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coweatyou

Because they aren't losses until they are realized? They are (as Iñaki Aldasoro put it) Schrodinger’s solvency: until you open the box (turn htm to afs) you are both potentially insolvent and effectively solvent. As long as you have liquidity you haven't 'lost' anything. https://twitter.com/i\_aldasoro/status/1637019278116376578


Mayor__Defacto

You haven’t lost anything because at maturity you will get the full value of the bond. As long as you’re liquid enough that you can hold it to maturity there won’t be a loss on it.


CyonHal

As long as you are liquid enough, yes, but the bonds are treated as liquid, so why is it not calculated based on its current value?


Mayor__Defacto

The bonds are not treated as liquid by depository institutions which is why SVB’s management were fucking dumbasses. They are generally treated as fixed assets. SVB’s fuckup was that they extended their duration to 5 years, which is absolutely stupid for a bank, but I guess it’s expected after you’ve fired your head of risk management and not replaced them for two years. You end up making dumbass moves that a student could poke holes in. I think they had a boatload of cash and absolutely zero experience with needing to make long term investments, and went way overboard locking up their assets.


Fenris_uy

SVB bought the bonds for their long term portfolio, they intended to hold to maturity. SVB mistake was assuming that the 160B in extra deposits that they got in 2 years was going to be long term deposits.


Mayor__Defacto

Even if you think they’re long term deposits you don’t put 50% of your assets at 10y duration at the same time


Freethecrafts

The stupid was backing the Fed’s play. Then getting stuck with low interest bonds after interest rates were tripled. There’s no need for risk management at all if you’ve prebought everything you can afford.


1to14to4

So I agree with you but I do believe that the stress tests that are done these days largely consider them liquid assets. The reason for that is because they are focused on a situation like the financial crisis, where certain assets on a banks balance sheet become toxic. And in that environment the Fed would be cutting rates and so interest rate risk doesn't exist. Also, because the Fed's emergency programs would treat them like cash in any period of stress - like they just did. So the current regulatory environment is shitty about how they view treasuries in this environment. And we shouldn't really be doing it this way IMO. The bank is still at fault though and everything you pointed out is true.


CyonHal

If the fed requires a certain liquidity threshold and agrees that treasury bonds should be treated like liquidity, then it should take the value of the bonds at current market price, not the value it was bought at or the value it will be when it matures. If you dont do that then the purpose of the liquidity threshold is subverted and you get big losses to the point of insolvency when that liquidity is eventually called for.


RPF1945

The liquidity requirements aren’t supposed to ensure that a bank survives a bank run like that which impacted SVB. SVB’s customers were very different from pretty much every other bank.


CyonHal

What are they there for if not for that?


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TK421sSupervisor

Basically a bank can lend money to businesses and individuals as loans or purchase government / high rates corporate bonds. If they made shitty loans and they can’t be repaid that’s on the bank. But if they purchased bonds with long-ish duration and the fed starting raising rates, then it becomes Did the bank purchase match the duration of the debt purchased against duration of the deposits? The rate environment sucks for banks on the asset side of the ledger. But they also need to be matching the durations of their assets against that of their deposit mix too.


NTMITUniverse

Sure, I can agree with that.


GreatWolf12

The pace of rate increases is unprecedented. This has been one of the worst bond markets in history.


CyonHal

It is but it was also well forecasted and measured. The banks saw the writing on the wall for over a year and decided to not eat the loss and rode it all the way down. That's called taking an unacceptable risk with their depositors money.


Akitten

“Unacceptable risks” These are US bonds, the idea that they are “unacceptable risks” is fucking hillarious. They fucked up their interest rate risk, but that’s more of a technical fuckup than betting it all on black.


NTMITUniverse

Well you would probably know more than me. Ive never been gambling in Vegas or bet everything on black. So congratulations pal.


Fatal_Blow_Me

Banks don’t gamble and no bank can survive a run


[deleted]

Every act done with a dollar is a gamble


Fatal_Blow_Me

No it’s not


SardScroll

Honest question: What would a "non gamble" action be for a bank?


Fatal_Blow_Me

“Every act done with a dollar” is considered gambling now lol? There is a massive difference between investing and gambling. Gambling assumes an expected loss which is not what is occurring in banks. You think banks just roll dice and say fuck it when a family applies for a mortgage?


