Yes but supposedly if you mark their balance sheet to market, the net is approximately zero, i.e. they have just enough assets to cover liabilities with no reserve. In this case you could say that the reserve requirement is serving its purpose. The stockholders may be wiped out (depending on how much a potential buyer values the goodwill), but the depositors should get all their money back. Worst case I think depositors would take a small haircut.
If they have to liquidate their assets (mbs/treasuries) they’ll probably create at least some slippage, moreso in MBS, that may prevent them from recouping their value at current prices. Alternatively they can try to hold to maturity or spread out their selling but that will make depositors illiquid
I don't think that holding to maturity really solves the fundamental problem though. The reason the MBS have lost value is because they have a low coupon compared to what you can get now. To execute the hold to maturity strategy, they would have to pay the depositors interest with the coupons from the MBS.
Under ZIRP, the depositors weren't getting anything, and so making 1.5% on MBS was fine. In the current interest rate environment, depositors won't be satisfied with a zero yield on their deposit accounts, and the MBS don't pay enough to cover it, so either they lose depositors because they're not paying competitive interest, or they take a loss every day because their investments don't cover the cost of the deposits.
Ultimately keeping the bonds on the books as HTM just spreads out the loss over the lifetime of the bonds rather than recognizing it right when interest rates change, but the result is the same.
Oh fully agreed. They fundamentally lost depositors’ money by making bad investments - holding to maturity is just a way to argue that depositors will be made whole. The depositors may as well just be given the bonds/mbs themselves and allowed to hold to maturity or sell them to meet immediate needs.
Yes so the key distinction is this bank had a bank-run against it that forced their hand. Fair to say any number of banks would fail if they faced a bank-run in current environment (depending on proportion of long dated bonds they hold)?
