yep. Due to the SVB failure, large banks are now backstopped by a guarantee that they can loan from the FED at 100% of the value of the bonds at redemption time (even though they're worth less right now, due to rates hiking).
That would have been enough to save SVB, if it had already been in force at the time.
see: https://www.federalreserve.gov/newsevents/pressreleases/mone...
amluto|2 years ago
Imagine, in an extreme case, a bank with $1 billion par value of treasury bonds, with mark to market value of $800M. And $1 billion of customer deposits. And that’s it. (Obviously this is unrealistic.). Now the customers flee. The bank borrows against its $1bn of bonds and pays off the customers. The bank now has no customers, $1bn (par) of bonds, and $1bn of short-term debt to the Fed. They can roll that debt over forever, but they need to pay interest, and, when you imagine that $1bn (par!) of bonds as being worth $1bn, that’s only if they are held, earning essentially no interest, to maturity.
So the bank has no income and is obligated to pay interest to the Fed until the bonds mature, and they can’t. Not can they sell the bonds because they will take a loss and be unable to roll over the loan. In other words, they’d be insolvent. They’re in the hole by $200M of present value, and they need assets or an income stream to back that up.
The normal business of banking can provide that income stream. For example, sufficiently lazy customers will deposit funds at less than market interest, and the bank can earn the difference.
FromOmelas|2 years ago
More importantly, the actions of the FED after SVB signaled they'll do whatever it takes to keep the system stable.
If a single bank was getting close to your hypothetical scenario, you'd probably see a forced merger. If the majority was at risk, you'd probably see actions to ensure higher margins (such as using reg Q to impose maximum rates on deposits)