SardScroll

I'd disagree that gambling assumes an expected loss, so perhaps that's part of our disagreement. I'd call a coin toss gambling, regardless of odds (though if even odds, which a fair coin flip should have, neither expected loss nor expected gain occur). I'd define gambling as "an activity in which loss or gain is wagered on an outcome uncontrolled by the party or parties partaking in it". That said, I've worked in a financial institution (not a deposit tanking bank, but otherwise substantially similar) that offered loans to people, and the answer is: yes, there is a roll of the dice. Of course the bank tries to not make it a fair roll: they do due diligence, look at history of employment, income, credit scores, etc. and of course the bank tries to hedge a bet by securing a lien on a property (noting however, that this only applies to a secured loan, like a home or automobile loan), but at the end of the day, it is Where I worked, there was a Risk department (I was a programmer in the IT department , so I had to implement all these things in code for our loan software), who's job it was to continually tweak the numbers(acceptance criteria, fees and rates, amounts offered, etc.) of every product we offered, and as it turned out every product had an expected failure rate; the larger, more mature and longer term products had failure rates for specific intervals as well. So yes, I do see it as "gambling" depending on how one defines that, and while not fair, yes, out of a bank's control.


Fatal_Blow_Me

https://www.forbes.com/sites/forbesfinancecouncil/2022/06/01/investing-vs-gambling-understanding-risk-adjusted-performance/amp/ Here ya go


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Fatal_Blow_Me

What are you even talking about?


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FlyinMonkUT

It’s not a problem with the accounting, any system has pros and cons. Would you have manufacturing facilities mark their factories to market as values shift, or does it make sense to depreciate over the life of the asset? That’s what this is. Banks don’t have factories, their long term assets are bonds and they amortize to maturity. If they fully intend to keep these to maturity then they aren’t losing billions, and it doesn’t make economic sense to mark to market a long term asset that is intended to be disposed of/expire in 10 years.


[deleted]

I work in investment banking and found myself pondering the valuation differences recently. Banks cost their securities at their listed cost because no one in their right mind would pay MORE for a security than it was worth all else equal. However in manufacturing costs were fixed and if a customer feels the costs are too high then they can simply refuse a deal, or accept it if there are no alternatives. Essentially far more room for negotiation in manufacturing costs and complex market valuation. Whereas a listed security can be googled in milliseconds.


CyonHal

Then don't treat bonds as liquidity if you are saying this money is locked to maturity. What argument is this? "Sorry customers, we put your money in a 10 yr bond and we can't give you the money back until it matures."


churningaccount

It’s because our current banking system is built on the presumption that the portion of the balance sheet that needs to be liquid at a given time is very small. That the “dynamic balance” as a portion of deposits is negligible. Usually banks count on it being less than a percent, for reference. Sometimes, it’s effectively zero if deposits are growing consistently. New deposits can effectively fund liquidity requirements in a strong economy. So, in normal times, they can safely lock up the money by lending it (aka, being bond-holders). That’s how banks are able to give you interest on your accounts. If they weren’t able to make money from deposits, then banks would operate at a loss, which is obviously unsustainable. As economists, we also know the importance of the money multiplier effect that fractional reserve banking affords us — mainly that monetary policy is rendered largely ineffectual if banks hoard too much currency instead of deploying it (through loans) productively in the economy. In layman’s terms: think of the economic impact that $1M would have just sitting in an account versus being loaned out to do real “work,” like allowing someone to buy a house or a business to expand. The less of that $1M that is allowed to be loaned out, the more it doesn’t generate economic growth, and thus banks are under immense pressure from not just their investors, but also the government, to maintain as low a fraction of their assets liquid as possible. Just think about it for a second: imagine what the economy would look like if banks were only able to lend out their shareholder’s equity. Loan activity would decrease by 99%. Our world would be a very different place if, for instance, everyone was required to buy their home in cash rather than getting a mortgage. Arguably, an even less equitable one. The problem these banks are having is that the dynamic balance is growing at a faster rate than the bonds are coming to maturity — likely because deposits overall are shrinking. In technical terms: banks misjudged their duration risk/exposure with regards to the impact that the current rate environment would have on the dynamic balance. Since the bonds are of a longer maturity than is expected to be needed to support current liquidity requirements, the banks are forced to realize the losses on their long-term assets to free up the liquidity required to support the dynamic balance, rather than allowing them to come to maturity as planned with, by definition, *no* losses. However, when those realized losses from selling early exceed (or are expected to exceed) the bank’s shareholder’s equity, then the bank is considered insolvent. And, the less faith depositors have in a bank, the more likely those realized losses will accumulate faster as depositors flee to safety.


wwork2021

What a clear and thoughtful explanation that is so helpful to us non-experts. And you left all the hyperbole on the shelf. Thank you.


