The problem is that the assets weren’t all marked to market. So selling off immediately will mean they’re taking a substantial hit compared to holding them to maturity.
They were taking the hit whether they held the bonds or sold them. The sale price is based on the net present value of future cash flows of the bond, and in today's interest rate regime, those future cash flows were relatively small. It has nothing to do with the book value.
>They were taking the hit whether they held the bonds or sold them.
Incorrect. The opposite is true, in fact. Todays interest rate is irrelevant with regards to future cash flows for the bond.
Bonds are fixed income, your coupons are set and you get paid what you get paid. The coupons are fixed and when the bond matures, you are paid face value.
The only difference that is due to todays interest rates is that your low interest bonds have to fall in value to meet the market clearing interest rate if you are to sell them.
>Todays interest rate is irrelevant with regards to future cash flows for the bond.
Correct.
>Bonds are fixed income, your coupons are set and you get paid what you get paid. The coupons are fixed and when the bond matures, you are paid face value.
Correct.
>The only difference that is due to todays interest rates is that your low interest bonds have to fall in value
Incorrect. They fall in price compared to the purchase price, not in value. The value was low even if they had held to maturity.
If you were forced to sell a bond before maturity, and you decided to repurchase that same bond, you could regain all of those future cash flows that were supposedly worth more according to the prior book value. Now if you repurchased that same bond, what price would you be willing to pay for it? That's right, you would be willing to pay no more than the current market price, because that is what it's actually worth, given those future cash flows that you so value so much.
Why would you only want to pay market price? Because those future cash flows aren't very much compared with the yield of other bonds. You're not going to pay the same price for a 2% yield and a 5% yield, because one is clearly better. The 2% yield has less value; it had less value before you sold it, it would've had less value had you held it to maturity. The bond's value is worth roughly the market price, whether you sell it or not. Its current value has exactly nothing to do with what you paid for it.
They are actually worth that amount if they hold them though.
They are worth one 2033 dollar or 0.7 2023 dollar. 2033 dollar and 2023 dollar should be considered two different currencies. The bonds are pegged to 2033 dollars but customers want 2023 dollars, and when dominated in 2023 dollars the bonds are devaluing like shit.
>The book value was predicated on holding the assets to maturity.
That is an accounting practice; it has no bearing on the actual value of the asset. The same is true with calculating cost of goods sold; you can actually choose to use LIFO or FIFO costing to alter the accounting value of your inventory for tax purposes and such. Look up "LIFO liquidation" to see an example of what I mean.
Using generally accepted accounting principles, you have some room to conceal extra value or loss on your balance sheet. But the cash flows don't lie.
A ten year 1% bond is worth about 70 cents on the dollar. Ten years from now it will be worth 100 cents on the dollar, but you can buy or sell it at 70 cents on the dollar, so that's what it's worth.
If they had held 3-month treasuries instead of 10-year bonds, the bank run would have been a non-issue since they could have liquidated the treasuries at the same price as they were listed on SVB's books.
They didn't become insolvent because of the bank run. The bank run exposed the fact that they were already insolvent.
Do remember that the SVB wasn't paying much interest on their deposits. They were making profits on those bonds. The only real problem was a maturity mismatch that happened to matter.
The people with money in their bank account are not going to wait 10 years to withdraw it, so that's a moot point. If they wanted those funds to be locked in for so long there are much better vehicles they would have chosen.
Banks are predicated on the idea that a limited percentage of depositors are going to want their deposits at any given time.
Insinuating that all assets must be liquid enough for all deposits to be withdrawn simultaneously basically requires that the bank only hold cash, which makes the entire concept of a bank fall apart.
From what I read banks must always have funds than liabilities and must immediately liquidate if that isn't true. If someone pays me to hold onto a box of cash for them I should obviously have it available when they ask for it back.
We may use fiat instead of gold now but that doesn't mean a bank can float itself by hoping no one opens the box and breaks their superposition.
Gold itself is quite volatile, you would have the same issue even on the gold standard. It was in fact an extremely common problem on the gold standard.
A bank is expected to be able to float itself as long as a sufficiently low number of customers demand their money at any given time, a bank run will collapse a bank no matter what monetary standard you’re on.
