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Comment by lolinder | Hacker News Reader

> Most of their assets are in the form of treasuries, bonds, etc.

I believe you know what you're talking about, but if that's the case why are they struggling to raise capital to pay depositors?

(I'm asking as an ignorant outsider to banking in general and SVB in particular.)

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What doesn't seem to be so explicitly stated is that due to rates going up, the bonds are worth less than they were when rates were high. So they wouldn't have enough money if they turned the bonds into money.

Guy lends you 100 at 3%, you buy 100 of bonds than pay you 5%. Guy asks for his money back, your bonds are worth only 80, big problem.

One of the biggest banks in the world failed to account for a capital management risk scenario where interest rates go up? Insane

Silicon Valley Bank was nowhere near one of the biggest banks in the world.

https://en.wikipedia.org/wiki/List_of_largest_banks

Not even amongst the largest banks in the US:

https://en.wikipedia.org/wiki/List_of_largest_banks_in_the_U...

They're #18 on the US list you linked, I saw other articles saying they were #16 so it probably just depends on the date assets were measured.

The falloff is extremely rapid. They're closer in both an absolute and relative sense to the 40th than even the 10th.

Practically every single bond - which banks effectively have to buy and hold for regulatory reasons - has reduced in mark-to-market value every single day the last 2 years.

Personally I think they are nuts for having (reportedly) such a long average duration of bonds in their portfolio, but they were also paying a pretty decent interest rate on savings to their customers - that money has to come from somewhere.

Looks I said high when I meant low. For people who aren't in finance, if rates go up, bond prices go down: an instrument that pays 10% a year on 100 is worth less when there are new instruments paying 15% a year on 100. For the rates to match the original 100 is now lower, because that's the only way you get the same amount of interest per dollar spent buying the bond.

Treasuries and bonds drop in price when interest rates go up.

in 2021 (when interest rates were low) you might pay 100 cents on the dollar for a treasury that payed 2.5% interest. In 2023, with interest rates much higher, you can no longer sell that treasury for 100 cents on the dollar. People can get much better returns by just buying recent treasury. So you need to sell your bonds lower, at say 95 cents on the dollar. That is an immediate 5% loss.

This is known as 'interest risk' and is really the only risk you have when buying safe bonds like treasuries. The risk is completely avoidable if you can hold your bonds to maturity, so it only matters in a liquidity crunch.

It's more like 50 cents on the dollar.

Interest rates went up. That would be fine if they could hold the bonds until maturity, but to honor withdrawals now they are forced to sell at a loss.

Right! Okay, that makes sense. So the failure on the assets end of the balance sheet was relying on bonds that were purchased at times of historically low interest.

Also, in more normal time they could have put more deposits into shorter term debt that would not have had this problem. But rates were so low that would have been very unattractive.

They factually lost 1.8B on 21B worth of investments, this is an 8.5% loss. Unclear why there's conjecture like previous comments saying its a 25% loss.

They did the right thing by selling out now -- likely because they see more rates raising in the future which would decrease it, so they took the liquidity and then raised a bit of money to cover up that loss (raising 2.25B)

No, they did the wrong thing by selling so late.

Agreed -- but are you saying they shouldn't have sold at all? I don't think you can say it was a "wrong decision" at the moment, I agree that it was too late. But you could also go back and say they shouldn't have invested in the long term assets in the first place.

Or you could go back and say they shouldn't have accepted the deposits without having short-term gain solutions in the first place.

I'm saying they shouldn't have bought what they sold in the first place.

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