The assets in their HTM portfolio did not all appear in March 2021 and it appears most of it was in various (C)MBS which likely paid a few bp more than comparable maturity treasuries. Unfortunately, the duration (sensitivity to change in interest rates) of mortgages extends in an increasing rate environment (less people prepaying) and so the portfolio probably lost a little bit more than comparable treasuries.
No that's not it. You can sell the bonds any time. But now they're worth considerably less because interest rates are much higher now. They locked themselves in at rate that are now terrible for 10 years.
No, rvnx is correct. SVB held many of these assets as "hold to maturity" assets. Point being, if all of their customers didn't need to withdraw their money, then SVB would have been fine, as they could have safely held these assets to maturity and then redeemed them for full face value.
The problem is that just when their long duration bonds lost value is also when their startup-heavy customer base needed their money out for expenses, and with VC funding dried up they weren't getting new deposits. SVB's problem was that their liquidity issue became a solvency issue when it became public that they were forced to sell their long duration bonds at a steep loss to cover withdrawals.
> No, rvnx is correct. SVB held many of these assets as "hold to maturity" assets.
He is wrong. This is just an accounting term / treatment. You can still sell them, and will obviously recognize the loss when you do. Had they been 3 month bonds, they could have been sold for basically full value and remained solvent.
Yeah, obviously the bank would have no problem if there were no bank run. But the reason there was a bank run was because the didn't have money because they locked their funds into bonds that subsequently lost all of their value.
Whether they were "held to maturity" or not, the fact is that they lost value. Not that they were locked away for 10 years untouchably.
There are a significant amount of other banks that are in the same situation with respect to long term bonds that have lost a lot of their value due to rising rates.
The difference for many of them, compared to SVB, is that they have a much more diversified deposit base, so they don't have the same dynamic of the majority of their depositors all needing their money out due to VC funding drying up.
The fact that bonds lost value is really not an issue if they didn't need to liquidate them before maturity. After all, someone deposited $100, and SVB turned around and bought a bond for $100. If they were able to hold that bond to maturity, they would get $100 dollars back to make the depositor whole. The problem is that depositor wants their money back now while the bond is worth less than par value.
> After all, someone deposited $100, and SVB turned around and bought a bond for $100. If they were able to hold that bond to maturity, they would get $100 dollars back to make the depositor whole.
No. In your example, someone deposited $80 and SVB turned around and bought a bond for $80. In 10 years, that bond will be almost certainly be worth about $100. Because it’s reliable, theu can use that value for some of their long-view bookkeeping and projections, but it’s still an $80 asset purchased for $80 and worth $80.
Some months later, the market for those bonds starts to shift. That bond will still be worth $100 eventually, but now trades for only $70.
This puts SVB into a different risk position than they were previously. While their books still reflect a $100 asset in 10 years, they actually hold less value in assets now than they started with and are more vulnerable to a run than they were previously.
Where they could have immediately sold that $80 bond to meet an $80 obligation, they can now only sell it for $70. That’s a problem. It’s a bearable problem as long as nobody asks for too much money at the wrong time, but the fact that they’re so much more vulnerable invites people to do exactly that, in order to make sure they’re not caught as the last one out the door.
Yes, the bank could hold the bonds to maturity to get $100 back in 10 years. But that $100 dollars in the future is worth much less than having $100 now.
SVB depends on earning net positive amounts on their interest income to continue operating. Turning $100 into $100 10 years later is the same as turning $100 into $90 now (illustrative numbers. The issue is of course varying interest rates).
No, the problem was that VC's led and pushed for the panic withdraw of all funds.
The bank would have had no problem if it was just the case of fewer new deposits. As to expense draw downs, those would have been ongoing and part of normal business operation.
> No, the problem was that VC's led and pushed for the panic withdraw of all funds.
If you knew that your bank was insolvent, would you withdraw your funds before SHTF? Or would you twiddle your thumbs until everyone else did that, and your accounts got frozen, with you sweating bullets over whether or not you'll be taking a haircut on your deposits?
Would your withdrawal be a 'panic', or simply a rational decision to not be the moron left holding what might be an empty bag?
It was a panic becaaue they realized the bank was vulnerable and so their money was vulnerable. This wasn't an irrational panic, it was the kind of panic you experience when being chased by a bear.
But surely there's a high chance of rates rising and your collateral falling in value over a ten year duration?
It seems like madness to leave yourself totally exposed to a situation like this. Rates rise, your investments fall and your depositors want their money back doesn't sound beyond the realms of the imagination.
So weird to think that near-zero interest rates are the best you can do for the next 10 years. I'm pretty sure everyone way saying "lock in this low interest rate before they go up again!"
