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SVB and Signature bank suffered from a liquidity crisis rather than a solvency crisis. The fed has often stepped in to provide liquidity in such situations but

SVB and Signature bank suffered from a liquidity crisis rather than a solvency crisis. The fed has often stepped in to provide liquidity in such situations but instead here shut them down. This could be a trend to shut down smaller regional banks to force consolidation to larger banks. This is helped by these downgrades and other pundits triggering further liquidity crises. The big question is why this is happening and what is their outcome desired. Could it be paving the way for CBDC?

kryogen1c 4y ago
> SMB and Signature bank suffered from a liquidity crisis rather than a solvency crisis did you mean SVB? they were insolvent, not just illiquid.
- labster 4y ago
  Insolvent only in a technical sense; if you could have valued their government bonds at face value rather than market value, they had plenty of money.
  - kryogen1c 4y ago
    > if you could have valued their government bonds at face value rather than market value, they had plenty of money that is not technical definition of insolvency. if you can cover your debts but need time to do so, thats the definition of being illiquid, not insolvent. my understanding of their books is that they could not cover their debts. the change in market conditions drove down their bond portfolio to the point of insolvency.
    - carnitine 4y ago
      Under your definition they can just hold the bonds to maturity to be solvent.
      - itsoktocry 4y ago
        But you can't "just hold to maturity"; you are obligated to pay back deposits on demand.
        carnitine 4y ago
        Obviously not in reality, but their (wrong) definition refers to ‘time to do so’.
        kryogen1c 4y ago
        >> time to do so, thats the definition of being illiquid, not insolvent. i said time is about liquidity, not solvency. i never said gaining money in the future makes you solvent in the past.
    - taeric 4y ago
      There is, of course, a complication here. If they had the option to take loans against their bonds at face value, there is an argument they would still exist. And that option is now on the table for everyone that didn't get shutdown. Per the news over the weekend. Granted, I think there is also a strong argument that shutting them was as much to stop the ability for the run to continue? Such that even with that loan option (that, again, didn't exist last week), something had to stop the run.
    - jjeaff 4y ago
      Are you sure about the technical definition of insolvent? Any definition I can find defines insolvent as the inability to pay debts as they come due. Insolvent is when your current liabilities exceed the current market value of your assets. Otherwise, one could remain forever solvent by simply putting $100 into a total market index. Sure, I owe $1m right now, but in 1,000 years, my $100 will be worth more than enough to pay off the debt.
      - labster 4y ago
        Under this definition, every non-central bank would become insolvent if subjected to the same conditions as SVB. If you take away $42B in one day in withdrawals, every single bank no longer pay its debts to depositors. Which is fine but not all that useful. We know bank runs make banks fail.
        AnimalMuppet 4y ago
        jeaff said: > Insolvent is when your current liabilities exceed the current market value of your assets. If I have a bank, and it's solvent (by jeaff's definition), and then it faces $42 billion in withdrawals in one day, then it's still solvent by jeaff's definition. It may be illiquid (unable to come up with $42 billion in cash in 24 hours), but the assets still exceed the liabilities. (Or, they might not even have been illiquid, if they could sell the assets at full price within a day.) So, no, your argument does not disprove jeaff's definition.
  - deleted 4y ago
    [deleted]
  - vkou 4y ago
    If you'd like to value my 10-year 1%-yield treasures at face-value, I have a lot of them I'd be happy to sell you. I don't suppose you would like to pay a dollar for eighty cents, though. The hold-to-maturity rules seem reasonable to me, and it's insane that SVB actively and voluntarily turned themselves from 'insolvent under a particular accounting interpretation' to 'actually insolvent'.
    - AnimalMuppet 4y ago
      Withdrawals turned them from "insolvent under a technical rule" to "actually insolvent". That's kind of why they were insolvent under the technical rule - because withdrawals could make them actually insolvent.
      - deleted 4y ago
        [deleted]
  - AnimalMuppet 4y ago
    If. You can't actually do that, though, so it's a meaningless "if".
  - vorpalhex 4y ago
    Were it only the case we could all have our assets valued at face value and not market value...
  - mrguyorama 4y ago
    They had to liquidate some assets to cover withdrawals. In doing so, they lost money on their investments, which put them underwater in term of assets.
  - itsoktocry 4y ago
    >Insolvent only in a technical sense What is there besides the technical sense? Their liabilities (deposits) can be called on demand, at any time, and they couldn't cover the value of those liabilities. This isn't complicated. Imaginary worlds where the bonds were worth more are irrelevant.
reducesuffering 4y ago
