>So it is perfectly valid to say "in ten years, this $100m bond is worth $100m...and I intend to hold it for ten years, so it's worth $100m [equivalent] today".
But that valuation model is not perfectly valid. It's only partially valid under limited scenarios.
As many comments have already pointed out, the issue is the bank has customers with demand deposits. The customers can demand withdrawal of their money anytime -- without advanced notice. In other words, SVB is not a hedge fund that has the customers' deposits contractually locked up for 10 years.
Therefore, the "10 year bond held to maturity" assumption becomes invalid if the bank has to sell them prematurely at distressed discount prices -- to meet liquidity requirements of demand deposits.
You can't use value securities as "mark-to-intended-optimal-future" as an alternative to "mark-to-market" for purposes of insolvency risk calculations.
> But that valuation model is not perfectly valid. It’s only partially valid under limited scenarios.
Its valid under the applicable regulations. However, it is one case where having adequate capital under those rules was not backstopped by available liquidity measures from the Fed.
One thing that seems to be generating less commentary is that, in the wake of the SVB collapse, and virtually simultaneously to the announcement of the systemic risk exception for SVB by the FDIC/Treasury/Fed, the Federal Reserve also announced a generally-available liquidity backstop program for this kind of hold-to-maturity assets.
> You can’t use value securities as “mark-to-intended-optimal-future” as an alternative to “mark-to-market” for purposes of insolvency risk calculations.
To the extent that refers to valuing the class of assets at issue at their par value, and to the extent that that was true last week, its not now.
Exactly. If you have a portfolio of 100% HTM bonds, your income schedule is completely predictable, down to the cent at every moment in time.
But your deposit demand is unpredictable and must be modeled. I don’t think even Taleb would have the scenario of “on Friday, you’ll lose $40b of deposits.” The bank would have had to be sitting on billions of T-bills, which ain’t gonna happen.
It seems like every bank is a tweet away from destruction.
>You can't use value securities as "mark-to-intended-optimal-future" as an alternative to "mark-to-market" for purposes of insolvency risk calculations.
I think this is exactly correct, but I dont think that is the purpose and scenario reported on their financial statements. I think it is fine to report valuation in terms of "mark-to-solvent future", as long as the appropriate data is provided to enable insolvency risk calculations, and the "mark-to-solvent future" model is not presented or confused with a insolvency risk model.
If an investor does not understand how HTM assets are accounted per regulation, but they are accurately reported, confusing the models is an investor error, not a bank reporting error.
My understanding is that banks provide clear reporting, and are transparent with their HTM portfolio.
HTM securities are typically reported as separate noncurrent assets; they have an amortized cost on a company's financial statements.
But that valuation model is not perfectly valid. It's only partially valid under limited scenarios.
As many comments have already pointed out, the issue is the bank has customers with demand deposits. The customers can demand withdrawal of their money anytime -- without advanced notice. In other words, SVB is not a hedge fund that has the customers' deposits contractually locked up for 10 years.
Therefore, the "10 year bond held to maturity" assumption becomes invalid if the bank has to sell them prematurely at distressed discount prices -- to meet liquidity requirements of demand deposits.
You can't use value securities as "mark-to-intended-optimal-future" as an alternative to "mark-to-market" for purposes of insolvency risk calculations.