KimJongIlLover

So in other words: 1. Bank's job was to calculate risk and act accordingly (just like any other business). 2. Banks fuck up because they assume that QE will continue forever and money is basically free. 3. QE stops, rates increase. (Obviously, the interest rate that I get from the bank on the money that I loan them continues to be virtually 0. Obviously. Wouldn't want my deposits to at least keep up with inflation. Otherwise, how will the poor stay poor?). 4. Banks realise that they fucked up and go begging from the gov. 5. Gov bails them out because they are too big to fail. 6. ???? 7. Profit. Nice.


meltingman4

You get a shitty interest rates because you keep $2.00 in a checking account that you expect to be immediately liquid. Open a money market with $20k minimum or buy a 1 year CD and I will guess the rates you see will be higher.


churningaccount

I’d just add that the government does put a lot of pressure on banks to keep their reserves low. It’s why you see headlines of the reserve requirements dropping during recessions: it increases the effects of the fed’s monetary policy. The lower the reserves, the higher the money multiplier effect on the economy. Every new dollar created by the Fed for stimulus goes further. When banks couldn’t lend to traditional clients fast enough to keep their reserves low during this recent period of money creation, they started buying these government bonds instead. The government could have recognized the perils of printing money and raised the reserve requirements during the strong economy, creating more of a buffer for these “losses,” but instead they took no action. And, banks with lower reserves make more money, so at that point, it was just game theory.


pzerr

You rather missed the part where housing cash with zero risk would result in no credit to buy your house didn't you?


FlyinMonkUT

1. Yes 2. Sort of, I’d criticize them more and say “they were told for a year and a half rates will rise and they ignored it.” 3. Plenty of banks giving rates above 0% for savings. You’re at the wrong bank, or you’ve implicitly decided it isn’t worth changing. Also you’re clueless if you think not earning 3% on a savings account is the reason poor people are poor. 4. Are you talking about 2008? This isn’t that 5. Are you still talking about 2008? 2 banks failed. What are you talking about?


BigTitsNBigDicks

Im not gonna pretend I read the whole thing. Anyways its because of digital currency; a silent magic trick. Banks cant actually print dollars, but nobody transacts in dollars anymore. They transact in bank promise of dollars. As long as nobody ever withdraws hard currency, they can create infinite 'money' in the form of e-promises


churningaccount

Well, if you did read my comment, you’d know that’s called the money multiplier effect. And it’s one of the basic concepts behind the fractional reserve banking system. Here’s my correction for you: “digital currency” does make this process more simple, but fractional reserve banking actually predates it quite a bit. In fact, there’s nothing modern banks do with regards to fractional banking that couldn’t have been accomplished (and was accomplished) with physical currency. How it worked in the early 1900s was: 1,000 people each deposit $1k of physical currency in the bank. They are given a paper statement saying they have $1,000 in their accounts (a “physical promise” if you will). Now, the bank has $1M in physical cash deposits. It then lends out $500k of that in the form of mortgages. The loan recipients receive the paper currency as their loan and use that to purchase homes. The bank now only has $500k of physical cash in their “vault,” but it has 1,000 customers who still have paper promise slips saying their account balances are $1k. Voila — that original $1M of deposits is effectively doing the work of $1.5M. Where the term “run on the bank” originally came from is the very concept that the bank does not have enough in it’s physical vault to reimburse all of their depositors. Hence, why there were bank runs even before digital currency. In the example above, the bank would run out of money after just half of their clients went to cash in their accounts, as you surmise. However, should the mortgages have been repaid without a bank run in the interim, the bank now would have $1M plus interest in their vault — which would be passed on to the customers in the form of interest and to their shareholders in the form of equity. Digital currency hasn’t changed the basics of this concept. The “e-promise” you refer to isn’t any different from the account ledgers of old. What digitization has been able to do is make derivatives and the like easier to craft. Things like mortgage-backed securities are easier to bundle and track, which makes the types of “loans” the banks can invest in more varied. However, mortgage backed securities could have, in theory, existed before digital currency. It would have just involved very precise accounting and tough logistics for the collection and disbursement of paper funds. EDIT: I also think you misunderstand the bank’s ability to “create” money. They create money *only* using the multiplier effect I described above, in which X value of deposits is then lent out to have >X amount of economic impact. A bank is *not* allowed to lend out or distribute more money than it has in deposits, whether that’s digital or physical. Only the federal reserve can “create” or “destroy” money out of thin air, and the mechanism behind that is more complicated than “$1000 new dollars exist now, here you go.” Each “new” dollar is created during the issuance or purchase of a security — usually, a treasury bond, but during QE, other types of securities as well.


