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Comment by dataviz1000 | Hacker News Reader

My understanding is that banks are required to have a certain level of liquid assets. For example, a safe liquid asset is gold. On the other hand, a cash deposit is not a safe asset because the entity that deposited the cash can easily remove it. Moreover, a loan will have collateral. Some collateral is much more liquid than other collateral. For example, if the collateral is gold, it is considered very differently than if the collateral is a building (which the bank provided the loan for) or stocks and bonds that the borrower can't trade for the duration of the loan.

What about US Treasury Bonds? Are those not safe? Yes, they are very safe, however, if they are low yield and the interest rates increase, they are not liquid so they at that point don't provide the requirement banks have for liquid assets.

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> My understanding is that banks are required to have a certain level of liquid assets.

In the US this is called "Reserve Requirement". In 2020 it was lowered to 0%

https://www.federalreserve.gov/monetarypolicy/reservereq.htm

(Not sure about the rest of the world currently)

Treasuries are always liquid. Just about the most liquid instrument out there. They can drop in value, but that’s not the same thing as illiquid.

Ah, I see. I misunderstood something I read earlier. Silicon Valley Bank had to sell Treasuries at a $1.8B loss which caused them to not meet capital ratio requirements. Their problem was a combination of their bond holdings decreasing in value and a bank run forcing them to sell the bonds at the discounted rate.

Sort-of, yes. But bank run makes it sound like something immoral or at least irrational. A bank that’s insolvent (has greater liabilities than assets) should expect and deserves a bank run.

The bad version of a bank run is when a bank is solvent but illiquid. It has a bunch of loans that are preforming and haven’t lost value due to interest rate changes, but there’s no easy way to sell them because they are just individual loan agreements between the bank and some borrowers.

But again, that’s not what happened here. The bank was in trouble because its assets were worth* less than it’s obligations.

* in the only sense of worth that matters

> a safe liquid asset is gold

Unless you're talking about melting gold, I can't see how gold is liquid. Bid/ask spreads are wide and it's hard to (literally) move a lot of it without both incurring costs and moving prices.

Most people don't own commodities in physical form for long, usually they buy some stock or ETF which tracks the price of the commodity, typically the ETF or stock issuer carry the physical commodity, so each stock is backed by the physical commodity. This mostly circumvents the issues of moving a lot of it around and the liquidity issue, albeit you pay a management fee which is fractions of a percent typically. Doing it this way is probably cheaper than the alternative of buying and selling the commodities yourself depending on the quantities you're buying as the firm managing it benefits from economies of scale.

Gold is considered a Tier 1 safe investment under Basel III which banks can use to meet the capital ratio requirement. Under Basel III, physical gold is considered the same as cash. [0] Either solid or melted gold will work meeting the capital requirements.

[0] https://www.marketwatch.com/story/why-basel-iii-regulations-...

I learned something new today! And I suppose that makes sense. Gold has been a medium of exchange for millennia, so the convertibility or not (in my discussion of liquidity) of gold to USD isn't as important as it might be for other commodities.

It's good to see that Basel III treats paper gold (gold futures or shares in gold-holding ETFs) as more risky than actual gold-in-hand.

Banks are required to have a certain amount of collateral (cash) on hand, but SVB was one of the banks whose cash holding requirements were loosened in the 2018 rollback of some Dodd-Frank rules.

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