Monetary Matters with Jack Farley Banks As Synthetic Hedge Funds | Elham Saeidinezhad on Private Credit ETFs, Interest Rate Swaps as Repo, and the Increasing Interconnectedness Between Banks And Nonbanks
Nov 24, 2024
Dr. Elham Saeidinezhad, a Term Assistant Professor of Economics at Barnard College and Market Structure Fellow at the Jain Family Institute, dives into the intriguing dynamics of banks functioning as synthetic hedge funds. She discusses the failures of Silicon Valley Bank, highlighting the role of interest rate swaps in its collapse. Elham also explores the complexities of private credit ETFs and the evolving relationship between banks and non-banking entities. Her insights shed light on the regulatory challenges and risks facing today’s financial markets.
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SVB as a Hedge Fund
- Silicon Valley Bank's (SVB) failure can be viewed as a failed hedge fund strategy, not just poor risk management.
- Their treasury holdings and interest rate swaps resembled a fixed-income arbitrage strategy.
Synthetic Limited Partners
- SVB's credit lines to private equity fund managers indirectly made them synthetic limited partners.
- This provided potential access to high returns in case of manager default.
Bank-Non-bank Connection
- Banks benefit from connecting with the non-bank sector by providing leverage.
- Credit risk has shifted from banks to non-banks, but banks still indirectly participate.