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> I don’t understand. If you hold a bond to maturity you get it’s NPV. Valuing it at NPV vs mark to market has more to do with your plan than any sort of fundam

> I don’t understand. If you hold a bond to maturity you get it’s NPV. Valuing it at NPV vs mark to market has more to do with your plan than any sort of fundamental truth - they’re both legitimate ways of valuing it. Correct. So, if you have customers and you put THEIR money into a bond and say you're holding it to maturity, but then your customers want their money, what exactly was the plan?

beezle 4y ago
Not all of the capital was in a HTM portfolio. SVB I'm sure had a good handle on the typical flow of funds and based off of that with some margin of error (that was obviously not everyone wants everything today).
fnordpiglet 4y ago
That’s literally the purpose of a bank my friend. Welcome, yes, the emperor has no clothes and never has.
- sdfghswe 4y ago
  No you didn't answer my question. You made the case that how you value it depends on the plan. So what was the plan? The answer, of course, was that these people didn't have a plan because they're incompetent, and that has nothing to do with the "purpose of a bank". It's just incompetence, nothing more.
  - fnordpiglet 4y ago
    The plan in a normal bank operations is to hold a mixture of long, medium, short, and liquid assets proportionate to a normal heavy withdrawal of funds. No bank stays liquid enough to survive the drawdowns they saw, because they’re not required to by law. They operate within the regulatory construct they exist in. The way they pay interest on deposits is by investing them to begin with, and if they’re invested in anything other than cash or treasuries, they face liquidity risk. That risk is not zero. It’s actually not even insubstantial. And risks are what the word implies, a risk. In an unlikely situation, they are insolvent while they liquidate assets - and often their long terms assets must be liquidated at a loss. This is literally how every bank operates. This is also why the government was able to step in and restore bank operations in a few days. They know how banks work too, they wrote the rules. So they know exactly what to do in this situation - because since it’s a risk of banking business, it can and will happen. You seem to understand the concepts enough, where is the disconnect? It’s genuinely confusing. This isn’t a novel take on how a bank works.
nomay 4y ago
You just explained the businness model of banking.
- sdfghswe 4y ago
  Wrong. The business model of banking is managing the money to an appropriate duration. Locking it up isn't a business model.
  - notch898a 4y ago
    Demand deposits can be immediately be recalled, so where exactly do you suggest they park it? In the central bank -- no bueno they've denied banking license for narrow banking. Margin lending that allows recall at any moment? I can think of some options but frankly I'd rather have my money in a bank that over-extends themselves on treasuries than most the alternatives. At least I'd most likely get 90+% of my money back eventually. Only retroactively in a bank run are you really able to see just what duration and what amounts were the limit.
    - sdfghswe 4y ago
      > Only retroactively in a bank run are you really able to see just what duration and what amounts were the limit. Exactly, so don't lock it up. Glad you agree with me.
      - notch898a 4y ago
        So put it where? Narrow banking is illegal by virtue of denying the banking license. You're basically left with what, something like recallable loans/margin? What are the other options?
        tripletao 4y ago
        Put it in bonds of whatever duration the bank chooses, but require sufficient equity that the shareholders will bear the loss and not the depositors? Interest rates didn't increase in a single step. If the SVB had been forced to recognize their losses on a continuous MTM basis, then they'd have been forced to raise capital (or liquidate if they couldn't) by late 2022, when they were undercapitalized but not insolvent. The shareholders might still have been zeroed, but the depositors would have been fine. In fact, the SVB designated those bonds as held-to-maturity, which allowed them to avoid reporting the loss, leaving them adequately capitalized for regulatory purposes despite being MTM insolvent. That accounting treatment doesn't change the actual economics though, so they still blew up.
jmvoodoo 4y ago
So, your plan is to do away with fractional reserve banking entirely ? How do you think that would impact GDP and the overall functioning of the economy?
- scott00 4y ago
  Not who you're responding to, but I actually don't think getting rid of fractional reserve banking is as crazy as it may sound at first. Maybe people who need to borrow money for 10 years shouldn't be borrowing it from people who will freak out if the loan isn't paid back in a week. On the investor side you'd put cash you really need in a non-interest bearing account, and the rest invested at a duration and risk level appropriate for your situation. For most people/organizations the details would be outsourced to a fund manager. On the borrower side, small stuff would get bundled and securitized, big stuff could trade on its own. The industry's already moving in that direction. Modern communication technology has so drastically changed the physical scale over which a marketplace can function I think it's reasonable to ask if we still need the banking smoke and mirrors sitting between borrowers and lenders.
hypothesis 4y ago
Sounds exactly like “held-to-mortality” plan! It does appear to work in at least some cases. The rest is getting bailed out. [0] https://news.ycombinator.com/item?id=35130979 https://news.ycombinator.com/item?id=35130979
fisherjeff 4y ago
I mean, it’s a balancing act, right? If you plan to be able to accommodate 20% redemption in a single day, you’re left with a portfolio maturity of 5 days. You will be almost unavoidably marked to market but your yield, even when rates are high, is going to be roughly zero and you’re going out of business anyway.
- benlivengood 4y ago
  You offer customers CDs if they want higher interest rates. Isn't that how it's been done for decades?
  - fisherjeff 4y ago
    Yes, that would narrow the maturity gap and pass some rate risk on to customers. In SVB’s case, though, they would’ve needed to sell a lot of CDs relatively quickly, which means their rates (i.e., borrowing cost) would have to be high.
- yunwal 4y ago
  If your customers actions are all highly correlated, you need to be planning for things like this. The fact that having your whole customer base in a single group chat is a bad business model for a bank should not be the taxpayers’ problem.
  - wstuartcl 4y ago
    it's good then that the funds to support the deposits are coming from the bank funded fdic fund not taxes then.
    - yunwal 4y ago
      The whole argument is whether uninsured deposits should be provided by the FDIC. I have no problems with the insured amount being returned to customers. The FDIC is a government owned business and shouldn’t be acting outside of it’s financial interests and obligations.
wstuartcl 4y ago
They had 13b in cash going into this year and other highly liquid assets, those evaporated as the draw downs happened. Its not like they tucked away all assets into 10 year lockups (or higher risk loans). Even the bonds they did lock up -- in what would be considered 99% "normal" markets given the last few decades a sell off of those bonds would not have been highly problematic. It became problematic when they were so low return needing to be sold to reblalance the 10/90 rule when market rates were much better and they needed to be discounted due to the huge rate hikes. SVB was pretty much considered the "boyscouts" of the industry and in normal circumstances they took a super conservative placement of the deposits. The only thing they could have done better was to (what would have normally been considered) overly hedge the bonds reducing their return even more. I personally think they were too transparent with the liquidity crunch, and the investors and their companies that pulled out 20-30b before they even could execute the sell probably saw the ability to crash the bank and offer shark hooked bridge funding to the competitive companies left in the lurch. Its not like these folks were naive clients -- imho they were looking to do damage and get blood returns/equity on those bridge funding after the fall.
- matthewdgreen 4y ago
  They had a customer base that would knife them at the first hint of a liquidity issue, then they had a liquidity issue. Of course a different approach would have reduced their returns, but then they’d still be in business.
  - cm2187 4y ago
    Deposits from financials are treated as disappearing at the first opportunity from a regulatory point of view. Corporate deposits are considered volatile but less volatile. So the behaviour we have seen isn’t entirely unexpected. It seems SVB has VC deposits and corporate deposits from startups that were effectively controlled by VC and behaved like financials in term of deposit outflows.
    - pas 4y ago
      what does financials mean in this? can you explain this term, please?
cowuser666 4y ago
this is inherent to fractional reserve banks and maturity transformation. any bank would be vulnerable if there's a bank run. this is a basic thing to understand before making claims on this issue imho.

