Regulator APRA’s always ‘woke’ but seldom awake

What APRA should be doing in the wake of the SVB collapse is demand more aggressive and timely disclosure by banks to treasuries, not tech start-ups.

Is our prudential financial regulator APRA really that stupid?

There are reports – neither confirmed nor denied by APRA – that it has sprung into action in the wake of the Silicon Valley Bank collapse.

APRA has apparently now demanded banks step up their disclosures – to APRA, not to the public –around crypto-linked assets and investments: loans and other financing to tech start-ups, crypto ventures and the like.

It might seem obvious to a - often, rather fast-asleep, but always and even aggressively - ‘woke’ APRA: Silicon Valley Bank, right in the heart of the tech world.

So its rapid collapse must be all about something in and around tech going sour, big-time and fast, right?

Wrong. Dead wrong.

SVB’s collapse had absolutely zip to do with tech and was all about more than a dozen years of central bank zero interest rates and money-printing by the tens of trillions of dollars.

It wasn’t SVB loans to tech that went sour but its – huge - holdings of US treasuries (government bonds).

When depositors – yes, heavily resident in an around, even if only virtually, Silicon Valley – wanted their money out, SVB had to sell those supposedly 100 per cent safe bonds at huge losses.

Why? Because of rising interest rates.

That’s the way it works.

A, say, 20-year bond bought directly from the government at par with an interest rate of 2 per cent will fall sharply in market value – not all the way to 50c in the dollar – when the 20-year bond rate doubles to 4 per cent.

APRA has reportedly demanded banks step up their disclosures around crypto-linked investments and loans and other financing to start-ups.

It should be obvious.

Why would an investor pay $100 for a bond paying $2 interest (the coupon), when they can now get $4 on a new bond from the government?

SVB should have written its bond holdings down earlier, and progressively, as rates rose.

But then its insolvency would have been obvious much earlier.

We can’t be that much awake, surely?

In short, what APRA should have been doing in the wake of the SVB collapse, and indeed that of Credit Suisse as well from similar but slightly different dynamics is demand more aggressive and timely disclosure not of exposure to tech but to treasuries.

This brings me to the heart of the much greater disgrace – the scandal of central banks deliberately creating huge profits in government bonds; and now both picking up from private investors and hiding huge losses.

It’s the greatest ever exercise we have ever seen in privatising the profits and socialising the losses.

As a direct – intended - consequence of central banks, led by the Fed, forcing policy rates down to zero and monetising huge budget deficits by buying bonds at artificially forced-down interest rates.

Our own Reserve Bank was doing it along with the big guys – but only through Covid, and not, to its great credit, when the Fed, the ECB, the Bank of England and of course the BoJ were doing it after the GFC.

Further, again to the RBA’s credit, it focused on buying three-year bonds – part of RBA governor Philip Lowe’s 0.1 per cent interest rate strategy.

So the profit handed to private investors and the consequent loss now being incurred by the RBA are smaller than what happens if you are doing it with 10 and even more 20 and 30 year bonds.

It was great while it lasted.

Buy a long bond at a 4 per cent yield and watch its ‘value’ soar well above its $100 face value when bond rates were forced down to 2 per cent.

Then buy that bond again at 2 per cent and see a further massive profit when its ‘value’ surged yet further as a central bank forced rates down to, say 1 per cent.,

Now it’s blowing up big-time and painfully as rates rocket.