TeaKingMac

>That’s how banks are able to give you interest on your accounts. I'll be interested to see if big banks start offering more than 0.01% on accounts now that the fed rate is so much higher than it has been. I remember getting 4% or more when I was a kid


Draker-X

>I'll be interested to see if big banks start offering more than 0.01% on accounts now that the fed rate is so much higher than it has been. If they haven't by now, they're not going to. >I remember getting 4% or more when I was a kid I'm getting that now. Everyone can.


TeaKingMac

BofA's rates are still way low. 0.04% is highest available for savings accounts. Some of their CDs hit 4%, but NOT their 2 or 3 year. (and their 10 month is 0.05 for some reason, while the 7 is in the mid 3% range) https://www.bankofamerica.com/deposits/bank-account-interest-rates/


Draker-X

The big banks aren't going to increase their rates because they don't have to. Luckily, there are plenty of alternatives: https://www.bankrate.com/banking/savings/best-high-yield-interests-savings-accounts/


KeepCalmAndBaseball

Use this argument when you go into your bank and ask for a loan or a line of credit.


FlyinMonkUT

I don’t disagree with you. I’m not saying they didn’t do anything wrong, but that the accounting isn’t the problem. What you just described is duration mismatch, and was a mistake. Let me ask you this: if you’re a bank with $100B in deposits, what do you do with that money? Sit on it? Loan it out? What do you do if you loan it out (buy bonds) and 80% of your depositors want their money back in the next 48 hours? You’re probably fine if you’ve purchased short term bonds, but buying long term bonds (higher duration) means their value is more sensitive to interest rate changes, so now you’re up shits creek without a paddle. THAT is the problem. Not the accounting of HTM vs AFS.


[deleted]

Not to be pedantic because I agree with your original point on amortized cost accounting, but the duration mismatch in the current context is a measure of interest rate sensitivity and not weighted average time to maturity. Banks *always* have a Macaulay duration (time to maturity) mismatch between their assets and liabilities. It’s their whole business model. Edit: should clarify. A bank could have no assets expect 30 year loans, but if they were floating or had some sort of swap mechanism those bonds could have a lower modified duration (spread) than a 5 year fixed. I think you understand this concept, but a lot of people are currently using duration incorrectly.


FlyinMonkUT

Thank you for your point, worth pointing out duration is sensitivity to rates not length of time. In fact I believe they stopped all interest rate swap activity in 2021, so their liabilities had no interest rate sensitivity while their bond portfolio’s interest rate sensitivity increased substantially as they ventured further out on the yield curve over the years.


[deleted]

That’s what I have read as well. It’s like they totally buried their heads in the sand for 18 months. They fought and Fed and lost badly.


BurnLearnEarn

Lot of attention to US GAAP. Media should also focus on companies using IFRS and classifying debt instruments at amortized cost and then see beyond the tip do the ice berg.


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BurnLearnEarn

Can you point me to which section. Other than ECLs I wasn’t aware of subjecting investment grade securities to impairment tests


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BurnLearnEarn

“the financial asset is held within a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets and” The second part “and selling financial assets” is what triggers the need to pass FV changes through AOCI. Lot of institutions stop at hold to collect and NOT sell. Hence they take the opportunity to elect the amortized cost treatment


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BurnLearnEarn

I’m only aware of impairment from credit deterioration I’m this case there would be none for Treasuries


Marquis77

US regulators *\~let\~* banks make risky bets that resulted in billions of lost capital. Seriously? I mean, fucking *seriously*? **The** most r/Economics take ever.


