I think it would cover interest rate risk because an increase in rates causes bond value to decrease, implying the bonds SVB held lose value and they would not be able to cover capital.

And if they have to value it appropriately every quarter, the issue likely would have been seen earlier and maybe they could have changed their positions as the rates were rising instead of being in a hole and trying to do it all at once.

At least I think that’s how the regulations might have worked here.

Look at Basel III and their liquidity tests. TLDR: bonds 5+ years are considered illiquid, and banks which are subject to Basel III (which SVB would be under old rules) must have at least 100% liquidity coverage ratio (which based on SVB's client base would require SVB to hold ~30% in short-term bonds).

Edit: this FT opine summarize the sillyness: https://www.ft.com/content/c95e7708-b903-405d-a017-963844eb3... (paywall bypass: http://archive.today/2023.03.11-083455/https://www.ft.com/co...)

The requirement to mark-to-market and undergo liquidity tests I think would’ve flagged the interest rate exposure back when SVB started on this path.

> Calculating the amount of a highly liquid asset. In calculating the amount of a highly liquid asset included in the liquidity buffer, the bank holding company must discount the fair market value of the asset to reflect any credit risk and market price volatility of the asset.

The part you quoted seems to be for "liquidity buffer" (ie. cash on hand for withdraws), not for the overall balance sheet.

>A bank holding company subject to this subpart must maintain a liquidity buffer that is sufficient to meet the projected net stressed cash-flow need over the 30-day planning horizon of a liquidity stress test conducted in accordance with paragraph (a) of this section under each scenario set forth in paragraph (a)(3)(i) through (iii) of this section.