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On paper SVB might well have been solvent until they got withdrawals. This is possible because you can account for bonds in two ways: mark to market, or held to
by rocqua 4y ago
On paper SVB might well have been solvent until they got withdrawals. This is possible because you can account for bonds in two ways: mark to market, or held to maturity.
In the second case you don't look at market prices. This actually makes some sense. If you intend to hold your bonds to maturity, any unrealized losses will naturally resolve themselves as you reach maturity. Hence a balance sheet that doesn't mark the losses is a more accurate picture. But only IF you never need those bonds for liquidity.
Note that liquidity crunches can ruin balance sheets even without this bond-specific feature. For example if you own 10% of a company stock, and need to dump all of it, the price will drop by a lot. They were accounted using Mark to Market, but even that was too optimistic in the face of liquidity crunches.
- amluto 4y ago> Hence a balance sheet that doesn't mark the losses is a more accurate picture. But only IF you never need those bonds for liquidity. I grade this as a fail of a hypothetical CFO interview I’m running. Sorry. > Note that liquidity crunches can ruin balance sheets even without this bond-specific feature. For example if you own 10% of a company stock, and need to dump all of it, the price will drop by a lot. Of course, but that’s an unrelated effect. I can lose money by buying something that loses value. I can also lose money by buying something that is hard to sell without paying large spread or causing a large market impact because I sold it. These are entirely orthogonal — I could buy securities that go up and lose some or all of the gain due to a forced sale. SVB’s bonds went down, in an NPV sense or a mid-market sense or any other sense that considers what they’re actually worth today.
- toast0 4y ago> Hence a balance sheet that doesn't mark the losses is a more accurate picture. A dollar in ten years isn't equivalent to a dollar today, so I don't think it's really an accurate picture to claim otherwise. You could use the held to maturity value as part of a projection of your balance sheet into the future. Although, mark to market to get current value and assume prevailing interest rates to get to future value should get you to the same place. I agree that if 20% of your deposits are demanded in the same day, that's going to cause at least big problems if not failures to most banks.
- rocqua 4y agoBalance sheets mix maturity very often. Outstanding loans to others, unpaid invoices, issued bonds, loans with banks. All of these are on the balance sheet, none of them represent dollars now. A balance sheet does not show "what is left if we needed to liquidate now". It shows some approximation of "what do we own, and what do we owe". If you fully intend to hold something to maturity (either bonds you own, loans you made, bonds you issued, or borrowed money) then it doesn't make sense to value that at market prices when you know that the price will converge to 100cents on the dollar before you sell it. If you borrowed at 1% interest and interest rates rise, you don't mark down your debt in value. Even though the 'market value' of that loan definitely dropped.