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In your assertion here are you assuming that the bank was solvent and just had a liquidity problem, not a solvency problem?

by drited 4y ago

expazl 4y ago
At the root of the issue was that they where not solvent when bonds where valued at market-to-market, but you don't really care about that when you are intending to hold the bonds to maturity. They where solvent when bonds where valued at maturation rates. The latter valuation is what you traditionally calculate and use in banking, the prior only becomes relevant if there is a run on the bank and you have to liquidate immediately to cover, which is of cause what happened. The great comedy of the situation is that if everyone had been calm and said "hmm, they need to raise some capital lets see what happens" SVB might have had a bad quarter or two, but they wouldn't have gone bankrupt. They only went down because the startup community reaction to hearing "we need to raise capital to cover day to day liquidity requirements" was to initiate an immediate flash run on the bank, which meant they where forced to sell all those bonds at a discounted market-to-market rate instead of holding them to maturity as was the expectation.
- drited 4y ago
  >> but you don't really care about that when you are intending to hold the bonds to maturity. They where solvent when bonds where valued at maturation rates Actually if you're a bank whose business model is predicated on interest spread between your assets and liabilities you do care. This is particularly true for banks like SVB whose duration of liabilities (deposits) is short because suddenly cost of deposits rises while longer-duration 'held to maturity' assets still generate the same (low) rate of interest. Suddenly the bank is loss-making. People are talking about mark to market like it's irrelevant but it's actually a very important market signal. It is not just relevant for balance sheet valuation. It is also a signal of future income statement profitability unless duration of assets is well matched with duration of liabilities.

In your assertion here are you assuming that the bank was solvent and just had a liquidity problem, not a solvency problem?

by drited 4y ago

In your assertion here are you assuming that the bank was solvent and just had a liquidity problem, not a solvency problem?

expazl 4y ago

At the root of the issue was that they where not solvent when bonds where valued at market-to-market, but you don't really care about that when you are intending to hold the bonds to maturity. They where solvent when bonds where valued at maturation rates. The latter valuation is what you traditionally calculate and use in banking, the prior only becomes relevant if there is a run on the bank and you have to liquidate immediately to cover, which is of cause what happened. The great comedy of the situation is that if everyone had been calm and said "hmm, they need to raise some capital lets see what happens" SVB might have had a bad quarter or two, but they wouldn't have gone bankrupt. They only went down because the startup community reaction to hearing "we need to raise capital to cover day to day liquidity requirements" was to initiate an immediate flash run on the bank, which meant they where forced to sell all those bonds at a discounted market-to-market rate instead of holding them to maturity as was the expectation.

drited 4y ago
>> but you don't really care about that when you are intending to hold the bonds to maturity. They where solvent when bonds where valued at maturation rates Actually if you're a bank whose business model is predicated on interest spread between your assets and liabilities you do care. This is particularly true for banks like SVB whose duration of liabilities (deposits) is short because suddenly cost of deposits rises while longer-duration 'held to maturity' assets still generate the same (low) rate of interest. Suddenly the bank is loss-making. People are talking about mark to market like it's irrelevant but it's actually a very important market signal. It is not just relevant for balance sheet valuation. It is also a signal of future income statement profitability unless duration of assets is well matched with duration of liabilities.