If those assets are in your hold to maturity portfolio, they are still worth $100m. This return is guaranteed unless the Federal Bank defaults on those treasuries.
Clearly, US Treasuries carry risk that's not been accounted for.
US treasury debt is approximately the safest. The risk was that SVB might need cash before the bonds matured. The regulations encouraged SBV to do this. Now the Fed put is re-imagined, and we shuffle on while mumbling 'nobody could have imagined'.
As I was trying to point out to the parent commenter, conflating "$100m today" with "$100m at maturity" leads to clear contradictions, like saying that a bank could earn $20m on paper simply by buying bonds trading below par value. Or to put it another way – if bank A holds $100m face value of 10-year bonds yielding 4%, and bank B holds $100m face value of 10-year bonds yielding 2% (but worth, say, $80m at market price), how can you claim that those banks are on equally good footing?
Valuing liquid bonds at par value is pretty clearly a hack to reduce volatility and increase confidence in banks' balance sheets, even if some people in the comments seem to view it as a more logical way of accounting. (Although to be clear, I don't mind companies doing their own fuzzy math as long as they give investors enough information to do proper due diligence. It's similar to the non-GAAP earnings that a lot of tech companies report.)
Equal assets should never be thought to mean equal footing. The banks will show the same number for assets locked up for 10 years, but the banks will also show that they have different returns listed on their finalcial statement for the HTM assets, and different revenue from capital!
You cant and shouldnt expect to bank comparison to be easily reduced to a single measure, or for that measure to tell you something that is captured elsewhere.
It is like expecting an athlete's height to tell you something about their speed or strength.
HTM assets tell you the nominal value of assets they are holding to maturity.
It is not intended to show how much they could raise if they had to liquidate it today. It is not intended to show what that yield is for their bonds.
There are separate line items for that.
If you change the valuation of the bonds to market value, then you lose sight of the mature value of those bonds.
Replacing athlete height with athlete BMI tells you something different.
If you put cash in a a CD with a 1 year lock in, do you list it at current value or subtract a withdraw penalty.
Do you subtract early withdrawal penalties when calculating the balance in your 401k?
At the end of the day, a list of your asset values is not the same as how much you could liquidate those assets for today.
That would be a list of liquidatable assets.
HTM assets are called out separately on the balance sheet specifically to highlight that they cannot be easily liquidated.
They are still worth $100m at maturity. $100m in ten years is (usually) worth less than $100m now. Do you really want to pretend that a ten year bond you purchased when inflation and the interest rate were near zero, is worth the same when inflation and the interest rate go up to say 10%? What about inflation of 100%? In nominal terms you’ll get back your capital, but in real terms you will get back only one thousandth.
To correctly value them now you need to calculate the NPV.
You can value something at its current market value, if the asset is one that has such a thing. And fair market value will generally correspond to what you would estimate to be net present value, plus whatever risk premiums and holding costs and so on that the market is accounting for.
According to Merrian-Webster [1]:
calculate: 1 b: to reckon by exercise of practical judgment : ESTIMATE
But sure, let me clarify it to: you can’t calculate a precise NPV.
You can only estimate one.
Which, when we are trying to do things like ‘calculate the total assets a bank has’, makes the net present value of their assets a not very reliable number to use.
I wasn't taking a math test. I was saying something about NPV using a common meaning of an English word. You chose to ascribe a different meaning to that word, and pedantically - and incorrectly - tried to correct me.
$1 after inflation is still $1. It is just that the value of $1 is now different.
As long as you hold to maturity, the number of dollars does not change.
If you report your Holdings in terms of dollars, they are always accurate as long as you hold.
If someone tells you they have $100 maturing in 10 years, it is Trivial for you to do the npv calculation yourself with your speculative model of what inflation will look like over the next 10 years.
In nominal terms. In real terms you have to adjust for inflation. [1] is a starting point if you want to read more.
> As long as you hold to maturity, the number of dollars does not change.
A dollar now is not the same as a dollar 10 years from now. [2]
[1] https://en.wikipedia.org/wiki/Real_versus_nominal_value_(eco... [2] https://en.wikipedia.org/wiki/Time_preference
If you buy a 10 year bond today, you will get $100m dollars in 2023.
In 2033, that $100m will have a real value of $100m 2033 dollars on your balance sheet.
HTM assets are reported in the nominal purchase price today, which is also the real dollar value if you calculated it on the day of maturity.
I agree that if you estimated the net present value of $100m 2033 dollars, it would be worth less in terms of 2023 dollars.
This brings us back to your earlier question
>Do you really want to pretend that a ten year bond you purchased when inflation and the interest rate were near zero, is worth the same when inflation and the interest rate go up to say 10%? What about inflation of 100%? In nominal terms you’ll get back your capital, but in real terms you will get back only one thousandth.
