Hacker News Reader

Comment by legitster | Hacker News Reader

If you read the actual report they quote, it says no such thing: https://www.gsb.stanford.edu/faculty-research/working-papers...

> On the other hand, SVB had a disproportional share of uninsured funding: only 1 percent of banks had higher uninsured leverage. Combined, losses and uninsured leverage provide incentives for an SVB uninsured depositor run. We compute similar incentives for the sample of all U.S. banks. Even if only half of uninsured depositors decide to withdraw, almost 190 banks are at a potential risk of impairment to insured depositors, with potentially $300 billion of insured deposits at risk.

Having fewer investment assets than liabilities does not necessarily make a bank insolvent - but it should be very concerning how much money has been left parked in low-interest uninsured bank accounts.

View on HN

From the IRS's website: A taxpayer is insolvent when his or her total liabilities exceed his or her total assets. But if you're a bank it's a different story, because it's unclear what your assets actually are. It's possible that your liabilities are secretly also assets, that's what happens when you get a bailout. Because of that it's somewhat meaningless to call a bank insolvent. But if we want the term to have meaning for banks, and we take the simple definition that the irs has then I believe all of the banks are insolvent. None of them have enough assets to cover their liabilities.

https://www.irs.gov/newsroom/what-if-i-am-insolvent

In the case of the report, they are only counting assets as the bank's investment purchases. But banks also usually have money from investors. So in a lot of cases investors will eat the loss until such a time as the banks have cycled through their bad investments. And presumably there is a lot of upside if their newer investments are getting set at a much higher interest rate.

I still don't understand what you're thinking of as assets vs liabilities for a bank. A bank's assets are any cash it has on hand, plus any loans it issued / bonds it purchased (I think that's what you meant by investment assets?). A bank's liabilities are its deposits as well as any other money raised via bonds. It's not clear at all what you're referring to as "money from investors" as that could mean money the bank borrowed (so show up as liabilities) or it could mean money raised via sale of stock (which is not a liability, but shows up as owners equity).

It's hard to understand what the article itself is claiming - it isn't clear what they are citing, but I read it as the banks being underwater on their investments specifically. Which could be true but they still have capital reserves and equity.

And also, as the report they actually cited points out, not all capital reserves are created equal. And it's the amount of uninsured deposits that predicts their risk of a bank flight.

First thing that popped in my head was the quote “War is peace. Freedom is slavery. Ignorance is strength.”

They keep changing the definitions. First what is a recession now what is insolvent.

What are people to believe?

>Having fewer assets than liabilities does not necessarily make a bank insolvent

Having fewer assets than liabilities is the literal definition of insolvency.

Banks debt > money+interest lent out

At the same time then maybe the bank is insolvent

However all debt typically isn't all due at the same time just like money lent out isn't paid back all at the same time.

This stuff is spread and balanced out so that ideally the bank has little liquid assets it needs, it is then able to borrow and lend out the maximum amount of money it can.

That is if it can lend money at a higher rate than it borrows it's making money. Otherwise it ain't.

I thought insolvency was when you didnt have the current assets to pay currently due liabilities? A 30 year note for $1M doesnt have to be paid right now. But it's ~$4000 per month interest does. So you can have $4k in cash assets and $1M in debt and still be solvent (for now).

I think this is why insolvency is bit opaque for banks. Literally any bank will be insolvent if everyone wants their money out at the same time. So you have to be pretty clever about how you estimate the risk of insolvency.

> Having fewer assets than liabilities does not necessarily make a bank insolvent

For that to translate into insolvency, all it takes is enough tension to accumulate in the banking sector. And the last months haven't been pretty. Truth is most banks are severely exposed and, if the wind start blowing in the wrong direction, it's going to be the end of them.

Reply on news.ycombinator.com