Re:How deep is the rot in America’s banking industry?
by tripletao on Friday March 17, 2023 @12:40AM
(#35193206)
You're conflating two reasons why an asset might be worth less now, but more later:
1. Illiquidity. For example, there might be few people anywhere in the world with the expertise to accurately value some weird loan to a startup. If those prospective buyers are busy or undercapitalized, then the market may become inefficient, with best bids well below FMV. If we wait for those expert buyers to research the startup's credit risk, to raise more money themselves, etc., then the bids will eventually come back up to FMV. This is the classic "It's a Wonderful Life" style bank run, and was an important dynamic in 2008.
2. Time value of money. Assuming positive interest rates, a dollar later is worth less than a dollar now. When interest rates increase, the NPV of a future cash flow decreases, so the FMV of the corresponding asset decreases. This isn't a market inefficiency; if you assume that money is lent at interest and no riskless arbitrage opportunities exist, then it's just how money works.
The SVB's problem was #2. There's a liquid and orderly market for their assets, trading at prices close to those predicted by a simple NPV calculation; that price is just lower than the SVB wished. Hold-to-maturity accounting allowed them to ignore that, but that didn't change the economic reality.
1. Illiquidity. For example, there might be few people anywhere in the world with the expertise to accurately value some weird loan to a startup. If those prospective buyers are busy or undercapitalized, then the market may become inefficient, with best bids well below FMV. If we wait for those expert buyers to research the startup's credit risk, to raise more money themselves, etc., then the bids will eventually come back up to FMV. This is the classic "It's a Wonderful Life" style bank run, and was an important dynamic in 2008.
2. Time value of money. Assuming positive interest rates, a dollar later is worth less than a dollar now. When interest rates increase, the NPV of a future cash flow decreases, so the FMV of the corresponding asset decreases. This isn't a market inefficiency; if you assume that money is lent at interest and no riskless arbitrage opportunities exist, then it's just how money works.
The SVB's problem was #2. There's a liquid and orderly market for their assets, trading at prices close to those predicted by a simple NPV calculation; that price is just lower than the SVB wished. Hold-to-maturity accounting allowed them to ignore that, but that didn't change the economic reality.