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An insolvent bank would eventually end up illiquid. But an illiquid bank is not necessarily insolvent. In this case, the bank is both illiquid and insolvent.

An insolvent bank would eventually end up illiquid. But an illiquid bank is not necessarily insolvent. In this case, the bank is both illiquid and insolvent. In which case we should not blame the illiquid event because it is eventual as the bank was insolvent ever since the feds hiked rates.

eganist 4y ago
Your recitals are correct, yes. But this: > the bank was insolvent long before that. Well, not quite. Insolvency was achieved the moment of the bank run. Until then, the bank was fully solvent based on the value of its liquid assets, including stock, against whatever obligations they had at that point in time. Once the bank run started, that's when withdrawals outpaced what they could fulfill through the sale of their liquid assets. Hence insolvency, and illiquidity very rapidly thereafter. --- edit: > as the bank was insolvent ever since the feds hiked rates. This is less "not quite" and more "not at all" as it misunderstands what insolvency is - the inability to pay debts at maturity.
- Aperocky 4y ago
  So what should it be called? There's got to be a name for it where the mark to market asset values are below that of liabilities right?
- kgwgk 4y ago
  > insolvency is - the inability to pay debts at maturity What is the maturity of deposits?
  - eganist 4y ago
    For all practical purposes, the moment of withdrawal. Though the FRB states that "maturity" is not something that applies to these types of accounts. https://www.federalreserve.gov/boarddocs/supmanual/cch/200601/int_depos.pdf https://www.federalreserve.gov/boarddocs/supmanual/cch/20060... page 2 That's also why CDs exist. Far easier for FIs to actually do something with the money when you lock up with them and drastically reduce the risk of you withdrawing it. Edit: Fed source.
    - kgwgk 4y ago
      Do you consider a bank with one billion in deposits and one million in assets solvent as long as there are no withdrawals? Are Ponzi schemes solvent until they collapse?
- shkkmo 4y ago
  > it misunderstands what insolvency is - the inability to pay debts at maturity. This is redefining insolvency based on the (legally sanctioned) accounting trickery of classifying assets as HTM.
btilly 4y ago
In which case we should not blame the illiquid event because it is eventual as the bank was insolvent ever since the feds hiked rates. You are assuming that the rates got hiked, and never again will fall. Had the rates fallen in a year, then they would have no longer been insolvent. And could have recovered. Indeed once they got stuck, they would have had every incentive to hunker down and pray for that outcome.

eganist 4y ago

Your recitals are correct, yes. But this: > the bank was insolvent long before that. Well, not quite. Insolvency was achieved the moment of the bank run. Until then, the bank was fully solvent based on the value of its liquid assets, including stock, against whatever obligations they had at that point in time. Once the bank run started, that's when withdrawals outpaced what they could fulfill through the sale of their liquid assets. Hence insolvency, and illiquidity very rapidly thereafter. --- edit: > as the bank was insolvent ever since the feds hiked rates. This is less "not quite" and more "not at all" as it misunderstands what insolvency is - the inability to pay debts at maturity.

Aperocky 4y ago
So what should it be called? There's got to be a name for it where the mark to market asset values are below that of liabilities right?
kgwgk 4y ago
> insolvency is - the inability to pay debts at maturity What is the maturity of deposits?
- eganist 4y ago
  For all practical purposes, the moment of withdrawal. Though the FRB states that "maturity" is not something that applies to these types of accounts. https://www.federalreserve.gov/boarddocs/supmanual/cch/200601/int_depos.pdf https://www.federalreserve.gov/boarddocs/supmanual/cch/20060... page 2 That's also why CDs exist. Far easier for FIs to actually do something with the money when you lock up with them and drastically reduce the risk of you withdrawing it. Edit: Fed source.
  - kgwgk 4y ago
    Do you consider a bank with one billion in deposits and one million in assets solvent as long as there are no withdrawals? Are Ponzi schemes solvent until they collapse?
shkkmo 4y ago
> it misunderstands what insolvency is - the inability to pay debts at maturity. This is redefining insolvency based on the (legally sanctioned) accounting trickery of classifying assets as HTM.

btilly 4y ago

In which case we should not blame the illiquid event because it is eventual as the bank was insolvent ever since the feds hiked rates. You are assuming that the rates got hiked, and never again will fall. Had the rates fallen in a year, then they would have no longer been insolvent. And could have recovered. Indeed once they got stuck, they would have had every incentive to hunker down and pray for that outcome.