beezle 4y ago

Not all of the capital was in a HTM portfolio. SVB I'm sure had a good handle on the typical flow of funds and based off of that with some margin of error (that was obviously not everyone wants everything today).

fnordpiglet 4y ago

That’s literally the purpose of a bank my friend. Welcome, yes, the emperor has no clothes and never has.

sdfghswe 4y ago
No you didn't answer my question. You made the case that how you value it depends on the plan. So what was the plan? The answer, of course, was that these people didn't have a plan because they're incompetent, and that has nothing to do with the "purpose of a bank". It's just incompetence, nothing more.
- fnordpiglet 4y ago
  The plan in a normal bank operations is to hold a mixture of long, medium, short, and liquid assets proportionate to a normal heavy withdrawal of funds. No bank stays liquid enough to survive the drawdowns they saw, because they’re not required to by law. They operate within the regulatory construct they exist in. The way they pay interest on deposits is by investing them to begin with, and if they’re invested in anything other than cash or treasuries, they face liquidity risk. That risk is not zero. It’s actually not even insubstantial. And risks are what the word implies, a risk. In an unlikely situation, they are insolvent while they liquidate assets - and often their long terms assets must be liquidated at a loss. This is literally how every bank operates. This is also why the government was able to step in and restore bank operations in a few days. They know how banks work too, they wrote the rules. So they know exactly what to do in this situation - because since it’s a risk of banking business, it can and will happen. You seem to understand the concepts enough, where is the disconnect? It’s genuinely confusing. This isn’t a novel take on how a bank works.

nomay 4y ago

You just explained the businness model of banking.

