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People keep talking about how 'this is a solvency crisis because if SVB had to sell everything today, they wouldn't cover liabilities' when that is the definition of a liquidity crisis.

EDIT: To be clear, think of it this way. I have a piece of paper saying you'll give me $100 in 1 year plus 1% interest that I bought for $98.

No-one buys that piece of paper for $98 today, because they can get the same deal with better interest. But that doesn't change the fact that I will get $100 for it.

If deposits hadn't shrunk, $100 would go to SVB in 1 year and everything would be fine, it's the fact that they have to sell it so far ahead of maturity that's the problem, we just didn't notice this phenomenon in the past few decades b/c rates fell and prices went up.

This is not because SVB has a particularly risky book (we're talking treasuries here), it's because they didn't account for declining deposits (itself a very stupid, but unique bad decision unrelated to their risk tolerance).

> People keep talking about how 'this is a solvency crisis because if SVB had to sell everything today, they wouldn't cover liabilities' when that is the definition of a liquidity crisis.

I don't think that's right. It would be a liquidity crisis if the market value of everything they own is higher than their liabilities but they can't find a buyer at this time. You are saying that a liquidity crisis is when they can find a buyer but everything they have is worth less than their liabilities. That's not the case.

> People keep talking about how 'this is a solvency crisis because if SVB had to sell everything today, they wouldn't cover liabilities'

This is not accurate, and the inaccuracy is the difference between solvency and liquidity.

If svb had longer (ie weeks), they still wouldn't be able to cover their debts. Its not a matter of needing time to arrange buyers for their assets; their inability to pay isn't related to liquidity today or tomorrow, it's related to their asset's value. If they snapped their fingers and marked to market all their assets, they would be in debt because they're insolvent.

> to pay isn't related to liquidity today or tomorrow, it's related to their asset's value

How do you calculate that precisely? That seems like a fuzzy distinction, considering that the value of things change over time.

> seems like a fuzzy distinction

Not really. Insolvency is by definition time independent. If you owe more than you have, you're insolvent. It doesn't really matter if you might make enough to cover the difference in the future.

In practice, you might get away with it if no one forces the issue upon you, but that doesn't change the math of whether or not you could pay your debts.

Liquidity is different. It is time dependent by definition. Some things take time to structure, deal, and sell. You can also get away with this in practice.

They can both have similar effects when they happen, but their causes are sharply different. I have a house I can sell to cover my mortgage, but couldn't sell it in less than a couple weeks or maybe even months. Illiquid but solvent.

Insolvency is a state of financial distress in which a business or person is unable to pay their bills.

If you think it is anything else you are just being an apologist.

> Insolvency is a state of financial distress in which a business or person is unable to pay their bills.

This isn't true. If you eat at a restaurant but forget your wallet, you can't pay your bill but you're still solvent. You have assets to cover your debts. "Can't pay your bill" is too broad a statement to be meaningful. There are many complicated financial instruments and needing time to make a payment doesn't automatically make you insolvent.

However, if SVB had EVEN longer, say, 10-15 years, they would have been fine, right?

Over what time scale delineates the two? If they were say, 1000 year bonds, would you feel the same?

I don't know the answer, but I see both sides. As of today, their liabilities exceed their assets worth, so it does feel like solvency fits.

yep, it's a solvency issue. The minute they tried to offload the bonds at a price lower than they paid for them (which seemed like the right thing to do to fix the liquidity issue), they were effectively in a hole and even if they waited 10 years later, would not have been able to cover the deposits.

They NEEDED to raise capital.

Their liabilities > assets.

They were 100% insolvent.

You need to realize that essentially bond pricing reflects the present value of all cash flows you expect from the bond. For long term bonds especially, this makes it a particularly risky book, because you are very sensitive to interest rate changes.

If the interest rate goes up while you are holding your low interest bonds, that means that your future cash flow from the bond (the repayment) is literally worth less than what it was. Your bond payments have a lower real value due to the higher interest rate of the surrounding environment and the increasing price levels, despite being the same nominal amount. That's why the bond's price plummets in the market, which is why this is a solvency crisis: because the assets really are not good for the liabilities at present value, which is the only kind of valuation that makes sense here.

> The crux of the issue here is that, for many types of assets, banks are able to test whether they meet capital requirements based on the price they paid for the assets, rather than the price the assets are currently worth.

I think this will limit the types of assets banks can purchase. They'll need to purchase only assets that regularly trade (and thus are quoted) on the market.

The assets they were holding do regularly trade and could easily be valued. They knew that the value was down. The problem was they didn't actually have to do anything about it.

Because they planned to hold them to maturity, which meant that marking to market didn’t make much sense.

Of course here it blew up, but even marked to market assets will depreciate in value if a bank tries to liquidate tens of billions of dollars worth.

sounds like you are describing a liquidity crisis to me

precisely, the maturation for the bonds were long-term. they would have been fine over time, if not for the bank run

If your "liquidity crisis" is measured in terms of years and years, you have a solvency crisis.

1 2023USD =/= 1 2033USD

Those aren't the same currency.

Solvency is whether you could go to market today (or soon) and show more assets than liabilities.

The liabilities are the same currency and the same amount in 2023 and 2033. They’re solvent.

The asterisk is that the liabilities are generating interest, but this is fine because (one very safely assumes) that’s covered by the interest on the long-duration assets SVB bought.

Interest rates have risen since those long-duration assets were purchased.

Depositors now expect higher interest rates which cannot be covered by those assets. They will withdraw their deposits and move them to a bank that can offer higher interest rates.

right, which is why this is a liquidity problem and not a solvency one. The assets cover the liabilities--you just have to wait ten years or whatever.

No their bounds are worth fundamentally less than they paid for them.

There is a continuum in how quickly you need to sell and the price you willmget for something.

No.

Those are short term liabilities. The ability of depositors to withdraw their funds is part of the liability.

If the bank wanted to raise long term deposits it would have had to pay much higher interest rates.

Once they withdraw the bank can not raise additional funds because all other depositors have better interest rates in other banks.

No amount of time will cure this situation, the values of those bonds will not recover. This is not some temporary panic.

The only way for the situation to improve is if interest rates go down in the short term. Unless that happens, the bank remain insolvent.

So it's the customer's fault?

No, it's Peter Thiel's fault for intentionally initiating a bank run?

SVB's systemic risk was just that the vast majority of their depositors are startups, and can corralled into action by VCs. Thiel decided all the startups he backed should withdraw all their money from SVB at once, and knew the rest of the VC world would follow suit.

A liquidity crisis is a solvency crisis if depositors are asking for their deposits. SVB made a miscalculation on their outflows and the price for that apparently is their whole market cap.

> SVB's total equity was only $16bn

Which table in the 10-K would I look at to see this?