They weren’t insolvent yesterday, they just had a rush of withdrawals. It will probably be upwards of 90 cents on the dollar, but that amount of money locked up in a possible credit crunch coupled with a loss of confidence in banks and the current startup environment is very bad
They weren’t insolvent because banks are allowed to pretend treasuries haven’t lost value so long as they intend to hold them to maturity.
Across all banks, there are over $600b in such losses. If they can hold those securities until they mature, all is good. If they need to sell them earlier, the losses become real.
In SVB's case I believe they are mostly mortgage backed securities (ironic, eh) rather than treasuries but yes. I wonder if this will spur any reflection on the accounting rules for HTM securities.
I bet they bought mortgage-backed securities because returns on everything safer were essentially zero. Crazy-low interest rates for too long created this problem.
> If they can hold those securities until they mature, all is good.
That's an odd bit of logic. If interest rates stay the same and nothing of interest happens for the next 20-30 years, then those banks will lose the spread between the interest on those instruments and the interest they're paying (SVB was paying 4.5% on savings!) for 20-30 years. That money needs to come for somewhere. The net present value of that loss is a very similar number to the unrealized mark-to-market loss of value of those instruments.
It's almost tautological that being able to hold those instruments to maturity requires that they remain solvent for the term of those instruments, which means that the money to cover their losses must come from somewhere.
Now everyone involved can gamble that interest rates will go back down in a few years and those short interest rate positions will recover, but that's a gamble, not a certainty. Of course, the Fed does have a bit of an interest in pushing rates down if needed to avoid bank failures...
Didn't management/CEO/someone high up in the company say something like "We're safe unless everyone pulls out their money" the other day, indicating that they were de facto insolvent?
That just indicates they didn't have liquidity to cover every deposit, which is true for basically every bank that doesn't charge you to store your money in a vault.
Which I guess makes it about semantics. If everyone takes out there money one at a time, one person each week, over years, they would be solvent. But if everyone did it at the same day, they wouldn't be able to handle it, making them insolvent.
i think by that definition all fractional reserve banks are 'de facto insolvent', which would make this a definition of 'de facto insolvent' that isn't useful for fractional reserve banks, since it doesn't distinguish among classes of fractional reserve banks
and yes, the ceo did say that yesterday, which is likely why this happened
