So put it where? Narrow banking is illegal by virtue of denying the banking license. You're basically left with what, something like recallable loans/margin? What are the other options?
Interest rates didn't increase in a single step. If the SVB had been forced to recognize their losses on a continuous MTM basis, then they'd have been forced to raise capital (or liquidate if they couldn't) by late 2022, when they were undercapitalized but not insolvent. The shareholders might still have been zeroed, but the depositors would have been fine.
In fact, the SVB designated those bonds as held-to-maturity, which allowed them to avoid reporting the loss, leaving them adequately capitalized for regulatory purposes despite being MTM insolvent. That accounting treatment doesn't change the actual economics though, so they still blew up.
But that's literally what they did. They put it in 10 year treasuries that they had to sell for 87 cents on the dollar because every "thought leader" in Silicon Valley had the same idea at the same time and triggered a bank run on their own bank.
Everybody who has deposits will get 100 percent of their money back and everybody who holds equity in SVB will be (mostly) wiped out.
https://www.federalreserve.gov/newsevents/pressreleases/mone...
If the SVB had been forced to recognize its loss sooner, then this government bailout wouldn't have been necessary. Perhaps they'd have succeeded in raising more capital, and survived as an operating business; or perhaps their shareholders would still have been zeroed and their creditors would have seen a partial recovery. The depositors would have been fine either way though, no government bailout required.
[1] https://www.federalreserve.gov/newsevents/pressreleases/mone...
And FMV is less than par, so that's an undercollateralized loan. That's another component of the subsidy to SVB depositors, and also a subsidy to shareholders of other banks that overexposed themselves to long-term debt (though too late for the SVB shareholders). There's no rational economic basis for this change in policy, and it goes against all modern central banking theory.
https://twitter.com/DanielaGabor/status/1635167154042716161
I hope you don't think holding the bond to maturity somehow means the loss isn't real? All bonds get held to maturity by someone (unless they default, but that's not the problem here). The FMV of a bond is ultimately determined by the value of those cash flows to that person; so if the FMV went down, then that should be a clue that value was fundamentally lost, regardless of who holds it.
The SVB's problem was that their HTM accounting treatment didn't model economic reality. The government is leaning into that fiction somewhat here, out of some combination of favoritism and concern for systemic risk. That doesn't make the fiction true though, and it doesn't mean the loss disappears; it just means the loss gets socialized.