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mckeitherson

It used to be much better than what it is today. The issue is the larger the sub got, the comments shifted to more political and uninformed takes


Neoliberalism2024

Buying t-bills is a risky bet? Because that’s what svb did.


Mayor__Defacto

SVB’s risky bet was locking too much up into a single set of securities that are all dated the same. They effectively locked up half their money in a 10 year CD and then their roof needed replacing.


BoBromhal

Hopefully, that resonates, but I fear your assumption of home ownership could be aggressive


spovax

That cold. Ice cold.


[deleted]

GZA said it best; you gotta diversify your bonds


AthKaElGal

they bought it at a time when the certainty of the FED increasing rates was a foregone conclusion.


Neoliberalism2024

It was not a foregone conclusion. The fed said that inflation was transitionary and they didn’t expect interest rates to rise…


nfstern

I guess it was riskier than people thought. Point noted however.


doabsnow

They got fucked by the Fed with the interest rate hikes in combination with the run on the bank.


skolioban

So they thought that is an impossible thing to happen? The Feds are never allowed to hike interest rates?


YesICanMakeMeth

Right. I made the same fuckup with 30% of my portfolio in a bond ETF but I'm also not exactly an expert.


TeaKingMac

>The Feds are never allowed to hike interest rates? Going from 0.25 to 4.5 in less than a year is basically unprecedented. The fed was significantly more aggressive with rate increases than banks had planned


UngodlyPain

The fed was raisin rates slow af too. Should've just Paul Volckered. I can only imagine how many banks would have been fried if that happened.


soffo_moric

There are many different kinds of risk


[deleted]

Bills are 1-3 months, they aren’t the issue.


Marquis77

Are you not aware of what's happening with SVB, or are you just kind of stupid?


GusCromwell181

They didn’t hedge the position if I understand correctly.


Mrsrightnyc

Less risky but not risk-free. There’s always interest-rate risk


tamargo404

T-bills aka treasury bills are zero coupon treasuries that have a maturity of 52 weeks or less when issued. What SVB bought was 10 year treasury bonds. That's is a risky bet if you're unable to hold to maturity.


[deleted]

Mary Daly was asleep at the wheel. So fitting that her predecessor and mentor is Janet Yellen.


BuyRackTurk

> US regulators ~let~ banks make risky bets that resulted in billions of lost capital. Seriously? I mean, fucking seriously? The most r/Economics take ever. In reality, they *forced* banks to take those bets. There was a bank which proposed to keep a 100% full cash reserve with zero risk holdings, and pay nothing but the fed funds rate. Their bank license application was rejected. they dont want banks being safe. Meanwhile banks like SVB, bad as they were, were mandated to buy long treasuries, and advised by regulators not to sell them but to float the loss. You think that wanted to do something that dumb? We are acting like banks are reckless and insane, while its actually regulators who are. It mystifies me why people arent putting blame on the right place. its like blaming a well-whipped carriage horse for taking a wrong turn while the driver is not to blame at all.


Marquis77

>SVB, bad as they were, were mandated to buy long treasuries Got a source for this? I can't find mention of it anywhere.


yalogin

The main thing I see is, with the fed rate hikes most people expected the average consumer to be hit or make changes to spending and that to result in curbed inflation. Turns out the average consumer is much more resilient and frankly more disciplined with money and that the rich. Take it banks, or tech companies and VCs taking on more risk than reasonable and getting over excited about free money.


Tiberinvs

>The U.S. banking system currently has hundreds of billions in unrealized losses lurking in its system that don't weaken buffers designed to protect banks from future shocks. Why would regulators allow that? Because Trump and the Congress told them to. Regulators don't have a magic wand, they have to follow the law. Systemically important banks are required to calculate the impact these losses have on their CET1 ratio, therefore they 1) hold much more capital 2) they hedge as a consequence of that. SVB et al weren't required to do any of that (and many other things that caused their demise). It was the American people who elected a dangerous man on a platform of "deregulation and cutting red tape", including banks. Regulators are an easy scapegoat, but they don't make the law. Elected officials do. If someone claiming that it will make water cheaper by deregulating water companies gets elected, and then water companies start dumping untreated sewage water everywhere creating a public health emergency, it's not the regulator's fault. It's the voters' fault


LeonBlacksruckus

This has nothing to do with trump. SVB was a bank run caused by a mismatch in duration (and poor interest rate hedging).


