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1979 sats \ 10 replies \ @zuspotirko 10 Mar 2023 \ on: ELI5 – What's happened to Silicon Valley Bank? ☠️ bitcoin
That's not what happened. If $100 of treasuries were worth $60 there would be a massive arbitrage opportunity to buy them until due date.
Treasuries generally trade between their issuance and issuance+interest. They could fall as deep as ( issuance+interest)- interest of other/newer treasuries.
However, the SIVB is also partly related to the duration missmatch on active and passive side. This could theoretically happen with 100% fractional deposits (which does not exist in reality).
"Duration missmatch", aka "Temporary Loss" is purely playing around with semantics IMO.
The reality is the capital is locked and your treasury is worth less on secondaries.
Am I wrong?
(Not sure what they are actually worth, just quickly calculated 4%,delta * 10 years)
EDIT: Okay, it's more like 2.5% yield delta... You get the point
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Imagine you were a bank and someone lend you $100
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What happened to Lehman was that they lend out 90 and these 90 were the problem
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What is happening to SIVB right now is that they lend out 90 but the remaining 10 are the problem
Thats "temporal conguence" aka duration missmatch. They can both turn into the same problem of a bankrun. What's supposed to happen is that you pay out your customers with the 10 and slowly liquidate the 90 to add to what previously was 10.
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In the first bankrun you run out of the 10 and the 90 are worthless.
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In the second bankrun you fail to liquidate the 10 in the first place. In a sense that's much worse. In another sense it's better since the domino effects are less impactful - except if it leads to people bankrunning other banks aswell
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Doesn't negate anything I said though. Same mechanics, the same fundamental concepts, and slightly different rules.
Also, try explaining this to a 5-year-old. 🥴
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Are you saying the prices of treasuries never change? Because they do!
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How could it happen with 100% full reserve banks? If that's what you're implying.
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Yes, illiquidity can happen due to duration missmatch can happen under 100% reserves.
Imagine you're a bank and someone lend you $100. You have no fractional reserves so you invest $0 and put all $100 into government bonds. If whoever lend you the $100 bucks wants to have them back you have all the money. There is completely no problem with solvency at all - but there is a problem with liquidity if the government bonds are not sellable on a liquid market and you to hold them until due date.
This however isn't completely what happened here after the small bankrun on SIVBs there was also a problem with solvency - they had to sell bonds that were not supposed to be sold before due date.
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Buying bonds is not 100% reserve. You're confused about these terms.
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I would argue that buying government bonds is still investing the money so it's a little misleading to say you invest $0. Yield always comes with some risk.
It's a bit like lending the $100 to your friend and he says he'll pay you back on Thursday when your rent is due on Friday. Yes you are owed the money before it's needed but it's not the same as having the money.
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I would argue that buying government bonds is still investing
You're not entitled to an opinion on things that are facts. Government bonds are reserves in banking. That's not my opinion, that's how banking works.
Yield always comes with some risk.
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A quote from that very page...
In practice, the risk-free rate of return does not truly exist, as every investment carries at least a small amount of risk.
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