YES! This way the asset sheet is always correct in how much you will get for the asset. If you have a $100 nominal bond it is worth $100 dollars. That is true today, and that will be true on the day of maturity. It will be true every day in between. The dollar value of the asset remains constant at the time of reporting.
Why would you want to report the net present value of that asset at maturation - which sounds like what you are suggesting?
The point of listing your bonds on your balance sheet isn't to estimate profit or returns, it is to list your current asset allocation.
You have a separate line item for revenue coming from those bonds. You have a separate model entirely for calculating ROI and profitability.
If you made a spreadsheet of your current asset allocation today, how would you list money locked in a 10 yr CD. As the dollar amount in the account, the value if you were forced to pull it out and pay a penalty, or some time shifted valuation?
you wrote 'real terms' when you meant 'nominal terms.'
> $1 after inflation is still $1. It is just that the value of $1 is now different.
That is why we distinguish between 'real value' and 'nominal value.'
>That is why we distinguish between 'real value' and 'nominal value.'
What will the real value of a $1 bond be on your balance sheet the day it matures? exactly $1
The real value in future-date dollars will be $1. In present-day dollars it is likely to be less, the ability to refer to which distinction is the purpose of the formal difference between nominal and real value.
Initial time for real dollar caluculation can be anything. You can ask what your real dollar salary is relative to 1950, or relative to 1951, or yesterday.
You can ask what was the real dollar salary in 1951 relative to 1950, or 2051 compared to 2050.
While I meant to write real dollars, I wish I wrote nominal, based on how much confusion it caused.
I still stand by the idea that it is silly, and not very useful to put a future return on investment on an asset list in to 2023 dollars using a 10 year inflation projection.
Then the reported asset would fluctuate based on your model, and you already know exactly where it will end on the maturation date.
Regardless of which day's dollars we use as a baseline for comparison, a bond issued under at a lower interest rate is discounted relative to the same bond issued later at a higher interest rate. Quibbling about how we express this valuation suggests you don't understand this difference, but this difference is important to understanding the current day banking crisis.
> While I meant to write real dollars, I wish I wrote nominal, based on how much confusion it caused.
You still seem unaware that these meanings and words are a very well understood convention that you violated. The only confusion was the confusion you had in the meanings you assigned to the words.
> I still stand by the idea that it is silly, and not very useful to put a future return on investment on an asset list in to 2023 dollars using a 10 year inflation projection.
The main thing is that these valuation rules exist for reasons and while we could debate which rules are good etc., understanding the basics of bond valuation and the common terminology we use to discuss them is a minimum prerequisite and I'm still working on getting you on board with the basic terminology every one else is using.
There isn't much discussion to be had without a common vocabulary.
I fully understand how bond market prices are impacted by interest rates. What most people seem ignorant of is the fact that bonds are not simply market trades asset, but are also have a value at maturity. Most people don't seem to know that HTM assets are reported separate from securities available for sale, which ARE tracked at market value.
And then there's the even stupider idea that the value of long-term assets should be listed as the maturation date npv, as if you can just look up future inflation rates for the next 10 to 30 years.
It seems obvious to me that if you never intend to sell a bond, the maturity value is a measure of interest.
Do you have anything else to add to the discussion, or was that your only point?
The reason this matters is because in the case of a bank who needs the funds to operate then they very much might need to sell the bonds, or revalue them at NPV because of statutory requirements.
This entire discussion is because the NPV of HTM assets is now relevant.
Most importantly, Banks already DO report the unrealized losses and Fair market value on HTM securities. Just not in the assists section, but in a dedicated section on the HTM assets. It is not some big secret.
You can even look at it in silicon valley Banks filings if you want(1). They break down the HTM losses and fair market value plain as day starting on page 125.
At the time of filing, they reported a mature value of 91 billion, fair value of 76 million, and unrealized losses of 15 billion. They break it down by the duration of maturity and interest they earn on them. Everything someone could ask for is there.
It seems to me that this whole question of reporting fair market value instead of maturity in the asset table comes from people who have never read a 10-k filing and think there is some conspiracy.
SVBs HTM loss situation should have been no surprise to anyone looking. The real conspiracy is their HTM position was common knowledge.
https://www.sec.gov/Archives/edgar/data/719739/0000719739230...
The day you are paid, you will still get handed exactly $100m million.
Every day between now and then you will still have exactly $100m in bond holdings. How many cheeseburgers you can buy with that number of dollars may change from day to day, but the number of dollars will not.
(Someone else is offering 100 future for 80 current because they have a forecast about cheeseburgers, sure. But you don't have to agree with that forecast to take their deal; the deal looks even better for you if you don't agree.)
Think of how you would report a non-transferable asset with maturation on your balance sheet?
How would you report savings in a CD with a steep early exit penalty?
Herein lies the difference between a list of assets, and a list of asset liquidation value.