Signature bank has $110B in assets and $102B in liabilities. 7.8% more. 3y Treasuries took a 9% loss in just the last year. You're certain their assets are less risky than that? They have a rapidly declining cash pile, down to just $5.8B now, and all their assets are in various "Other Securities," Real Estate loans, and "Unspecified/Other Loans."
MrMan 4y ago
SVB was insolvent your statement is false
- kornhole 4y ago
  The insolvency followed the liquidity crisis. https://www.morningstar.com/articles/1143298/bank-stock-selloff-triggered-by-svb-financial-liquidity-crunch https://www.morningstar.com/articles/1143298/bank-stock-sell...
  - itsoktocry 4y ago
    No, you have it backwards. Insolvency means the value of their liabilities exceeds the value of the assets. The bank owned long term bonds that lost value and could no longer cover deposits. That's what happened, that's why people started pulling money from the bank.
mdasen 4y ago
For those who, like me, don't recognize CBDC: Central Bank Digital Coin. I think the reality isn't that there's a desired outcome or conspiracy to move things in a direction. Reality is often boring. This is really just a few banks in a country of over 4,000 banks. Shutting down SVB, Signature, and maybe a few others isn't going to dramatically change the banking landscape toward some desired end-game. Visa and Mastercard will still be giants, none of these banks are part of the 33 large banks that get extra stress-test scrutiny or the 30 Global Systemically Important Banks, etc. This will impact the banking sector. It's likely that we'll go back to some Dodd-Frank rules that Trump repealed. Some banking profits might be impacted by FDIC assessments. Banks might reassess their risk profiles. Some might offer higher interest rates to lure deposits. However, it's hardly creating something that goes toward some radical end-game. I mean, if your end game is "Trump shouldn't have rolled back certain Dodd-Frank protections," then yes I could see that happening. But this isn't really paving the way for something like CBDC. That doesn't mean CBDC won't happen, this just really doesn't do anything to help it along. Really, the case for CBDC is more made by the 2-3% tax Visa and Mastercard are putting on our economy. "We need a secure digital payments system that doesn't cost merchants (and by proxy consumers) 2-3% on most of their purchases," is really unrelated to a few bank failures. I'd also note that the Fed is basically made up of the banks - not in any conspiracy theory way. The regional Fed boards are mostly chosen by the member banks of that regional Fed (with some being appointed by the Board of Governors who is appointed by the President and confirmed by Congress). The FOMC (Federal Open Market Committee) has 5 members that are regional Fed presidents (chosen by the regional Fed board who is chosen by the member banks) and 7 that come from the Board of Governors (President/Congress appoint/confirm). These aren't people who are plotting the end of commercial banking and trying to pave the way to some government-controlled single-bank. And I don't believe that a CBDC would need to be some overbearing thing. The US needs a better way of making payments. Europe has regulated fees and also makes it really simple to send money between people. Here we're left with weird things like multi-day ACH, banking hours, and third-party cash-sending apps. But I digress, this isn't really something that offers some major end-game. We'll probably see some regulations to ensure that banks don't face this issue in the future and that's about it. > SMB and Signature bank suffered from a liquidity crisis rather than a solvency crisis Solvency is complicated when we're talking about things that aren't cash. Let's say that you hold treasuries that the government will redeem in 10 years for $1.1M. You bought them for $1M and they're paying 0.96% interest per year. Normally, you could just sell them for somewhere around $1M because people are happy to buy US government debt. Now let's say the government is offering 2.5% interest on new debt. If I buy your treasury and hold it, I'm only getting $1.1M at the end. If I buy a new one, I'm getting $1.28M at the end. That's a big difference. I'm not going to buy your's at $1M despite the fact that it might nominally be worth $1M. Maybe I'll only give you $0.9M. $1.1M-$0.9M would mean a $200k gain which isn't as much as the $280k gain I'd get on new debt, but the maturity is a year closer. Still, you're losing $100k. Ok, but that's just a liquidity issue for you, right? If someone just gave you the liquidity to hold you over until maturity, you'd get your $1.1M and be whole. Well, sorta. Realistically, with high interest rates and inflation, you're likely to lose some customers over time (who leave for banks that can offer them better rates) and you're recouping less due to inflation outpacing your investment. Plus, if someone just gives you the liquidity, you're asking them to lose money unless you're willing to pay them interest on that liquidity. Of course, if you're willing to pay them interest on that liquidity, then we're back to you being insolvent since the interest on that liquidity would be outpacing the interest in the treasuries you hold. Assets on companies' books often don't get reevaluated every day and what something is worth can also be a bit complicated - people can disagree.

