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Comment by HDThoreaun | Hacker News Reader

No, all banks are illiquid by design, not insolvent. Sure the banks don't have cash in the vault to cover all deposits, but the mark to market value of their assets should be greater than liabilities which makes them solvent. SVB was insolvent due to the interest rates increasing since they bought their mbs's.

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This is the correct take.

There are reports that, on a mark to market basis they were insolvent since September 2022.

It is very plausible that sooner or later we remove HTM accounting.

Yeah. The only justification for HTM accounting is an expectation that depositors will be irrationally "sticky", i.e. that when interest rates increase they won't move their money to a bank (or Treasury bill, etc.) offering a correspondingly increased return. It's a real economic loss no matter what; the HTM accounting just assumes that the depositors' irrational behavior will allow the bank to earn its way out of it. For the SVB it clearly didn't.

Just for the population and myself tomorrow: this "HTM" means Held to Maturity

+1 I wish people would understand cashflow vs. assets.

> mark to market value of their assets should be greater than liabilities which makes them solvent. SVB was insolvent

SVB wasn’t insolvent if they held their assets to maturity though. The issue was that the market to market vale was significantly lower than the hold to maturity value.

The difference was still a liquidity issue. It was magnified by the fact that the market value of their assets was dropping precipitously.

It's a solvency issue, not a liquidity issue, and HTM accounting does not reflect economic reality. Let's say that I have $1000 cash, but owe $1200 due tomorrow. I assume you'll agree I'm insolvent.

I can take my cash and purchase a 10-year zero-coupon Treasury paying ~4%; so my $1000 now buys me a payment of 1000*(1.04)^10 = $1480 in ten years. Would you say that I'm solvent now?

NPV is what matters for solvency; a cash flow later is worth less than the same cash flow now. Interest rates were ~zero for long enough that everyone seems to have forgotten this, but I guess Peter Thiel didn't.

HTM is considered entirely valid accounting by regulators.

Opinions may differ, but nothing about it is “made up” or arbitrary. It’s a generally accepted practice and reflective of very clearly defined income.

I do agree that so far, the SVB's HTM accounting seems to have been entirely compliant. Indeed, I think those rules are the root cause of the failure--if the SVB had been forced to mark to market, then they'd have recognized the loss earlier, causing them to raise equity (or wind down less abruptly) before the hole got so deep.

Regulators can draft whatever they want, but if their rules depart too much from economic reality then bad stuff tends to happen. I think that's what happened here.

This is a distinction without a difference for pretty much everyone except finance nerds. It is totally irrelevant whether the mark to market on an illiquid asset is greater than the value of the deposits outstanding when I am trying to make payroll next week. What's the liquidation value of that illiquid asset? What games have been played to "mark to market" said illiquid asset? If you want to mark it at liquidation price (likely 10 cents on the dollar or less for a large portion of this stuff) then you might have a point that is relevant to the average person but at the same time my statement about all banks being insolvent by design would be technically true instead of practically true if you did that.

The difference is that if a bank is solvent but illiquid, you can find a buyer to assume the deposits and the depositors will have access to all their money ASAP. If they bank is both insolvent and illiquid, then there's no way that could happen. Either the depositors have to take a haircut, or the government has to bail them out. I agree that both cases would cause a crisis that might cause a company to miss payroll, but the latter case is obviously worse than the former. The best analogy I can think of is having your server explode and having a backup, and having your server explode and not having a backup. Sure, both cases will result in downtime, but the former is obviously preferable to the latter, and it's not exactly "a distinction without a difference for pretty much everyone except [computer] nerds".

Another difference is that if they are solvent but illiquid they would not have too much trouble borrowing money to cover short-term liquidity needs.

If I'm not mistaken that's one of the services the Fed offers.

You are arguing from the perspective that the mark to market is correct and perfectly or nearly perfectly knowable when that is not the case pretty much all the time. This bank was solvent according to the regulators until the day or a few days before it was taken over and yet could not find a buyer or raise capital. Why was that? It is because the accounting allowed to determine solvency allows hold to maturity and no marking to market on nearly perfectly knowable assets like MBS and this bank held a significant portion of its assets as loans to startups and warrants in same startups that are all basically valued on hopes and dreams and swing in value by a huge margin on market sentiment changes without necessarily changing the value they have to be marked at on the bank's books. I agree in the finance nerd sense there is a large difference, but for practical purposes for the average depositor there isn't really any difference.

I'm not sure what you're exactly arguing for here. I agree that "mark to market" might be non-trivial to calculate (although that's questionable for MBS, which are bond-like instruments that you can calculate the market value of based on current interest rates), and that regulations allowed their balance sheets to deviate from the actual market value (ie. ground truth). However, that doesn't change the fact that to "the average depositor", there's a material difference between being worth more than your liabilities and being worth less than your liabilities.

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