Mandelbrot
There are few conversations that make you rethink the fundamentals of how modern finance functions—and fewer still that manage to blend bank balance sheets, behavioral risk, and the role of central banks into one compelling narrative. In this four-part conversation, Guy Spier sits down with Eric Schaanning to unpack the mechanics of banking risk through the lens of Silicon Valley Bank, the Savings & Loan crisis, and lessons from decades of asset-liability mismanagement.
What follows is a distilled list of lessons from their exchange—sharp, accessible, and immediately useful if you work in finance, invest in banks, or simply want to understand how the financial system actually works.
1. ALM is the Cardiovascular System of a Bank
Asset Liability Management (ALM) isn’t just another department. It’s what links the “lungs” (deposits) and the “heart” (loans and assets). When ALM fails, it’s like a heart attack. SVB was a case of clogged arteries: deposits priced short, assets locked long, no hedging.
2. The Real Culprit at SVB: Interest Rate Risk
It wasn’t just deposit outflows or bad PR. The real problem was unhedged interest rate exposure. Rising rates torpedoed the fair value of their long-term securities. SVB bet deposits were sticky. They weren’t. Duration assumptions collapsed in real time.
3. This Isn’t New: Echoes of the Savings & Loan Crisis
The same misstep happened in the 1980s. Fixed-rate assets + floating-rate liabilities = disaster when rates spike. Different era, same mistake. And it’s always tempting during low-rate periods.
4. Liquidity is a Mirage in a Crisis
Non-maturing deposits look stable. Until they don’t. Modeling deposit duration is guesswork, especially under stress. In benign times, they behave like long-term funding. In panic, they’re overnight money.
5. Behavioral Option Risk is the Wild Card
You can model all you want, but when depositors change their behavior, models break. SVB’s customer base exited in herds, not individually. Social media turned behavioral option risk into a liquidity cliff.
6. Delta NII vs Delta EVE: Two Sides of the Same Coin
Net Interest Income (NII) tells you how your cash flows might shift over 1-5 years. Economic Value of Equity (EVE) tells you what your balance sheet is worth today. One’s about earnings; the other’s about solvency.
7. Why Gap Risk is a Bigger Deal Than It Looks
When assets and liabilities don’t reprice together, you’re exposed. Even a small gap can cause big damage under rate shocks. It’s not about the size of the spread, but the mismatch in timing.
8. Pillar 3 Disclosures Are a Missed Opportunity
SVB’s interest rate risks were visible in public filings. But few read them. Pillar 3 offers sunlight, but only if someone opens the blinds. We need better formats or incentives for market discipline to work.
9. Banks Create Money (Sort Of)
Banks don’t need to “find” deposits to lend. Loans create deposits. When someone takes a mortgage, the bank creates both the asset (loan) and the liability (deposit). It’s a balance sheet expansion.
10. The Discount Rate is a Sensitivity Minefield
EVE is hyper-sensitive to the discount rate. The further out your cash flows, the more fragile your assumptions. Choosing the right curve is both art and science.
11. Risk Appetite Isn’t Optional. It’s a Board-Level Mandate
Boards must own the bank’s appetite for rate risk—not just credit. IRRBB guidelines require clear risk limits for both EVE and NII metrics. Delegation stops at implementation, not accountability.
12. The Role of Equity: Buffer or Hidden Risk?
Most banks treat equity as rate-insensitive. But when it funds floating-rate assets, there is embedded rate risk. Should you hedge it? Depends on your philosophy and liquidity strategy.
13. Reverse Stress Testing: Flip the Script
Instead of asking “What if this happens?”, ask: “What would it take to break us?” It’s a powerful lens. Helps find blind spots that standard scenario testing might miss.
14. Personal Finance Parallels
These aren’t just bank problems. Individuals have their own asset-liability mismatches: long retirement liabilities vs. short-term income. Thinking in terms of balance sheet duration is useful for households too.
15. Final Insight: It’s Not About Prediction, It’s About Preparedness
You can’t predict where rates go. But you can know how exposed you are. That’s the point of ALM. Not to be right about the future, but to survive it.
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