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> Current market value of assets may be below what was paid for them, but that doesn't matter unless the owner was depending on liquidating them at par value at

by amluto 4y ago

> Current market value of assets may be below what was paid for them, but that doesn't matter unless the owner was depending on liquidating them at par value at any time. That is simply not true. The current value is the mark-to-market value, possibly plus half the spread depending on your perspective. The net present value is roughly the same number, because it’s the future value discounted by the discount/risk-free rate, and any credible estimate of the risk free rate has increased substantially. This may not be a liquidity problem because, if those assets don’t need to be liquidated, then they don’t need to be liquidated. And it may or may not be a solvency problem, because the banks in question may not need that money before maturity, and even if their portfolio currently has negative value, they may make it up with other investments before maturity. But yes, that money really is lost. Before you say “but the money will all be there at maturity”, keep in mind that, if you project the banks’ balance sheets out 30 years, the value, in 2053 dollars, of those long term bonds may be unchanged, but the cost of the liabilities (deposits) that offset them has gone way up. edit: it is possible and maybe even likely that some of these banks hedged this risk. In that case they may have a loss from the interest rate exposure and an offsetting gain from the hedge.

paulddraper 4y ago
All these people comparing 2023 dollars to 2053 dollars.... I swear HN is the dumbest smart place there is.
sroussey 4y ago
If people followed this reasoning, then they would keep everything in cash or money market mutual funds. The mark to market will always be 1=1 and have no liquidity problems. Of course, all banks would fail. These “unrealized losses” don’t include “unrealized hedges” either. Of course, SPV let those go. Oops.
- amluto 4y ago
  I don’t really know what you’re trying to say. There are many things one can invest in. And indeed cash and money market funds are not strongly exposed to interest rate risk, and a rate change does not affect their present value to any substantial extent. And banks can absolutely make money without taking on interest rate risk. They can hedge, or they can invest in things that produce earnings at a rate that varies with interest rate (short term bonds, adjustable rate mortgages, etc). Or both. Or take on a limited amount of interest rate risk such that they are okay if they bet wrong.
Retric 4y ago
> but the cost of the liabilities (deposits) that offset them has gone way up. That assumes the bank is paying a higher interest rate to depositors in the interim. Banks don’t care about inflation directly only competition between each other. There’s upsides to having someone deposit 100 million at 4% rather than 10k people depositing 10k each @ 0.1%, but also risk. Major accounts have vastly less overhead per dollar deposited, but such accounts are also highly motivated to get the highest returns possible even if they need to move to another bank.
- amluto 4y ago
  > That assumes the bank is paying a higher interest rate to depositors in the interim. Of course they are. I just looked at a Bank of America 10K [0], in which they reported more interest-bearing deposits than non-interest-bearing deposits. They pay embarrassingly low average interest rates (of course), but those rates still go up as interest rates go up, and I also expect that more customers will demand interest when rates are higher. I do expect that average deposit interest rates do not increase as much as market interest rates, so a high-interest environment is generally better for banks. [0] https://investor.bankofamerica.com/regulatory-and-other-filings/all-sec-filings/content/0000070858-23-000092/0000070858-23-000092.pdf https://investor.bankofamerica.com/regulatory-and-other-fili... - see table 8
  - Retric 4y ago
    Your investments could be paying 2% or 4% and it’s basically irrelevant when you can get away with paying 0.05% on deposits. Which is my point, for banks to get in trouble the actual interest paid needs to change before it matters and looking at Bank of America’s current rates they aren’t changing. https://media.bac-assets.com/DigitalDeposit_VA_VA_Northern.pdf?cacheBuster=8800 https://media.bac-assets.com/DigitalDeposit_VA_VA_Northern.p... This might in theory shift over time if people start swapping to higher interest rate accounts at different banks, but until then they are, pardon the pun, making bank. 6 months CD’s are typically a different story, but nope BoA is again paying well under 0.1% Aka crap. https://www.bankofamerica.com/deposits/bank-cds/standard-term-cd/ https://www.bankofamerica.com/deposits/bank-cds/standard-ter...

by amluto 4y ago

paulddraper 4y ago

All these people comparing 2023 dollars to 2053 dollars.... I swear HN is the dumbest smart place there is.

sroussey 4y ago

If people followed this reasoning, then they would keep everything in cash or money market mutual funds. The mark to market will always be 1=1 and have no liquidity problems. Of course, all banks would fail. These “unrealized losses” don’t include “unrealized hedges” either. Of course, SPV let those go. Oops.

amluto 4y ago
I don’t really know what you’re trying to say. There are many things one can invest in. And indeed cash and money market funds are not strongly exposed to interest rate risk, and a rate change does not affect their present value to any substantial extent. And banks can absolutely make money without taking on interest rate risk. They can hedge, or they can invest in things that produce earnings at a rate that varies with interest rate (short term bonds, adjustable rate mortgages, etc). Or both. Or take on a limited amount of interest rate risk such that they are okay if they bet wrong.

Retric 4y ago

> but the cost of the liabilities (deposits) that offset them has gone way up. That assumes the bank is paying a higher interest rate to depositors in the interim. Banks don’t care about inflation directly only competition between each other. There’s upsides to having someone deposit 100 million at 4% rather than 10k people depositing 10k each @ 0.1%, but also risk. Major accounts have vastly less overhead per dollar deposited, but such accounts are also highly motivated to get the highest returns possible even if they need to move to another bank.

amluto 4y ago
> That assumes the bank is paying a higher interest rate to depositors in the interim. Of course they are. I just looked at a Bank of America 10K [0], in which they reported more interest-bearing deposits than non-interest-bearing deposits. They pay embarrassingly low average interest rates (of course), but those rates still go up as interest rates go up, and I also expect that more customers will demand interest when rates are higher. I do expect that average deposit interest rates do not increase as much as market interest rates, so a high-interest environment is generally better for banks. [0] https://investor.bankofamerica.com/regulatory-and-other-filings/all-sec-filings/content/0000070858-23-000092/0000070858-23-000092.pdf https://investor.bankofamerica.com/regulatory-and-other-fili... - see table 8
- Retric 4y ago
  Your investments could be paying 2% or 4% and it’s basically irrelevant when you can get away with paying 0.05% on deposits. Which is my point, for banks to get in trouble the actual interest paid needs to change before it matters and looking at Bank of America’s current rates they aren’t changing. https://media.bac-assets.com/DigitalDeposit_VA_VA_Northern.pdf?cacheBuster=8800 https://media.bac-assets.com/DigitalDeposit_VA_VA_Northern.p... This might in theory shift over time if people start swapping to higher interest rate accounts at different banks, but until then they are, pardon the pun, making bank. 6 months CD’s are typically a different story, but nope BoA is again paying well under 0.1% Aka crap. https://www.bankofamerica.com/deposits/bank-cds/standard-term-cd/ https://www.bankofamerica.com/deposits/bank-cds/standard-ter...