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SVB held $21bn of 'available for sale' bonds and $91bn of 'held to maturity' bonds on its balance sheet, that were actually only worth $19bn an $76bn respective

by nr378 4y ago

SVB held $21bn of 'available for sale' bonds and $91bn of 'held to maturity' bonds on its balance sheet, that were actually only worth $19bn an $76bn respectively on a mark-to-market basis, which means a total unrecognised hole its in balance sheet of $17bn. SVB's total equity was only $16bn[1][2] That means it didn't have a liquidity crisis, and it didn't have reserves in excess of it's liabilities, it had a solvency crisis, and it has more liabilities than it has assets (before even considering the haircut it's assets will suffer at liquidation prices). The crux of the issue here is that, for many types of assets, banks are able to test whether they meet capital requirements based on the price they paid for the assets, rather than the price the assets are currently worth. So SVB was sailing along nicely whilst it's bond portfolio slipped further and further under water, and wasn't required to recapitalise when it should have done. [1] https://ir.svb.com/financials/annual-reports-and-proxies/default.aspx https://ir.svb.com/financials/annual-reports-and-proxies/def... [2] https://www.wsj.com/articles/bond-losses-push-silicon-valley-bank-parent-to-raise-capital-125e89d4 https://www.wsj.com/articles/bond-losses-push-silicon-valley...

RC_ITR 4y ago
People keep talking about how 'this is a solvency crisis because if SVB had to sell everything today, they wouldn't cover liabilities' when that is the definition of a liquidity crisis. EDIT: To be clear, think of it this way. I have a piece of paper saying you'll give me $100 in 1 year plus 1% interest that I bought for $98. No-one buys that piece of paper for $98 today, because they can get the same deal with better interest. But that doesn't change the fact that I will get $100 for it. If deposits hadn't shrunk, $100 would go to SVB in 1 year and everything would be fine, it's the fact that they have to sell it so far ahead of maturity that's the problem, we just didn't notice this phenomenon in the past few decades b/c rates fell and prices went up. This is not because SVB has a particularly risky book (we're talking treasuries here), it's because they didn't account for declining deposits (itself a very stupid, but unique bad decision unrelated to their risk tolerance).
- SftwrSvior81 4y ago
  > People keep talking about how 'this is a solvency crisis because if SVB had to sell everything today, they wouldn't cover liabilities' when that is the definition of a liquidity crisis. I don't think that's right. It would be a liquidity crisis if the market value of everything they own is higher than their liabilities but they can't find a buyer at this time. You are saying that a liquidity crisis is when they can find a buyer but everything they have is worth less than their liabilities. That's not the case.
- kryogen1c 4y ago
  > People keep talking about how 'this is a solvency crisis because if SVB had to sell everything today, they wouldn't cover liabilities' This is not accurate, and the inaccuracy is the difference between solvency and liquidity. If svb had longer (ie weeks), they still wouldn't be able to cover their debts. Its not a matter of needing time to arrange buyers for their assets; their inability to pay isn't related to liquidity today or tomorrow, it's related to their asset's value. If they snapped their fingers and marked to market all their assets, they would be in debt because they're insolvent.
  - tshaddox 4y ago
    > to pay isn't related to liquidity today or tomorrow, it's related to their asset's value How do you calculate that precisely? That seems like a fuzzy distinction, considering that the value of things change over time.
    - kryogen1c 4y ago
      > seems like a fuzzy distinction Not really. Insolvency is by definition time independent. If you owe more than you have, you're insolvent. It doesn't really matter if you might make enough to cover the difference in the future. In practice, you might get away with it if no one forces the issue upon you, but that doesn't change the math of whether or not you could pay your debts. Liquidity is different. It is time dependent by definition. Some things take time to structure, deal, and sell. You can also get away with this in practice. They can both have similar effects when they happen, but their causes are sharply different. I have a house I can sell to cover my mortgage, but couldn't sell it in less than a couple weeks or maybe even months. Illiquid but solvent.
whimsicalism 4y ago
sounds like you are describing a liquidity crisis to me
- hackernewds 4y ago
  precisely, the maturation for the bonds were long-term. they would have been fine over time, if not for the bank run
  - paulddraper 4y ago
    If your "liquidity crisis" is measured in terms of years and years, you have a solvency crisis. 1 2023USD =/= 1 2033USD Those aren't the same currency. Solvency is whether you could go to market today (or soon) and show more assets than liabilities.
    - ves 4y ago
      The liabilities are the same currency and the same amount in 2023 and 2033. They’re solvent. The asterisk is that the liabilities are generating interest, but this is fine because (one very safely assumes) that’s covered by the interest on the long-duration assets SVB bought.
      - oldgradstudent 4y ago
        Interest rates have risen since those long-duration assets were purchased. Depositors now expect higher interest rates which cannot be covered by those assets. They will withdraw their deposits and move them to a bank that can offer higher interest rates.
        ves 4y ago
        right, which is why this is a liquidity problem and not a solvency one. The assets cover the liabilities--you just have to wait ten years or whatever.
csomar 4y ago
> The crux of the issue here is that, for many types of assets, banks are able to test whether they meet capital requirements based on the price they paid for the assets, rather than the price the assets are currently worth. I think this will limit the types of assets banks can purchase. They'll need to purchase only assets that regularly trade (and thus are quoted) on the market.
- CydeWeys 4y ago
  The assets they were holding do regularly trade and could easily be valued. They knew that the value was down. The problem was they didn't actually have to do anything about it.
  - tyre 4y ago
    Because they planned to hold them to maturity, which meant that marking to market didn’t make much sense. Of course here it blew up, but even marked to market assets will depreciate in value if a bank tries to liquidate tens of billions of dollars worth.
tikkun 4y ago
> SVB's total equity was only $16bn Which table in the 10-K would I look at to see this?

