Weekly Forecast, March 24: Calculating The Default Risk Of Interest Rate Mismatches

Mar. 26, 2023 9:25 AM ET, , , , , , , ,

Summary

  • In light of the interest-rate-risk-driven failure of Silicon Valley Bank on March 10, 2023, we've added a chart showing how interest rate mismatching increases default risk.
  • The calculation applies to institutional and individual investors as well as banks.
  • "Failure" is determined both by (a) margin calls and deposit runs and (b) seizure by banking authorities when the institution is clearly in no condition to escape an ultimate bank run.
  • Looking for a helping hand in the market? Members of Corporate Bond Investor get exclusive ideas and guidance to navigate any climate. Learn More »

Silicon Valley Bank"s Future Remains Uncertain As Branches Reopen On Monday

Justin Sullivan

The weekly interest rate simulation now includes an assessment of the probability of default when a bank, institutional investor, or individual investor has a significant interest rate mismatch between assets and liabilities. We present a worked example below based on

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This article was written by

Dr. Donald R. van Deventer has been in the risk management business since completing his Ph.D. in Business Economics at Harvard University in 1977. He founded the Kamakura Corporation in 1990 after 13 years with two of the 10 largest banks in the US and a stint as investment banker in Tokyo. He joined SAS Institute Inc. as co-head, of the Center for Applied Quantitative Finance in 2022 when SAS acquired Kamakura Corporation. At the time Kamakura was acquired by SAS, Kamakura's institutional clients had total assets or assets under management of 48 trillion dollars.

He leads the investing group Corporate Bond Investor to bring Kamakura's state-of-the-art risk analytics to individual investors. The analytical processes underlying the Corporate Bond Investor are identical to those provided to institutional investors by SAS Institute Inc. He also provides a daily ranking of corporate bonds by best risk-adjusted return. His investing group is currently the only one on Seeking Alpha to focus exclusively on corporate bonds.

Analyst’s Disclosure:I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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