Interest Rate Hedging and Silicon Valley Bank Idiosyncrasies

Under a "mea culpa" framework, evidence suggests that financial institutions practice discretionary hedging of both interest rate and funding risks, unlike Silicon Valley Bank and First Republic Bank. Banks asymmetrically manage risk by intensifying hedging with interest rate derivatives as HTM and AFS portfolio losses accrue, and by reducing hedging intensity as portfolio gains accrue. As funding risk increases, banks also intensify hedging, suggesting the mistakes of Silicon Valley Bank are idiosyncratic, not systematic. Evidence suggests financial institutions are generally successful at incorporating forward interest rate guidance when managing and anticipating balance sheet risks