sdfghswe 4y ago
Wrong. The business model of banking is managing the money to an appropriate duration. Locking it up isn't a business model.
- notch898a 4y ago
  Demand deposits can be immediately be recalled, so where exactly do you suggest they park it? In the central bank -- no bueno they've denied banking license for narrow banking. Margin lending that allows recall at any moment? I can think of some options but frankly I'd rather have my money in a bank that over-extends themselves on treasuries than most the alternatives. At least I'd most likely get 90+% of my money back eventually. Only retroactively in a bank run are you really able to see just what duration and what amounts were the limit.
  - sdfghswe 4y ago
    > Only retroactively in a bank run are you really able to see just what duration and what amounts were the limit. Exactly, so don't lock it up. Glad you agree with me.
    - notch898a 4y ago
      So put it where? Narrow banking is illegal by virtue of denying the banking license. You're basically left with what, something like recallable loans/margin? What are the other options?
      - tripletao 4y ago
        Put it in bonds of whatever duration the bank chooses, but require sufficient equity that the shareholders will bear the loss and not the depositors? Interest rates didn't increase in a single step. If the SVB had been forced to recognize their losses on a continuous MTM basis, then they'd have been forced to raise capital (or liquidate if they couldn't) by late 2022, when they were undercapitalized but not insolvent. The shareholders might still have been zeroed, but the depositors would have been fine. In fact, the SVB designated those bonds as held-to-maturity, which allowed them to avoid reporting the loss, leaving them adequately capitalized for regulatory purposes despite being MTM insolvent. That accounting treatment doesn't change the actual economics though, so they still blew up.

jmvoodoo 4y ago

So, your plan is to do away with fractional reserve banking entirely ? How do you think that would impact GDP and the overall functioning of the economy?

scott00 4y ago
Not who you're responding to, but I actually don't think getting rid of fractional reserve banking is as crazy as it may sound at first. Maybe people who need to borrow money for 10 years shouldn't be borrowing it from people who will freak out if the loan isn't paid back in a week. On the investor side you'd put cash you really need in a non-interest bearing account, and the rest invested at a duration and risk level appropriate for your situation. For most people/organizations the details would be outsourced to a fund manager. On the borrower side, small stuff would get bundled and securitized, big stuff could trade on its own. The industry's already moving in that direction. Modern communication technology has so drastically changed the physical scale over which a marketplace can function I think it's reasonable to ask if we still need the banking smoke and mirrors sitting between borrowers and lenders.

hypothesis 4y ago

Sounds exactly like “held-to-mortality” plan! It does appear to work in at least some cases. The rest is getting bailed out. [0] https://news.ycombinator.com/item?id=35130979 https://news.ycombinator.com/item?id=35130979

fisherjeff 4y ago

I mean, it’s a balancing act, right? If you plan to be able to accommodate 20% redemption in a single day, you’re left with a portfolio maturity of 5 days. You will be almost unavoidably marked to market but your yield, even when rates are high, is going to be roughly zero and you’re going out of business anyway.

benlivengood 4y ago
You offer customers CDs if they want higher interest rates. Isn't that how it's been done for decades?
- fisherjeff 4y ago
  Yes, that would narrow the maturity gap and pass some rate risk on to customers. In SVB’s case, though, they would’ve needed to sell a lot of CDs relatively quickly, which means their rates (i.e., borrowing cost) would have to be high.
yunwal 4y ago
If your customers actions are all highly correlated, you need to be planning for things like this. The fact that having your whole customer base in a single group chat is a bad business model for a bank should not be the taxpayers’ problem.
- wstuartcl 4y ago
  it's good then that the funds to support the deposits are coming from the bank funded fdic fund not taxes then.
  - yunwal 4y ago
    The whole argument is whether uninsured deposits should be provided by the FDIC. I have no problems with the insured amount being returned to customers. The FDIC is a government owned business and shouldn’t be acting outside of it’s financial interests and obligations.

wstuartcl 4y ago

They had 13b in cash going into this year and other highly liquid assets, those evaporated as the draw downs happened. Its not like they tucked away all assets into 10 year lockups (or higher risk loans). Even the bonds they did lock up -- in what would be considered 99% "normal" markets given the last few decades a sell off of those bonds would not have been highly problematic. It became problematic when they were so low return needing to be sold to reblalance the 10/90 rule when market rates were much better and they needed to be discounted due to the huge rate hikes. SVB was pretty much considered the "boyscouts" of the industry and in normal circumstances they took a super conservative placement of the deposits. The only thing they could have done better was to (what would have normally been considered) overly hedge the bonds reducing their return even more. I personally think they were too transparent with the liquidity crunch, and the investors and their companies that pulled out 20-30b before they even could execute the sell probably saw the ability to crash the bank and offer shark hooked bridge funding to the competitive companies left in the lurch. Its not like these folks were naive clients -- imho they were looking to do damage and get blood returns/equity on those bridge funding after the fall.

matthewdgreen 4y ago
They had a customer base that would knife them at the first hint of a liquidity issue, then they had a liquidity issue. Of course a different approach would have reduced their returns, but then they’d still be in business.
- cm2187 4y ago
  Deposits from financials are treated as disappearing at the first opportunity from a regulatory point of view. Corporate deposits are considered volatile but less volatile. So the behaviour we have seen isn’t entirely unexpected. It seems SVB has VC deposits and corporate deposits from startups that were effectively controlled by VC and behaved like financials in term of deposit outflows.
  - pas 4y ago
    what does financials mean in this? can you explain this term, please?

cowuser666 4y ago

this is inherent to fractional reserve banks and maturity transformation. any bank would be vulnerable if there's a bank run. this is a basic thing to understand before making claims on this issue imho.