by nr378 4y ago

RC_ITR 4y ago

People keep talking about how 'this is a solvency crisis because if SVB had to sell everything today, they wouldn't cover liabilities' when that is the definition of a liquidity crisis. EDIT: To be clear, think of it this way. I have a piece of paper saying you'll give me $100 in 1 year plus 1% interest that I bought for $98. No-one buys that piece of paper for $98 today, because they can get the same deal with better interest. But that doesn't change the fact that I will get $100 for it. If deposits hadn't shrunk, $100 would go to SVB in 1 year and everything would be fine, it's the fact that they have to sell it so far ahead of maturity that's the problem, we just didn't notice this phenomenon in the past few decades b/c rates fell and prices went up. This is not because SVB has a particularly risky book (we're talking treasuries here), it's because they didn't account for declining deposits (itself a very stupid, but unique bad decision unrelated to their risk tolerance).

SftwrSvior81 4y ago
> People keep talking about how 'this is a solvency crisis because if SVB had to sell everything today, they wouldn't cover liabilities' when that is the definition of a liquidity crisis. I don't think that's right. It would be a liquidity crisis if the market value of everything they own is higher than their liabilities but they can't find a buyer at this time. You are saying that a liquidity crisis is when they can find a buyer but everything they have is worth less than their liabilities. That's not the case.
kryogen1c 4y ago
> People keep talking about how 'this is a solvency crisis because if SVB had to sell everything today, they wouldn't cover liabilities' This is not accurate, and the inaccuracy is the difference between solvency and liquidity. If svb had longer (ie weeks), they still wouldn't be able to cover their debts. Its not a matter of needing time to arrange buyers for their assets; their inability to pay isn't related to liquidity today or tomorrow, it's related to their asset's value. If they snapped their fingers and marked to market all their assets, they would be in debt because they're insolvent.
- tshaddox 4y ago
  > to pay isn't related to liquidity today or tomorrow, it's related to their asset's value How do you calculate that precisely? That seems like a fuzzy distinction, considering that the value of things change over time.
  - kryogen1c 4y ago
    > seems like a fuzzy distinction Not really. Insolvency is by definition time independent. If you owe more than you have, you're insolvent. It doesn't really matter if you might make enough to cover the difference in the future. In practice, you might get away with it if no one forces the issue upon you, but that doesn't change the math of whether or not you could pay your debts. Liquidity is different. It is time dependent by definition. Some things take time to structure, deal, and sell. You can also get away with this in practice. They can both have similar effects when they happen, but their causes are sharply different. I have a house I can sell to cover my mortgage, but couldn't sell it in less than a couple weeks or maybe even months. Illiquid but solvent.

whimsicalism 4y ago

sounds like you are describing a liquidity crisis to me

hackernewds 4y ago
precisely, the maturation for the bonds were long-term. they would have been fine over time, if not for the bank run
- paulddraper 4y ago
  If your "liquidity crisis" is measured in terms of years and years, you have a solvency crisis. 1 2023USD =/= 1 2033USD Those aren't the same currency. Solvency is whether you could go to market today (or soon) and show more assets than liabilities.
  - ves 4y ago
    The liabilities are the same currency and the same amount in 2023 and 2033. They’re solvent. The asterisk is that the liabilities are generating interest, but this is fine because (one very safely assumes) that’s covered by the interest on the long-duration assets SVB bought.
    - oldgradstudent 4y ago
      Interest rates have risen since those long-duration assets were purchased. Depositors now expect higher interest rates which cannot be covered by those assets. They will withdraw their deposits and move them to a bank that can offer higher interest rates.
      - ves 4y ago
        right, which is why this is a liquidity problem and not a solvency one. The assets cover the liabilities--you just have to wait ten years or whatever.

csomar 4y ago

> The crux of the issue here is that, for many types of assets, banks are able to test whether they meet capital requirements based on the price they paid for the assets, rather than the price the assets are currently worth. I think this will limit the types of assets banks can purchase. They'll need to purchase only assets that regularly trade (and thus are quoted) on the market.

CydeWeys 4y ago
The assets they were holding do regularly trade and could easily be valued. They knew that the value was down. The problem was they didn't actually have to do anything about it.
- tyre 4y ago
  Because they planned to hold them to maturity, which meant that marking to market didn’t make much sense. Of course here it blew up, but even marked to market assets will depreciate in value if a bank tries to liquidate tens of billions of dollars worth.

tikkun 4y ago

> SVB's total equity was only $16bn Which table in the 10-K would I look at to see this?