0 sats \ 5 replies \ @fiatjaf 11 Mar 2023 \ parent \ on: ELI5 – What's happened to Silicon Valley Bank? ☠️ bitcoin
How could it happen with 100% full reserve banks? If that's what you're implying.
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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