6 ms·

"This is not a liquidity issue as long as SVB maintains their deposits, since these securities will pay out more than they cost eventually." But that's exactly

"This is not a liquidity issue as long as SVB maintains their deposits, since these securities will pay out more than they cost eventually." But that's exactly the problem. With higher interest rates, those deposits will be looking for a higher deposit rate. With their assets tied up in low-paying long-term bonds, SVB will not be able to pay that higher rate. It would only work out "eventually", if the depositors would accept a below-market rate until the bonds matured. EDIT: This is indeed a solvency issue, not a liquidity issue, as also pointed out below.

lkbm 4y ago
He meant solvency issue. Someone else called this out downthread and he confirmed. Definitely felt like it should've been corrected more prominently, though.
- zzleeper 4y ago
  And yet he is wrong! They were stuck with assets earning <2% for 10+ years, meanwhile depositors were demanding higher returns (else they would put their money in other banks, in 6m tbills, 10yr treasuries, etc.. all of which paid a lot more). And thus, "it's not a solvency issue as long as depositors are stupid and don't realize they can get more $$$ from other banks" ends up being quite misleading
- jamiequint 4y ago
  Yes, I mis-spoke. If only there was some way to edit tweets or to pin your replies to the top of a thread :P
  - lkbm 4y ago
    If you reply directly to your initial tweet with your correction (perhaps QTing the person who asked), I think it will appear at the top, or at least get higher ranking. I often see replies "boosted" via the original author QTing them as a reply this way.
- benlivengood 4y ago
  So they didn't require the deposits earning 2% to be in term CDs like sane banks and credit unions do?
danpalmer 4y ago
It's never a liquidity issue as long as no one tests the liquidity!
blantonl 4y ago
“Eventually” The markets can stay irrational longer than you can remain solvent.
pishpash 4y ago
All liquidity issues are solvency issues when marked to market.
- actionablefiber 4y ago
  That's true in a tautological way, but there really is a difference between liquidity and solvency. If a firm's assets will eventually mature and be worth more than the current liabilities, then a private rescuer can make a lot of money by bailing them out. If the assets will never recover or pay out, then someone will be holding the bag.
  - kgwgk 4y ago
    But it's important that they are eventually worth more. Enough to provide the rescuer with a substantial gain that compensates them for their troubles. Solvency in a "breakeven" sense is not enough.
  - pishpash 4y ago
    We've just seen there is no difference with SVB, because they tried to get a private rescuer to bail them out. Didn't work. Because why would a private rescuer lose liquidity to a lower paying assets (SVB's book) when they could lose liquidity to a higher paying one on the market (e.g. Treasury bonds)? Mark to market is real. If you need liquidity immediately from the market, whether through a rescuer or otherwise, you do your accounting using that value and in SVB's case they were insolvent.
    - actionablefiber 4y ago
      I think that is a difficult call to make this early on. The FDIC's job here is to recover value for depositors and find buyers for its assets. It is hard to organize bank takeovers on short notice, and even in a private rescue there is a lot of regulatory involvement. The story isn't even close to over yet. There are some possibilities. Perhaps there was no single buyer that also had the (potentially hundreds of billions of dollars of) liquidity you would need to rescue the bank. Perhaps there were buyers who could come up with that liquidity reasonably quickly (on the order of a week or a month) but certainly not in the 48 hours it took for the bank to be completely vaporized. SVB was intending on raising liquidity from the market, and just the act of announcing their intent to do so triggered the bank run in the first place.

lkbm 4y ago

He meant solvency issue. Someone else called this out downthread and he confirmed. Definitely felt like it should've been corrected more prominently, though.

zzleeper 4y ago
And yet he is wrong! They were stuck with assets earning <2% for 10+ years, meanwhile depositors were demanding higher returns (else they would put their money in other banks, in 6m tbills, 10yr treasuries, etc.. all of which paid a lot more). And thus, "it's not a solvency issue as long as depositors are stupid and don't realize they can get more $$$ from other banks" ends up being quite misleading
jamiequint 4y ago
Yes, I mis-spoke. If only there was some way to edit tweets or to pin your replies to the top of a thread :P
- lkbm 4y ago
  If you reply directly to your initial tweet with your correction (perhaps QTing the person who asked), I think it will appear at the top, or at least get higher ranking. I often see replies "boosted" via the original author QTing them as a reply this way.
benlivengood 4y ago
So they didn't require the deposits earning 2% to be in term CDs like sane banks and credit unions do?

danpalmer 4y ago

It's never a liquidity issue as long as no one tests the liquidity!

blantonl 4y ago

“Eventually” The markets can stay irrational longer than you can remain solvent.

pishpash 4y ago

All liquidity issues are solvency issues when marked to market.

actionablefiber 4y ago
That's true in a tautological way, but there really is a difference between liquidity and solvency. If a firm's assets will eventually mature and be worth more than the current liabilities, then a private rescuer can make a lot of money by bailing them out. If the assets will never recover or pay out, then someone will be holding the bag.
- kgwgk 4y ago
  But it's important that they are eventually worth more. Enough to provide the rescuer with a substantial gain that compensates them for their troubles. Solvency in a "breakeven" sense is not enough.
- pishpash 4y ago
  We've just seen there is no difference with SVB, because they tried to get a private rescuer to bail them out. Didn't work. Because why would a private rescuer lose liquidity to a lower paying assets (SVB's book) when they could lose liquidity to a higher paying one on the market (e.g. Treasury bonds)? Mark to market is real. If you need liquidity immediately from the market, whether through a rescuer or otherwise, you do your accounting using that value and in SVB's case they were insolvent.
  - actionablefiber 4y ago
    I think that is a difficult call to make this early on. The FDIC's job here is to recover value for depositors and find buyers for its assets. It is hard to organize bank takeovers on short notice, and even in a private rescue there is a lot of regulatory involvement. The story isn't even close to over yet. There are some possibilities. Perhaps there was no single buyer that also had the (potentially hundreds of billions of dollars of) liquidity you would need to rescue the bank. Perhaps there were buyers who could come up with that liquidity reasonably quickly (on the order of a week or a month) but certainly not in the 48 hours it took for the bank to be completely vaporized. SVB was intending on raising liquidity from the market, and just the act of announcing their intent to do so triggered the bank run in the first place.