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Just because there is a whole lot of misuse of terms that makes it hard to understand certain comments and debate over if SIVB is insolvent or illiquid, here ar

Just because there is a whole lot of misuse of terms that makes it hard to understand certain comments and debate over if SIVB is insolvent or illiquid, here are some definitions: https://www.investopedia.com/terms/s/solvencyratio.asp#toc-solvency-ratios-vs-liquidity-ratios https://www.investopedia.com/terms/s/solvencyratio.asp#toc-s... Defn. (informal) A company is illiquid if they can not service short term liabilities/debt as it comes due. This includes the ability to quickly sell assets to raise cash. According to what we hear Silicon Valley Bank is/was illiquid: They were struggling to _liquidate_ at well below the maturity value of the MBS to serve their liabilities -- withdrawals. They were not able to service the withdrawal rate (there were withdrawals/wires frozen for hours yesterday). In essence, driving themselves towards the insolvent side (hopefully not, because if they are insolvent now (discounting the equity value) we are going to have contagion.

opportune 4y ago
The maturity value of a bond/mbs is not really the true value at a given time between it being issued and maturing. You can treat it that way as a person holding the bond if you pinky-promise to yourself to not sell until maturity, but since banks need to periodically sell these to let customers get their deposits, that fiction doesn’t work for them. These things trade on the open market and adjust to interest rate changes. What really happened is that they bought a bunch of securities backed by depositors that lost value at mark-to-market. This is poor risk management, not some unfortunate unavoidable issue caused by a bank run. They are insolvent at market prices - illiquidity would be more like they have a bunch of contracts or snowflake assets (like buildings, or a security that doesn’t trade on the open market). As a depositor, saying “in 10 years you will get the full value of your deposit back” is bullshit: you could give me the actual reduced value now, and I could invest it in the same kind of instrument, and in 10 years I’d also have the full value back - but I could do other things with it too, which may be preferable considering it’s my deposit that I may need to spend now rather than in 10 years. The fear is that many other banks are in the same position, that they are technically underwater and vulnerable to runs because the true value of their deposit-backed assets have decreased due to interest rate increases, but that SVB was affected first because their customer base of VC-backed businesses just happened to have their withdrawal:deposit ratio increase the most.
- eftychis 4y ago
  The regulation to my knowledge does require marking to maturity. Yes as I have commented elsewhere in this post, all banks do this. SVB had the unique situation of being the canary in the mine, as they had to get a lot of MBS during low interest rates of 2021/2020. Your question is the jackpot one, yes: how many other banks are following closely by. If the Fed continues or increases the rate hike I would be surprised if we don't hear more -- assuming no other action. The silver lining might be that SVB might give the heads up for the Fed, FDIC and government to act.
  - opportune 4y ago
    Sure that is the regulation, but just because it’s a regulation doesn’t mean it’s all you should do for risk management, it’s just the bare minimum. If the present value of a bank’s assets are lower than the present value of deposits, that is insolvency: calling it illiquidity just because the bank doesn’t want to sell its actually-liquid underwater assets right now is a cop-out.

opportune 4y ago

The maturity value of a bond/mbs is not really the true value at a given time between it being issued and maturing. You can treat it that way as a person holding the bond if you pinky-promise to yourself to not sell until maturity, but since banks need to periodically sell these to let customers get their deposits, that fiction doesn’t work for them. These things trade on the open market and adjust to interest rate changes. What really happened is that they bought a bunch of securities backed by depositors that lost value at mark-to-market. This is poor risk management, not some unfortunate unavoidable issue caused by a bank run. They are insolvent at market prices - illiquidity would be more like they have a bunch of contracts or snowflake assets (like buildings, or a security that doesn’t trade on the open market). As a depositor, saying “in 10 years you will get the full value of your deposit back” is bullshit: you could give me the actual reduced value now, and I could invest it in the same kind of instrument, and in 10 years I’d also have the full value back - but I could do other things with it too, which may be preferable considering it’s my deposit that I may need to spend now rather than in 10 years. The fear is that many other banks are in the same position, that they are technically underwater and vulnerable to runs because the true value of their deposit-backed assets have decreased due to interest rate increases, but that SVB was affected first because their customer base of VC-backed businesses just happened to have their withdrawal:deposit ratio increase the most.

eftychis 4y ago
The regulation to my knowledge does require marking to maturity. Yes as I have commented elsewhere in this post, all banks do this. SVB had the unique situation of being the canary in the mine, as they had to get a lot of MBS during low interest rates of 2021/2020. Your question is the jackpot one, yes: how many other banks are following closely by. If the Fed continues or increases the rate hike I would be surprised if we don't hear more -- assuming no other action. The silver lining might be that SVB might give the heads up for the Fed, FDIC and government to act.
- opportune 4y ago
  Sure that is the regulation, but just because it’s a regulation doesn’t mean it’s all you should do for risk management, it’s just the bare minimum. If the present value of a bank’s assets are lower than the present value of deposits, that is insolvency: calling it illiquidity just because the bank doesn’t want to sell its actually-liquid underwater assets right now is a cop-out.