> If SVB is sitting on a pile of Treasury bonds that mature in 20 years, they can “hold to maturity” and get their principal plus some very low interest rate. But this is useless!
No it isn't. Any other bank would be happy to write a loan backed by US treasury holdings, at no more than a moderate profit. If you're sitting on that, it has value. But it doesn't have value in literal dollars by tomorrow morning to pay out a withdrawal. That's what "liquidity" is all about.
I’m not saying the T bond is useless. I’m saying that the fact that it’s nominally worth a specific amount in the future if I hold it is useless.
This has nothing to do with liquidity. If I had a 0 interest, $100 T bond maturing in 30 years, I cannot sell it today for $100. But anyone who lent me $90, nonrecourse, using it as collateral and asking for only a moderate profit is nuts because this bond is not worth $90 — not even close. Maybe I can get a loan that is based on my own credit-worthiness, but that’s a different story entirely.
If I have this $100 T bond, and I’m a bank, and that T bond is collateral for a $100 savings account paying 4.5% APY, I am in the hole. If my depositor sticks around, I can gamble and hope I can make up my losses (e.g. by interest rates going way down), or I can try to be such an awesome bank going forward that my profits can make up for my losses, and maybe I’ll get away with it, but I don’t really deserve to get away with it.
Not to a retail investor looking at short term returns (and irrationally obsessed with Inflation! due to media consumption), but to a bank with regulatory deposit requirements and a longer term outlook? Seems not unreasonable.
Anyway it doesn't have to be worth the full face value. It just needs to be worth enough to back a short term loan big enough to honor current withdrawal demands.
> to a bank with regulatory deposit requirements and a longer term outlook?
Maybe with some generally accepted accounting principle, but not by any sensible business standard.
If that bond trades for $80, no one would buy it for $90. It’s worth $80. Similarly, if you already own it, it’s not magically worth more.
And if you are a bank with a long term outlook, you expect interest rates to hold near current levels, and you pay 4.5% APY to depositors, your long term outlook of paying 4.5% to deposits where that deposit money is locked up in a very safe bond earning 1.8% APY, you are losing a lot of money, very safely, in the long term. Almost exactly as much as you would lose by booking the loss right away and investing in something else.
Other than tax or regulatory arbitrage, complex accounting is no substitute for actual profits and losses :)
No it isn't. Any other bank would be happy to write a loan backed by US treasury holdings, at no more than a moderate profit. If you're sitting on that, it has value. But it doesn't have value in literal dollars by tomorrow morning to pay out a withdrawal. That's what "liquidity" is all about.