4 ms·

There isn't clear messaging on where the money is coming from to cover depositors. Thats whats leading to no one even factually knowing whats happening.

tptacek 4y ago
In SVB's case, can't you cover depositors simply by holding their assets to maturity and waiting for them to be repaid? SVB couldn't do that because there was a run that was forcing them to sell early, in unfavorable conditions.
- jandrese 4y ago
  This doesn't make sense though. Sure they would have to take a haircut on those securities thanks to the fed jacking up the interest rate so much, but if you offer the right price they should still sell. Investing involves risk. Sometimes that means losing money, even if you are the bank.
  - tptacek 4y ago
    No, they don't, right? They simply hold them to maturity. The reason a $100 par bond paying 2% sells for (I don't know, say) $87 when interest rates are (I don't know, say) 5% isn't that the original bond is impaired. It's that the same $100 buys you a bond that pays 3% better, so nobody will buy the bond without a discount. But the bank doesn't normally sell the bond to begin with. That's why people say banks "borrow short and lend long". What the bank is supposed to do is hold the bond until it matures and is paid back in full. The only reason SVB can't do that is that all its depositors simultaneously demanded their money bank, so it couldn't wait the bonds out. But other institutions can do that waiting.
    - jandrese 4y ago
      But it's not like there is no market for bonds. You can calculate what they will be worth at maturity and sell them to people looking for shorter term bonds. Yes they're getting a bad deal thanks to the Fed, but that's life. It will be a loss for the bank, but that seems better than total collapse. Banks are ultimately companies that take calculated risk to make money, if you can't afford to take an occasional loss then you shouldn't be in a risk based business.
      - tptacek 4y ago
        Right: SVB was incompetent. Their stock got zeroed out. Meanwhile, institutions that have adequate cushion can step in and hold SVBs assets to maturity. The thread here asks: "who's paying to cover SVB's uninsured depositors?". Isn't that the answer?
        tripletao 4y ago
        The SVB was mark-to-market insolvent, not just undercapitalized. There's no indication that those marks were unrealistic; the market was orderly, and they were consistent with a naive NPV calculation, with a loss due to the increase in that discount rate. So it wasn't obvious that sufficient money to repay the depositors would exist even after zeroing the shareholders and creditors; if it were, then the SVB would probably have found a buyer. Maybe enough depositors will leave money in the SVB at below-market interest rates that it will earn its way out of the hole. The FDIC has given depositors a special incentive to, since by guaranteeing all funds they've made the SVB the safest bank in the USA. If the depositors don't, then the FDIC will take the loss, and socialize it over all participating banks. Per my other comment, the HTM accounting is a distraction. That accounting was compliant, but accounting doesn't define reality. The holders of long-term bonds take a real economic loss when interest rates increase, regardless of whether they sell. This may seem unintuitive since the cash flows don't change, but it couldn't be otherwise--if the bond is worth par, then why aren't any buyers willing to pay that?
    - trifurcate 4y ago
      The bond is impaired in that sense. The concept of present value isn't made up just for fun, it's because the value of money depends upon the time at which it is available. $10 in 10 years is obviously worth less than $10 right now, which is not only captured by present value calculations but it's also plainly and intuitively visible if you make the chain of associations of high interest rates -> higher price levels -> lower monetary value. So yes, if your bond sells for $87, you can be reasonably sure that $87 is the value of all of its payments back to you. It doesn't matter that the nominal payouts sum to $100, because they are denominated in future dollars which are worth less than present dollars! You need to cover the shortfall when you move those payments from the future to now!
      - NovemberWhiskey 4y ago
        The bond is impaired (fair value less than amortized cost basis) but from the accountancy perspective, the question is whether it's Other Than Temporarily Impaired (OTTI). As long as the holder does not intend to sell the bond, believes that is more likely than not going to be a position where it isn't forced to sell (to generate working capital etc), and there is no likelihood of a credit loss, then the bond is not OTTI. The subjective assessment of whether you're "more likely than not" going to be forced to sell the bond is the pivot on which this whole thing tilts. It's probably a good question whether a simple balance of probabilities is really where that standard ought to be.
- lmm 4y ago
  > In SVB's case, can't you cover depositors simply by holding their assets to maturity and waiting for them to be repaid? If you're willing to lock the depositors up for 10 years and pay them back when those assets mature, sure. But that probably wouldn't be seen as an acceptable way of making those depositors whole. Someone's got $100 of deposits with you today; you're holding a 10-year bond that will pay $102 over the 10 years but currently trades at $87. Yes you "can" "pay" "them" "back" eventually, but what if they want to pull their deposit today, perhaps to buy a bond like the one you were holding? If you do the accounting based on today, they're entitled to $100 and you only have $87; if you do the accounting based on 10 years' time, they're entitled to $115 and you only have $102; either way there's a shortfall.

