you referring to lower capital requirements for US Govnt securities vs loans (as opposed to an actual statement)? I’m just skeptical that any official actually told banks to buy US Govn’t securities.
Terry Says
Well, don’t be skeptical. The Fed actually encouraged banks to invest their reserves conservatively. In government securities.
Read this article from 2021 explaining how it happened:
https://www.nytimes.com/2021/08/25/business/banks-government-bonds.html
So they didn’t have “credit” risk — but they did have “maturity” risk. That is, they never thought they’d sell these bonds — just wait until they matured. But when rates rose, bond values fell. That didn’t become an issue until the withdrawals — forcing some banks to sell at a loss.
