Maybe a very basic question, but why does FDIC say it costs them 20B$ ? The assets are higher than deposits, can they not sell off all assets and cover the deposits?
SVB had plenty of assets at "par" value or held to maturity value. But it was insolvent if you marked those to market.
So FDIC is letting First-Citizens buy the assets at closer to their true market value. 20% loss.
That's my understanding but it is kind of a distressing conclusion. SVB had no enterprise value, and the outcome we're getting is financially the same for FDIC as if they just firesold the assets and did a pure winddown?
Could you explain why that's a distressing conclusion?
Not saying I studied the data and concluded that; it's just what I wanted to believe.
$20b loss to FDIC insurance fund feels high. It still meets the technical definition of "no losses borne by taxpayers" but it's a lot of money. I've gotta believe it's among the largest ever if not the largest ever losses borne by the FDIC for a single bank failure.
Distressing – some combination of having been in denial about just how screwed up SVB was financially, paired with concern for what this will mean if the dominos keep falling.
And yes, if it does cost $20b, it will be the most expensive single bank failure (exceeding IndyMac).
Limits (possibly to include prohibitions) on using H2M accounting to back demand deposits would be a more targeted (and therefore appropriate) intervention.
If I have $100 in assets in 10yr zero coupon treasuries at par issued in a 0% interest rate environment, and funded with $100 of liabilities in the form of deposits paying 0%, and rates increase 1% and the rate I’m paying depositors increases to 0.1%. My bonds are now only worth $90, but I’m going to receive $100 at maturity, and so I’m really only out the the $1 on interest paid to depositors over 10 years, not the $10 mark to market loss. In this example I’d say your economic impairment is closer to $1 vs the $10 implied. judging at the asset side of the ledger in isolation doesn’t give you the whole picture.
So while you might not feel like you are not going to take a loss, you are also chained to a position that will not make money either.
While everyone else is out making 1%, you are stuck with 0%. If you could wave a wand and get out of your bond with no loss, you would pick up a 1% and hold that instead. It would almost certainly be better to just eat the loss, and re-invest that money into something else, and come out ahead after 10 years.
Dollars in, dollars out isn't the only factor here. Bonds give this illusion that loss isn't happening because you can wait to get your money back. But a little introspection reveals that the loss is actually just hidden in the waiting is a itself.
No bank / institution today probalby wants older bonds that yield e.g. 1% if bonds issued today yield 3.5% and the Fed interest rate is 4.75-5.00%.
So there just may not be a market for them, unless you discount them enough to make the purchase price yield profit in the current inflation environment. At which point, you're selling 20B worth of bonds for e.g. 15B.
This is the whole 'mark to market' loss thing. If I have a treasury at 4% that I want to liquidate - but new ones are being issued at 5% - I can still do so instantly. I have to make up that 1% myself in cash, though. The 'loss' is the amount I have to come up with to make my treasury equivalent to a new one.
Inflation doesn't factor in.
It is more complicated than that because the price of the bonds change to account for the market alternatives.
As an example, Would you rather buy a bond that returns $1005% for $100, or a greater number of bonds that return $1001% for $20 each?
Because the price of the low interest bond is discounted, the annual ROI is the same as the high interest bond. Additionally, if you hold to maturity, the ROI is better with lower interest (in this example)
You can sell treasuries almost instantly for an instantly computed discount/premium...it's not like selling real estate, treasuries are nearly perfectly fungible
So it's not really a matter of demand for low yield treasuries...they've been instantly revalued every second since they were issued. All that matters is the duration remaining.
its a currency market, liquid and fungible...there is no "enticement" of buyers