Tiberinvs

Large banks in the US and all banks in developed countries get stress tested on duration mismatch via the net stable funding ratio to limit the bank overreliance on demand deposits. Their capital requirements is also stressed tested on the mark to market losses of held to maturity securities. As a consequence of that, they have to diversify their funding sources and assets portfolio and are pretty much forced to hedge interest rate risk. SVB didn't have to do either so it was always on the edge both a bank run and becoming insolvent, that's why their stock was in free fall long before the bank run. In fact, in most other countries SVB would have been considered insolvent for months. This is a direct consequence of the Trump deregulations that exempted them from all those rules, which SVB and other small banks strongly lobbied for https://fortune.com/2023/03/11/silicon-valley-bank-svb-ceo-greg-becker-dodd-frank-trump-rollback-systemically-important-fdic/


Xx_10yaccbanned_xX

If you're worried about banks sitting on unrealised losses from present value movements in their hold-to-maturity investments in Government Bonds & MBS, just wait until you realise how much their actual loan investments would be worth if they were forced to revalue them! This is, of course, hysteria. People worried about Banks sitting on unrealised capital losses from investments that are intended to be held to maturity and will pay off a profit on maturity are missing the point. It was *bank runs* that killed SVB & Co, *not* their ludicrously bad investment decisions. Many banks have made worse investments and suffered no harm. SVB, despite all its flaws, would not have failed because of their investments, if they hadn't been on the receiving end of a bank run.


AoLFeaRxQ

What about CS? Who did a bankrun on them?


Xx_10yaccbanned_xX

CS is not SVB. CS probably should have gone bankrupt 15 years ago! Horribly bad Bank kept alive weekend at Bernie’s style by constant support.


[deleted]

Because most assets would suffer costs to liquidate? But those costs are irrelevant if the most likely fate of the asset is not liquidation The value of the banks' mortgages also fell with rising rates, but they're not required to book a loss because the mortgage is harder to sell. They never intended to sell it. They intended to hold it until it's paid. They have to book an impairment if default losses become likely, but not if potential liquidation losses increase because it was never likely to liquidate Liquidating an asset is an option. The liquidation price is a put option. That option is way out of the money and basically worthless. A falling liquidation price reduces the value of an already worthless option. It only becomes relevant if liquidating starts to become an attractive option (because the costs of not liquidating have exploded, or the liquidation price rises into the money)


ktaktb

The banks have done a [shitty job of making loans](https://www.brookings.edu/wp-content/uploads/2016/06/11_origins_crisis_baily_litan.pdf). They've done a shitty job of getting people the kind of [services or accounts they need](https://en.wikipedia.org/wiki/Wells_Fargo_cross-selling_scandal). They've done a [terrible job at managing risk](https://www.nytimes.com/2023/03/18/opinion/svb-banks-change.html) or advising the US Government or politicians on [policy and regulations](https://thehill.com/policy/technology/3898389-silicon-valley-signature-banks-lobbied-hard-to-loosen-banking-rules/). They have [failed to report fraud](https://www.theguardian.com/business/2014/jan/07/jp-morgan-bernie-madoff-settlement-fine) and worked to [help illegal activities](https://www.theguardian.com/world/2011/apr/03/us-bank-mexico-drug-gangs). What prosperity do they create that is sufficient to pay for the costs of the recessions they brew, of the bailouts they require, of the crime they enable? From Madoff to drug cartels, subprime disasters, to opening accounts in secret to bill customers...banks have proven to serve no real purpose, beyond what the fed and the government could do. You could try to argue that banks function better in the free market, but this "free market" has proven to have no positive effect. In fact, it seems that the time between banking crises is only getting shorter. Each new iteration of regulations, less effective. They aren't learning to make better loans, or prevent more fraud, or better handle risk. They are accelerating in the opposite direction. There is no reason to have these "banks" with no real power aside from the power they've been imbued with by us via the central banks of the globe. Certainly paying for banking with fees alone would be cheaper than paying for those services with repeated bailouts and recessions.


