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Comment by ummonk | Hacker News Reader

SVB is basically solvent and had a panic bank run. It should be pretty low risk to offer startups credit collateralized against their SVB deposits.

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No, SVB was solvent as long as their assets didn’t have to marked to market, once there was a bank run they became insolvent. If the SVB assets are liquidated they will not cover the deposits.

That's a liquidity crisis, not insolvency. They were invested in long term maturity US treasuries! The safest asset there is (arguably)

The income from them is safe, but the value of them is not.

Same with their mortgage-backed securities.

> a liquidity crisis, not insolvency

Ish. On a mark-to-market basis they had insufficient reserves. That's closer to insolvency than illiquidity. The mismanaged duration is closer to illiquidity. But not of the sort a lender of last resort could save them from.

All they had to do was freeze withdrawals for 10 years and it all would have worked out fine.

Right. But that is exactly the distinction between being illiquid and being insolvent.

No it isn't? Not having access to enough quickly enough is a liquidity crisis; not having enough even when it is all liquidated is insolvency.

They were still solvent despite the mark to market losses - they just couldn't meet reserve requirements (and planned to raise money through a stock sale to that effect) after the assets were marked to market. Meeting reserve requirements is a much higher bar than simply having assets worth more than liabilities.

What reserve requirements? The last US reserve requirements were eliminated 3 years ago.

this is a lie, I am petty sure. why are you posting this stuff

I mean we'll find out shortly enough. If they can't find a buyer for SVB, then it's likely insolvent. If they do then it's obviously solvent.

I mean both Californian and federal regulators have specifically published press releases saying that the bank is actually insolvent...

So basically you're saying you don't know or you don't have concrete evidence, but you're going to confidently make a claim anyway.

That is not true. They initially had some withdrawals that they hoped to raise for, then it spiraled and they had to mark-to-market a larger portion of their portfolio which made them insolvent. Right now they are insolvent (they are also illiquid, but that's a smaller issue).

Wrong. SVIB is exempt from reserve requirements since 2018 as their assets are below 250b.

It’s more complicated than that: debt assets can be classified in a number of different ways i.e. hold-to-maturity, available-for-sale or trading.

Hold-to-maturity assets are not required to mark to market, for example.

Why do we let banks play these sorts of shell games? If they are holding an asset worth $0.80, I don't see why we allow them to claim it is worth $1.00 because that is what they paid for it.

I would guess that this incentivizes retail and commercial banks to invest in less volatile investments with guaranteed returns, and not the stock market or other more volatile markets.

And it's not based on what they paid for it from what I gather, it's based on what the total payout will be when it matures.

Let me give you a simple example.

Imagine a bank takes demand deposits and pays a variable rate of the base rate minus 1%. The bank then makes fixed rate, 30 year mortgage loans that it intends to service itself at the base rate plus 2% (portfolio loans).

Interest rates then go up.

Bang: that bank just became insolvent. Is this actually the model of the world you want?

> Bang: that bank just became insolvent. Is this actually the model of the world you want?

I'm not sure what the problem is, this model to me actually seems reasonable. The alternative is to claim that "We are solvent as long as our clients keep deposits in our bank and are happy with an interest rate lower than our competitors for 30 years".

In fact the scenario you're describing is basically what happened to SVB except the interest rates increased more.

I guess the main issue is that generally banks do take a risk by borrowing short and lending long, and hope that things work out in the end.

> Hold-to-maturity assets are not required to mark to market, for example.

This is irrelevant in a scenario where every client wants to withdraw their money, because the only way SVB can fulfill that is by selling their HTM assets at the current market price, which will be at a heft discount compared to where they bought them.

It’s relevant to whether they were insolvent or not before the run.

let's say you have an emergency fund of 6x your monthly earnings. Instead of holding that in cash, you put that money into US treasuries at a price of 1:1.

When yields rise, prices fall. Remember that.

Now let's say you need to access that emergency fund, and the amount you need is 90% of it. However, what you've found is that treasury prices have fallen so far, your investment is now only worth 50% of what it was before unless you hold it for another 5 years. If you don't sell now, you will be homeless. If you do sell now, you buy a bit of time and can possibly get a loan, and barring that, you will be homeless.

That is what happened to SVB.

I understand how they ended up with losses, having bought long duration securities at the top. I'm saying they were still solvent despite the losses. They just weren't liquid.

Solvent relative to the maturity date on the bonds though, right?

If you need a closer date (because you need to fulfill customer cash flow requests), then solvent plus illiquid can become insolvent quickly.

No I think more likely than not it's outright solvent if you look at current market value of the bonds. We'll find out by Monday whether it has been acquired or not.

Solvent how? Their 80 billion of 10 year MBS's are sitting on a tremendous loss.

Just hold the bond to maturity.

But that’s not an option if you have to pay out now.

That's a liquidity crisis

It's insolvency if the current market value (not the hold to maturity value) of the assets is less than the liability. As far as I can tell though, SVB was solvent despite its losses, and just needed to raise money to cover reserve requirements after it realized the losses. What did it under was a lack of liquidity after everyone panicked and did a run on the bank, with 45 billion (out of ~175 billion in deposits) in withdrawals overnight.

There's no reserve requirements

It started as a liquidity crisis (do they had to start selling or raise capital), it turned into a solvency crisis (they had to sell even more therefore marking assets as available for sale which made them marked to market).

Right now SVB, if fully liquidated, cannot repay all of the deposits.

Let’s say I owe $100.

If I have assets worth $110 today but they are locked up, and I have to pay back what I owe today, then I’m facing a liquidity crisis.

If I have assets worth $90 today, but $110 in a few years, and I have to pay back the money I owe in a few years, then I’m solvent and everything is good.

If I have assets worth $90 today, but $110 in a few years, and I have to pay back what I owe today then I’m insolvent.

People aren't waiting ten years for their money.

I’m inclined to say they will if it guarantees they get it back.

But a dollar in 10 years is worth less than a dollar today. In either case the result is the same: you take a haircut on the present value of your deposits.

No but $1 in ten years will be worth more than $0.50 today.

Specifically, it's worth about $0.65 today.

A $100 in 10 years is just not worth $100 today in the current interest rate environment.

> As of December 31, 2022, Silicon Valley Bank had approximately $209.0 billion in total assets and about $175.4 billion in total deposits.

Per the FDIC

I thought the follwoing was an interesting analysis: Aside from the fact that those assets don't seem to be valued at the current price (i.e. are marked at cost basis, not market,) much of it is already pledged as collateral.

https://twitter.com/FedGuy12/status/1634031134505066496

They had 45 billion in withdrawals before they ran out of liquidity and were taken over by FDIC, so that analysis would appear to be incorrect, since it implied they only had 80-55 = 25 billion of liquidity available.

I think the wording in the FDIC order was that customers were "initiating 42bn of withdrawals."[0] Doesn't mean those went through (in fact many from what I heard didn't.)

Still certainly very possible that the analysis is incorrect.

[0] https://dfpi.ca.gov/wp-content/uploads/sites/337/2023/03/DFP...

Ah yeah you're correct good catch.

From what I understand, the assets were allowed to be on the books at face value, under the assumption they would be held to maturity, but they're worth significantly less on the open market.

obviously nobody believed those numbers. i had 50% of my 401K in a AAA bond index fund and it lost 15% in 6 months. SVBs assets aren't even close to AAA. They are loaning money to startups, creating deposits out of those loans, and then using those deposits as collateral to issue 10X more loans. That is all perfectly cool and legal, but when all of those startups run out of runway at the same time the party stops.

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