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Comment by xuki | Hacker News Reader

SVB created a run on themselves by betting against rising interest rate.

Nope, wrong. Their balance sheet is strong and they are fully solvent. This is completely different from an FTX situation.

They DID make a bad bet, but they were still solvent as a bank. The liquidity crisis was caused due to poor communication on SVB's part and typical VC herd mentality.

Read the full article by Matt Levine for a breakdown.

They weren't solvent, 100 billion in 2033 dollars doesn't equal 100 billions in 2023 dollars.

Solvency and liquidity are two different things.

2033 dollars lost a lot of value due to interest rate increases. Higher interest rates means that 2023 dollars would convert to more 2033 dollars, so now if you want to sell 2033 dollars for 2023 dollars you would get less back.

If the interest rates weren't increased they would just have sold their 2033 dollars and everything would be fine, a bank doesn't go under just because it takes a while to get billions of dollars, the whole issue is that they ran out of assets due to their assets having lost value.

That might be true, but it's got me thinking. Suppose you owe $100M and had $80M of cash. That would be considered both involvent and illiquid, correct? Now suppose you go out and buy $80M worth of 10 year treasuries with the cash you have. At current rates you will have $115M in 10 years, plenty of money to pay of your liabilities of $100M. Does that mean that if you're "insolvent" you can magically make yourself "solvent" by buying a bunch of bonds?

No, because you need to value the bonds at their current market value, which would presumably be 80 MM. The fact that you believe an asset will get you a certain amount of money doesn’t mean it’s worth that now.

If the debt is due in ten years, it won't be worth $100m, and you can presumably just pay it off with the cash.

In that context no it’s the same thing. It’s profitability and balanced books (liabilities matching assets) that are different. A business can be profitable and insolvent if cash flow temporarily dries (e.g. you can’t hold employee salaries because customers take too long to pay invoices). A viable business needs both profitability (long term) and cash flow/solvability (short term).

Unmatched assets and liabilities (like FTX) is not insolvency, it’s fraud, and mechanically causes insolvency when the cash is gone after the run.

They are, and this is a full-on solvency issue, not just a liquidity one. Think of it this way: suppose you have an investment that pays out $100 in 2031, plus a low rate of interest that due to interest rates increasing substantially in 2022 is now below what you can get from savings accounts or ultra-safe investments like Treasury bonds. That investment may have been worth $100 in 2021, but it's worth substantially less in 2023 because someone with $100 in 2023 could put it into those higher-interest investments and end up with a lot more money by 2031. However, banking regulations allow banks to not immediately recognize that drop in the value of their reserves by claiming they'd hold the investments to maturity.

Matt Levine article: https://archive.is/GafKl

I read Matt Levine's write-up: as always, a delight!

However it didn't strike me as him making a case that SVB is solvent.

His thesis is that they'll bail out the depositors to avoid other runs.

Yes, that's my reading as well. Which sounds rather different to me than 'Their balance sheet is strong and they are fully solvent.'

Their balance sheet is weak, but they kept going because some accounting tricks allowed them to defer mark-to-market on their losses.

I’m not saying they are insolvent. Their bet led them to having to raise money, and that gave enough signal for their depositors to pull money. Don’t blame VCs, their reactions were rational in this situation.

Only inasmuch as they knew other VCs and depositors would be panicking in response to the signal.

There's another possible stable equilibrium where no one panics because they know no one else will panic and that the bank is solvent.

Well SVB can't raise the interest rate they pay to depositors much without taking a bath, and I don't see why someone would want to keep their money in the bank once it is paying a notably lower interest rate than most other banks. Maybe some more time or wider spread of people wanting to withdraw would've kept them alive long enough to salvage something. But they put a huge amount of their money into this bond that they will be stuck with for a long amount of time. I dunno bank run almost just seems inevitable here.

No, the bank is actually insolvent.

> On March 8, 2023, the Bank announced a loss of approximately $1.8 billion from a sale of investments (U.S. treasuries and mortgage-backed securities). On March 8, 2023, the Bank's holding company announced it was conducting a capital raise. Despite the bank being in sound financial condition prior to March 9, 2023, investors and depositors reacted by initiating withdrawals of $42 billion in deposits from the Bank on March 9, 2023, causing a run on the Bank. As of the close of business on March 9, the bank had a negative cash balance of approximately $958 million. Despite attempts from the Bank, with the assistance of regulators, to transfer collateral from various sources, the Bank did not meet its cash letter with the Federal Reserve. The precipitous deposit withdrawal has caused the Bank to be incapable of paying its obligations as they come due, and the bank is now insolvent.

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

> Nope, wrong. Their balance sheet is strong and they are fully solvent.

The fact that they sold assets for a loss indicates that they are not.

The fact that the FDIC took over the bank indicates that they are not.

The fact that the bank is winding down with no other bank willing to buy them indicates that they are not.

What fact would you put forward to support your assertion that the bank is fully solvent. Because right now you are saying the opposite of the market, the FDIC and the banks competitors.

If they were fully solvent it would be pretty trivial to find a buyer to keep the bank to Silicon Valley startups going.

The fact that no one will take on their liabilities is very damning.

I think what they meant to say is they were solvent, till the run.

I partially agree with you... except "The fact that they sold assets for a loss indicates that they are not." is not true. Firms sell assets at losses all the time -- that doesn't mean they are not solvent. That means they had a loss, but their assets were still greatly in excess of their liabilities (as reported by the FDIC 211b vs 195b).

What they were not able to do was have enough cash on hand to deal with a bank run.

The assests they sold recovering as soon as intrest rates drop is as close to a sure thing as you get in finance.

The only reason to realise the loss is they needed the money now.

>as soon as intrest rates drop

Which could take a lot longer than people seem to expect. If you look at the past 100+ years of economic history, 2009-2021 is a complete anomaly. ZIRP is not the normal state of affairs, nor are negative real rates. There was an attempt at returning to normalcy from 2017-2019 but then Covid hit. Starting last year the Fed is attempting once again to return to a normal monetary environment. Rates are likely headed higher than people think and will remain there longer than people think.

What you are saying reported by FDIC as 211B vs 195B was December 31st IIRC

And it appears that wasn't market to market

Since then they have had $40B in withdrawals causing them to sell all liquid assets at a loss and not being able to furnish withdrawals

The California regulator has explicitly stated they are insolvent: https://dfpi.ca.gov/2023/03/10/california-financial-regulato...

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