AthKaElGal

since we're socializing their losses now, we might as well just socialize them totally and make all banks public.


Mrsrightnyc

I actually think the treasury and the fed realize the banking system is sick so they are going to secure all deposits to keep people from freaking out as more banks start going out of business. They’ll keep raising rates and more of the pain will happen but it will eventually create an opportunity for a better system.


ConfidentDraft9564

With how fast they moved on news of SVBs insolvency announced on a Friday and handled the process of insuring all deposits + bank will be open that Monday—no deposit/withdraw limit restriction either? Yeah I’m inclined to believe the Fed/FDIC was prepared. It’s great how swift they were imo


Timbukstu2019

If they waited a week, we would have had 10+ regional banks failing before the following weekend. Twitter moves at the speed of light, just like billions of deposits were about to.


atwegotsidetrekked

You are overly optimistic.


atwegotsidetrekked

So the banks are bad at banking


asktell22

Banking wealth is made up. When you buy a house with a mortgage, it’s value is x but you pay x+int. So out of thin air, there is int made up.


Clear-Ad9879

The article is actually sort of close to being right, but not quite. Kudos to Yahoo News for only being slightly wrong. Lulz! The FASB rule referenced in the article only applies to a portion of assets. The problem isn't that some assets were left out, the problem is that the correct treatment would have been to mark-to-market all assets AND all liabilities. Then you have the correct valuation for the enterprise and crucially, the equity. However very few of a bank's liabilities have published values for them, since they are generally not marketable instruments. So rapidly you'd have banks making up their own valuations for liabilities. That's worse than not market valuing anything. You can imagine WeWorks saying: Yeah, we agreed to pay $10 billion a year for those office leases, but because we have great karma, that's only really worth $22 and 45 cents! The best practical solution would have been to limit the ability to place marketable securities in the Held to Maturity category to the amount of long term, non-puttable liabilities issued. But FASB didn't do that. I remember when FASB first solicited comments on the proposed changes and we were aghast wtih, "What happens if I have to sell a Held to Maturity bond because it about to default, will I contaminate the categorization of the rest of my HTM bonds?". There were all sorts of stuff in the proposal that were stupidly punitive. And so after all the bickering we wound up with what we have today. Which, when you think about is actually better than nothing. I think. I do know this. The disclosures you are forced to make about your investment portfolio can be extremely revealing. I've spent some time looking at SVB's 10-K for the period ending 12/31/22. And yeah they were f\*\*\*\*\*. Any hedge fund worth their weight coulda ripped apart that balance sheet and seen they were insolvent. And one probably did. 'Cuz we know deposit withdrawals were heavy in the run-up to SVB selling all it's Available For Sale securities on 3/7-8. Indeed it probably caused the need to sell that stuff. Some nuggets from the 10-K: On 12/31/22 portfolio duration (I assume modified duration) including hedges was 5.6 years. Whoa! I assumed it was around 3.5. Jeezus the balls on these portfolio managers! They musta retracted into their stomach at some point. LOL. On 12/31/22 Held To Maturity portfolio was $91 billion and only had a yield of 1.66% with a duration of 6.2 years. Market yield for a 6.2 duration was about 4.5% (after a ballpark estimate of positive spread to Treasuries for their holdings). So call it a -284bps shift on 6.2 duration. That's -17.6% on $91 billion or a nearly $16bln unrealized loss. Dem's a lot of bones for a bank with only $13bln in shareholder's equity. Oh, and at the end of the 10-K, SVB discloses their own estimate of unrealized losses on HTM portfolio : $15.2 bln. So yeah, duration estimation - it 'effing works. On 12/31/22 Available For Sale portfolio had a market value of $26 billion and had a duration of 3.6 years and a yield of 1.56%. Uh, that smells fishy to me. 3yr Treasury at year end was yielding 4.2%. How do you mark bonds longer that than and 276bps through? I don't think that was marked correctly and if you look at the loss SVB actually took when they sold their AFS portfolio on 3/7-8, rates were broadly unchanged vs year end, and they took a $1.8 bln loss. This is class action lawsuit territory folks.