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Assuming I buy the bond today, the two accounting treatments agree (correctly) that in 2033, the bond is worth $1000 2033-dollars. The problem is that when inte

Assuming I buy the bond today, the two accounting treatments agree (correctly) that in 2033, the bond is worth $1000 2033-dollars. The problem is that when interest rates increase, a 2033-dollar becomes worth relatively less than a 2023-dollar. So that agreement in future says nothing about the economic value of the bond today. That's the loss that took down the SVB, and it's a real economic loss. If the SVB's depositors behaved like the simplest textbook model, then as soon as short-term Treasury rates increased, they'd insist on correspondingly increased interest on their deposits. The cost of that extra interest would be the SVB's loss--the cash flows in from the bonds stay the same, but the cash flows out to the depositors would need to increase. In reality, I understand that depositors are generally "stickier" than that, leaving their funds at their existing banks even when bank interest rates increase slower than Treasury rates. That gave the SVB some hope that they could earn their way out of the hole, passing the loss slowly to their depositors over time by paying below-market interest rates. That's the behavior that HTM accounting roughly models. The SVB's depositors had no economically rational incentive to accept that though, and they didn't.

NovemberWhiskey 4y ago
>The cost of that extra interest would be the SVB's loss--the cash flows in from the bonds stay the same, but the cash flows out to the depositors would need to increase. ... but SVB expected to have positive net-interest-income with increasing rates. Look here: https://www.sec.gov/Archives/edgar/data/719739/000071973923000021/sivb-20221231.htm#ibb4dd73a1d3f4bff944b5d35fd2c5e2a_172 https://www.sec.gov/Archives/edgar/data/719739/0000719739230... A 100bp increase in interest rates would've increased net-interest-income by 1.8%; a 200bp increase by 3.5%. This is typical for banks, because lending rates go up more than deposit rates as the base rate increases, increasing interest margin. So the idea that this is about NPV of future cash flows is not right.
- tripletao 4y ago
  Why should economically rational depositors leave more money than they need for short-term working capital at the SVB at ~0% when a Treasury bill pays ~5% and carries less risk? Back when rates for everything were ~0%, a startup might lazily just put everything in the bank; but when interest rates increased, the reward for moving and the risk of staying both increased. I agree (and already noted above) that depositors are often irrationally sticky in practice; but nothing obligates them to be, and these ones weren't. Of course most of the money left in a self-sustaining bank run, not directly for the reason above. There's a quite rational reason for someone to start that run, though. That reason wouldn't exist if the bank were well-capitalized on a MTM or NPV basis. The SVB's expectation in that 10-K is a model of depositor behavior, predicting that depositors will leave their funds at a MTM-insolvent bank earning below-market interest for long enough for the SVB to earn its way out of the hole. That prediction obviously didn't come true. So doesn't that just mean their model was wrong, and shouldn't be relied upon elsewhere either?

NovemberWhiskey 4y ago

>The cost of that extra interest would be the SVB's loss--the cash flows in from the bonds stay the same, but the cash flows out to the depositors would need to increase. ... but SVB expected to have positive net-interest-income with increasing rates. Look here: https://www.sec.gov/Archives/edgar/data/719739/000071973923000021/sivb-20221231.htm#ibb4dd73a1d3f4bff944b5d35fd2c5e2a_172 https://www.sec.gov/Archives/edgar/data/719739/0000719739230... A 100bp increase in interest rates would've increased net-interest-income by 1.8%; a 200bp increase by 3.5%. This is typical for banks, because lending rates go up more than deposit rates as the base rate increases, increasing interest margin. So the idea that this is about NPV of future cash flows is not right.

tripletao 4y ago
Why should economically rational depositors leave more money than they need for short-term working capital at the SVB at ~0% when a Treasury bill pays ~5% and carries less risk? Back when rates for everything were ~0%, a startup might lazily just put everything in the bank; but when interest rates increased, the reward for moving and the risk of staying both increased. I agree (and already noted above) that depositors are often irrationally sticky in practice; but nothing obligates them to be, and these ones weren't. Of course most of the money left in a self-sustaining bank run, not directly for the reason above. There's a quite rational reason for someone to start that run, though. That reason wouldn't exist if the bank were well-capitalized on a MTM or NPV basis. The SVB's expectation in that 10-K is a model of depositor behavior, predicting that depositors will leave their funds at a MTM-insolvent bank earning below-market interest for long enough for the SVB to earn its way out of the hole. That prediction obviously didn't come true. So doesn't that just mean their model was wrong, and shouldn't be relied upon elsewhere either?