kryogen1c 4y ago

> SMB and Signature bank suffered from a liquidity crisis rather than a solvency crisis did you mean SVB? they were insolvent, not just illiquid.

labster 4y ago
Insolvent only in a technical sense; if you could have valued their government bonds at face value rather than market value, they had plenty of money.
- kryogen1c 4y ago
  > if you could have valued their government bonds at face value rather than market value, they had plenty of money that is not technical definition of insolvency. if you can cover your debts but need time to do so, thats the definition of being illiquid, not insolvent. my understanding of their books is that they could not cover their debts. the change in market conditions drove down their bond portfolio to the point of insolvency.
  - carnitine 4y ago
    Under your definition they can just hold the bonds to maturity to be solvent.
    - itsoktocry 4y ago
      But you can't "just hold to maturity"; you are obligated to pay back deposits on demand.
      - carnitine 4y ago
        Obviously not in reality, but their (wrong) definition refers to ‘time to do so’.
        kryogen1c 4y ago
        >> time to do so, thats the definition of being illiquid, not insolvent. i said time is about liquidity, not solvency. i never said gaining money in the future makes you solvent in the past.
  - taeric 4y ago
    There is, of course, a complication here. If they had the option to take loans against their bonds at face value, there is an argument they would still exist. And that option is now on the table for everyone that didn't get shutdown. Per the news over the weekend. Granted, I think there is also a strong argument that shutting them was as much to stop the ability for the run to continue? Such that even with that loan option (that, again, didn't exist last week), something had to stop the run.
  - jjeaff 4y ago
    Are you sure about the technical definition of insolvent? Any definition I can find defines insolvent as the inability to pay debts as they come due. Insolvent is when your current liabilities exceed the current market value of your assets. Otherwise, one could remain forever solvent by simply putting $100 into a total market index. Sure, I owe $1m right now, but in 1,000 years, my $100 will be worth more than enough to pay off the debt.
    - labster 4y ago
      Under this definition, every non-central bank would become insolvent if subjected to the same conditions as SVB. If you take away $42B in one day in withdrawals, every single bank no longer pay its debts to depositors. Which is fine but not all that useful. We know bank runs make banks fail.
      - AnimalMuppet 4y ago
        jeaff said: > Insolvent is when your current liabilities exceed the current market value of your assets. If I have a bank, and it's solvent (by jeaff's definition), and then it faces $42 billion in withdrawals in one day, then it's still solvent by jeaff's definition. It may be illiquid (unable to come up with $42 billion in cash in 24 hours), but the assets still exceed the liabilities. (Or, they might not even have been illiquid, if they could sell the assets at full price within a day.) So, no, your argument does not disprove jeaff's definition.
- deleted 4y ago
  [deleted]
- vkou 4y ago
  If you'd like to value my 10-year 1%-yield treasures at face-value, I have a lot of them I'd be happy to sell you. I don't suppose you would like to pay a dollar for eighty cents, though. The hold-to-maturity rules seem reasonable to me, and it's insane that SVB actively and voluntarily turned themselves from 'insolvent under a particular accounting interpretation' to 'actually insolvent'.
  - AnimalMuppet 4y ago
    Withdrawals turned them from "insolvent under a technical rule" to "actually insolvent". That's kind of why they were insolvent under the technical rule - because withdrawals could make them actually insolvent.
    - deleted 4y ago
      [deleted]
- AnimalMuppet 4y ago
  If. You can't actually do that, though, so it's a meaningless "if".
- vorpalhex 4y ago
  Were it only the case we could all have our assets valued at face value and not market value...
- mrguyorama 4y ago
  They had to liquidate some assets to cover withdrawals. In doing so, they lost money on their investments, which put them underwater in term of assets.
- itsoktocry 4y ago
  >Insolvent only in a technical sense What is there besides the technical sense? Their liabilities (deposits) can be called on demand, at any time, and they couldn't cover the value of those liabilities. This isn't complicated. Imaginary worlds where the bonds were worth more are irrelevant.

reducesuffering 4y ago

Signature bank has $110B in assets and $102B in liabilities. 7.8% more. 3y Treasuries took a 9% loss in just the last year. You're certain their assets are less risky than that? They have a rapidly declining cash pile, down to just $5.8B now, and all their assets are in various "Other Securities," Real Estate loans, and "Unspecified/Other Loans."