tptacek 4y ago

In SVB's case, can't you cover depositors simply by holding their assets to maturity and waiting for them to be repaid? SVB couldn't do that because there was a run that was forcing them to sell early, in unfavorable conditions.

jandrese 4y ago
This doesn't make sense though. Sure they would have to take a haircut on those securities thanks to the fed jacking up the interest rate so much, but if you offer the right price they should still sell. Investing involves risk. Sometimes that means losing money, even if you are the bank.
- tptacek 4y ago
  No, they don't, right? They simply hold them to maturity. The reason a $100 par bond paying 2% sells for (I don't know, say) $87 when interest rates are (I don't know, say) 5% isn't that the original bond is impaired. It's that the same $100 buys you a bond that pays 3% better, so nobody will buy the bond without a discount. But the bank doesn't normally sell the bond to begin with. That's why people say banks "borrow short and lend long". What the bank is supposed to do is hold the bond until it matures and is paid back in full. The only reason SVB can't do that is that all its depositors simultaneously demanded their money bank, so it couldn't wait the bonds out. But other institutions can do that waiting.
  - jandrese 4y ago
    But it's not like there is no market for bonds. You can calculate what they will be worth at maturity and sell them to people looking for shorter term bonds. Yes they're getting a bad deal thanks to the Fed, but that's life. It will be a loss for the bank, but that seems better than total collapse. Banks are ultimately companies that take calculated risk to make money, if you can't afford to take an occasional loss then you shouldn't be in a risk based business.
    - tptacek 4y ago
      Right: SVB was incompetent. Their stock got zeroed out. Meanwhile, institutions that have adequate cushion can step in and hold SVBs assets to maturity. The thread here asks: "who's paying to cover SVB's uninsured depositors?". Isn't that the answer?
      - tripletao 4y ago
        The SVB was mark-to-market insolvent, not just undercapitalized. There's no indication that those marks were unrealistic; the market was orderly, and they were consistent with a naive NPV calculation, with a loss due to the increase in that discount rate. So it wasn't obvious that sufficient money to repay the depositors would exist even after zeroing the shareholders and creditors; if it were, then the SVB would probably have found a buyer. Maybe enough depositors will leave money in the SVB at below-market interest rates that it will earn its way out of the hole. The FDIC has given depositors a special incentive to, since by guaranteeing all funds they've made the SVB the safest bank in the USA. If the depositors don't, then the FDIC will take the loss, and socialize it over all participating banks. Per my other comment, the HTM accounting is a distraction. That accounting was compliant, but accounting doesn't define reality. The holders of long-term bonds take a real economic loss when interest rates increase, regardless of whether they sell. This may seem unintuitive since the cash flows don't change, but it couldn't be otherwise--if the bond is worth par, then why aren't any buyers willing to pay that?
  - trifurcate 4y ago
    The bond is impaired in that sense. The concept of present value isn't made up just for fun, it's because the value of money depends upon the time at which it is available. $10 in 10 years is obviously worth less than $10 right now, which is not only captured by present value calculations but it's also plainly and intuitively visible if you make the chain of associations of high interest rates -> higher price levels -> lower monetary value. So yes, if your bond sells for $87, you can be reasonably sure that $87 is the value of all of its payments back to you. It doesn't matter that the nominal payouts sum to $100, because they are denominated in future dollars which are worth less than present dollars! You need to cover the shortfall when you move those payments from the future to now!
    - NovemberWhiskey 4y ago
      The bond is impaired (fair value less than amortized cost basis) but from the accountancy perspective, the question is whether it's Other Than Temporarily Impaired (OTTI). As long as the holder does not intend to sell the bond, believes that is more likely than not going to be a position where it isn't forced to sell (to generate working capital etc), and there is no likelihood of a credit loss, then the bond is not OTTI. The subjective assessment of whether you're "more likely than not" going to be forced to sell the bond is the pivot on which this whole thing tilts. It's probably a good question whether a simple balance of probabilities is really where that standard ought to be.
lmm 4y ago
> In SVB's case, can't you cover depositors simply by holding their assets to maturity and waiting for them to be repaid? If you're willing to lock the depositors up for 10 years and pay them back when those assets mature, sure. But that probably wouldn't be seen as an acceptable way of making those depositors whole. Someone's got $100 of deposits with you today; you're holding a 10-year bond that will pay $102 over the 10 years but currently trades at $87. Yes you "can" "pay" "them" "back" eventually, but what if they want to pull their deposit today, perhaps to buy a bond like the one you were holding? If you do the accounting based on today, they're entitled to $100 and you only have $87; if you do the accounting based on 10 years' time, they're entitled to $115 and you only have $102; either way there's a shortfall.