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Comment by BlandDuck | Hacker News Reader

"This is not a liquidity issue as long as SVB maintains their deposits, since these securities will pay out more than they cost eventually."

But that's exactly the problem. With higher interest rates, those deposits will be looking for a higher deposit rate. With their assets tied up in low-paying long-term bonds, SVB will not be able to pay that higher rate.

It would only work out "eventually", if the depositors would accept a below-market rate until the bonds matured.

EDIT: This is indeed a solvency issue, not a liquidity issue, as also pointed out below.

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He meant solvency issue. Someone else called this out downthread and he confirmed. Definitely felt like it should've been corrected more prominently, though.

And yet he is wrong!

They were stuck with assets earning <2% for 10+ years, meanwhile depositors were demanding higher returns (else they would put their money in other banks, in 6m tbills, 10yr treasuries, etc.. all of which paid a lot more).

And thus, "it's not a solvency issue as long as depositors are stupid and don't realize they can get more $$$ from other banks" ends up being quite misleading

Yes, I mis-spoke. If only there was some way to edit tweets or to pin your replies to the top of a thread :P

If you reply directly to your initial tweet with your correction (perhaps QTing the person who asked), I think it will appear at the top, or at least get higher ranking. I often see replies "boosted" via the original author QTing them as a reply this way.

So they didn't require the deposits earning 2% to be in term CDs like sane banks and credit unions do?

It's never a liquidity issue as long as no one tests the liquidity!

All liquidity issues are solvency issues when marked to market.

That's true in a tautological way, but there really is a difference between liquidity and solvency.

If a firm's assets will eventually mature and be worth more than the current liabilities, then a private rescuer can make a lot of money by bailing them out. If the assets will never recover or pay out, then someone will be holding the bag.

But it's important that they are eventually worth more. Enough to provide the rescuer with a substantial gain that compensates them for their troubles. Solvency in a "breakeven" sense is not enough.

We've just seen there is no difference with SVB, because they tried to get a private rescuer to bail them out. Didn't work. Because why would a private rescuer lose liquidity to a lower paying assets (SVB's book) when they could lose liquidity to a higher paying one on the market (e.g. Treasury bonds)?

Mark to market is real. If you need liquidity immediately from the market, whether through a rescuer or otherwise, you do your accounting using that value and in SVB's case they were insolvent.

I think that is a difficult call to make this early on. The FDIC's job here is to recover value for depositors and find buyers for its assets. It is hard to organize bank takeovers on short notice, and even in a private rescue there is a lot of regulatory involvement. The story isn't even close to over yet.

There are some possibilities. Perhaps there was no single buyer that also had the (potentially hundreds of billions of dollars of) liquidity you would need to rescue the bank. Perhaps there were buyers who could come up with that liquidity reasonably quickly (on the order of a week or a month) but certainly not in the 48 hours it took for the bank to be completely vaporized. SVB was intending on raising liquidity from the market, and just the act of announcing their intent to do so triggered the bank run in the first place.

It think this stretches eventually. I think it as, If the current value of assets is less than current value of liabilities, we have solvency issue. If the current value is higher but will need some time to offload those assets, it is a liquidity issue.

Classically, it’s a liquidity issue if the market value of your bonds goes down because rates went up, causing the discounted present value of the future maturity payout to decrease. It’s a solvency issue if the market value of your bonds went down because your borrowers turned into smoldering craters and they will not ever pay you back 100 cents on the dollar.

Really it is not so obvious to discern between them at the moment that the crisis is at its worst.

Except SVBs assets would eventually mature for more than liabilities but no one would bail them out because the opportunity cost meant the book was worth less than just buying 10 year treasury bonds.

“Eventually”

The markets can stay irrational longer than you can remain solvent.

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