Re:Savings and Loan Crisis 1980–1989
by skybrian on Monday May 01, 2023 @02:34PM
(#35777137)
While it’s true that the future cash flow from the bond hasn’t changed, it is quite literally worth less money now, because better investments are available.
For a bank, these better investments are available to its depositors if they leave. The bank’s borrowing costs have gone up (or will soon) and that’s the difference between profits and losses. The losses will happen sometime (unless interest rates go down again), but when they get recognized is a matter of accounting.
So the bonds were risky, as is any fixed-income investment when your borrowing costs are variable. (Though it’s clearly not as bad a loss as it would be if the bonds defaulted.)
For a bank, these better investments are available to its depositors if they leave. The bank’s borrowing costs have gone up (or will soon) and that’s the difference between profits and losses. The losses will happen sometime (unless interest rates go down again), but when they get recognized is a matter of accounting.
So the bonds were risky, as is any fixed-income investment when your borrowing costs are variable. (Though it’s clearly not as bad a loss as it would be if the bonds defaulted.)