4 ms·

You’re confusing liquidity with solvency. For most banks, it is fine to assume a 20 year deposit window because deposits are fungible and for most of recent hi

• amluto 4y ago
  > For most banks, it is fine to assume a 20 year deposit window Let me try again. You're still thinking about liquidity -- assuming a 20 year deposit window seems okay to me. But the problem is solvency. It's not that the assets are illiquid -- it's that they insufficient. If you run a bank, assume a 20 year deposit window, and invest those deposits in safe assets that carry similar interest rate risk to the deposits themselves, then you are solvent. If depositors leave faster than expected, you may be forced to pay a spread or other haircut to sell your long term assets early, but that's a small effect and can be managed gradually as long as you stay on top of it. This isn't SVB's problem AFAICT. SVB bought assets that were perfectly liquid (T bonds!) and (if I read the filings right) assets that are still fairly liquid (MBSes), but they had interest rate exposure that did not match the deposits. Savings account interest rates (at SVB!) were up to 4.5%, and those T bonds had much lower fixed interest rates. [0] If depositors held their money at SVB for 20 years and SVB didn't have a bank run right now, SVB would still be in trouble: SVB would be paying more interest on those deposits than they would receive on their investments, and their portfolio would slowly go negative. [0] Whether you think about them as paying low interest for a long time or as being marked to market at a loss and then paying current interest rates at maturity is immaterial. You end up with the same number of actual dollars at the same times.
  • RC_ITR 4y ago
    >It's not that the assets are illiquid -- it's that they insufficient. You are confusing price today with the actual characteristics of the instrument. A T-bill pays back it's face value always, it just trades below face when interest rates are higher than when it was purchased. That is the definition of a liquidity problem. You'll get the face value back eventually (it is sufficient), but not if you sell today. A liquid market is not the only characteristic of liquidity. There's a liquid market for anything at a low enough price... >If depositors held their money at SVB for 20 years and SVB didn't have a bank run right now, SVB would still be in trouble: SVB would be paying more interest on those deposits than they would receive on their investments, and their portfolio would slowly go negative. This is a true statement people are making that has nothing to do with what happened here. The point of a bank is interest rate arbitrage, so I agree SVB would have to do their job better over those 20 years, but this thing that happened over 3 months is a liquidity crisis. They weren't running out of money to pay interest on deposits, they were running out of money to give those deposits back and were veering into the problem discussed above - selling things below value to create liquidity.