MrMan 4y ago

SVB was insolvent your statement is false

kornhole 4y ago
The insolvency followed the liquidity crisis. https://www.morningstar.com/articles/1143298/bank-stock-selloff-triggered-by-svb-financial-liquidity-crunch https://www.morningstar.com/articles/1143298/bank-stock-sell...
- itsoktocry 4y ago
  No, you have it backwards. Insolvency means the value of their liabilities exceeds the value of the assets. The bank owned long term bonds that lost value and could no longer cover deposits. That's what happened, that's why people started pulling money from the bank.

mdasen 4y ago

For those who, like me, don't recognize CBDC: Central Bank Digital Coin. I think the reality isn't that there's a desired outcome or conspiracy to move things in a direction. Reality is often boring. This is really just a few banks in a country of over 4,000 banks. Shutting down SVB, Signature, and maybe a few others isn't going to dramatically change the banking landscape toward some desired end-game. Visa and Mastercard will still be giants, none of these banks are part of the 33 large banks that get extra stress-test scrutiny or the 30 Global Systemically Important Banks, etc. This will impact the banking sector. It's likely that we'll go back to some Dodd-Frank rules that Trump repealed. Some banking profits might be impacted by FDIC assessments. Banks might reassess their risk profiles. Some might offer higher interest rates to lure deposits. However, it's hardly creating something that goes toward some radical end-game. I mean, if your end game is "Trump shouldn't have rolled back certain Dodd-Frank protections," then yes I could see that happening. But this isn't really paving the way for something like CBDC. That doesn't mean CBDC won't happen, this just really doesn't do anything to help it along. Really, the case for CBDC is more made by the 2-3% tax Visa and Mastercard are putting on our economy. "We need a secure digital payments system that doesn't cost merchants (and by proxy consumers) 2-3% on most of their purchases," is really unrelated to a few bank failures. I'd also note that the Fed is basically made up of the banks - not in any conspiracy theory way. The regional Fed boards are mostly chosen by the member banks of that regional Fed (with some being appointed by the Board of Governors who is appointed by the President and confirmed by Congress). The FOMC (Federal Open Market Committee) has 5 members that are regional Fed presidents (chosen by the regional Fed board who is chosen by the member banks) and 7 that come from the Board of Governors (President/Congress appoint/confirm). These aren't people who are plotting the end of commercial banking and trying to pave the way to some government-controlled single-bank. And I don't believe that a CBDC would need to be some overbearing thing. The US needs a better way of making payments. Europe has regulated fees and also makes it really simple to send money between people. Here we're left with weird things like multi-day ACH, banking hours, and third-party cash-sending apps. But I digress, this isn't really something that offers some major end-game. We'll probably see some regulations to ensure that banks don't face this issue in the future and that's about it. > SMB and Signature bank suffered from a liquidity crisis rather than a solvency crisis Solvency is complicated when we're talking about things that aren't cash. Let's say that you hold treasuries that the government will redeem in 10 years for $1.1M. You bought them for $1M and they're paying 0.96% interest per year. Normally, you could just sell them for somewhere around $1M because people are happy to buy US government debt. Now let's say the government is offering 2.5% interest on new debt. If I buy your treasury and hold it, I'm only getting $1.1M at the end. If I buy a new one, I'm getting $1.28M at the end. That's a big difference. I'm not going to buy your's at $1M despite the fact that it might nominally be worth $1M. Maybe I'll only give you $0.9M. $1.1M-$0.9M would mean a $200k gain which isn't as much as the $280k gain I'd get on new debt, but the maturity is a year closer. Still, you're losing $100k. Ok, but that's just a liquidity issue for you, right? If someone just gave you the liquidity to hold you over until maturity, you'd get your $1.1M and be whole. Well, sorta. Realistically, with high interest rates and inflation, you're likely to lose some customers over time (who leave for banks that can offer them better rates) and you're recouping less due to inflation outpacing your investment. Plus, if someone just gives you the liquidity, you're asking them to lose money unless you're willing to pay them interest on that liquidity. Of course, if you're willing to pay them interest on that liquidity, then we're back to you being insolvent since the interest on that liquidity would be outpacing the interest in the treasuries you hold. Assets on companies' books often don't get reevaluated every day and what something is worth can also be a bit complicated - people can disagree.