Losses caused by the rise in interest rates in 2022, coupled with inadequate interest rate risk management, appear to be the trigger for the collapse of Silicon Valley Bank. However, most of the losses on its fixed rate assets were not recognised in either the balance sheet or in profit and loss.
We discuss why investors may have thought the bank was better hedged against interest rate risk than turned out to be the case, and show how 2022 profit would have been very different when measured on a full fair value basis – we estimate a pre-tax loss of $14.4bn rather than a US GAAP reported profit of $2.2bn.
Continue reading “Fair values and interest rate risk – Silicon Valley Bank”