People are talking past each other. It is all about context.
To a bank, cash in the form of deposits is a liability. The bank does not own this cash. A bank fails when it cannot repay the amount owed in deposits when demanded. In contrast, the cash owned by the bank obtained through its financial operations (loans and investments) is an asset.
The irony here is there is not enough of a liability.
chuckle
Thank you.
I know you are joking, but actually what SVB had was too much of the wrong kind of liability. SVB catered to clients with deposits that were much larger than the insured $250K, and so were more likely to panic at rumors of a bank failure. They also catered to startups who because economic activity slowed during the pandemic had to withdraw a lot of money.
SVB was solvent as long as they didn’t have to sell their bonds before maturity. That’s why regulators didn’t act earlier, or so I’ve heard. What SVB lacked was sufficient liquidity to cover the larger than expected withdrawals resulting from the above.
I am no accountant but I believe that by stepping in early, the regulators avoided the need to sell most of the bonds before maturity at a loss. The government is providing funds to meet the needs of the depositors and should get much of that back when the bonds mature.
While this is all true, these only happened near the end. A year ago, they were still growing deposits like crazy. The real issue that precipitated the whole mess is that they invested a huge amount of those deposits into 7 to 10 year duration money (mostly MBS and some long-term treasuries). Let’s say they were getting 2 or 3 or maybe 3.5 percent on that money (which was far better than short-term rates at the time) Then interest rates began to rise. At first it wasn’t a problem, their depositors were content getting 1% on their money even if prevailing rates were 1.5% or 2%. But then, as the months of 2022 passed, rates went higher, to 3% … to 4% … and then came a point at which the depositors couldn’t take it anymore. I mean, you have $100M in the bank (or even Roku with $500M in the bank!), earning 1%, maybe 2%, so call it $2M a year. But then you see short-term T-bills at 4%, and various money markets at 4%, and other banks offering 4%, and you can’t really leave that extra $2M on the table … you go to SVB and tell them “hey, you need to offer competitive rates”, and SVB is in a bind because all the money they invested is yielding only 2% or 3%. If they offer 4%, they will lose lots of money. So they finally decide (in 2023 when rates continued their rise to 5%, and a lot of deposits started leaving) to raise equity. But they botch the equity raise and make the failure public … and then all hell breaks loose with some VCs saying to yank the money … and that’s when the bank run started.
Yes, we are talking past each other.
I do admit that I really hate it when people try to redefine commonly used terms. “Cash is a liability” is one of those things that gets under my skin.
The reality is a bit more complicated.
For a bank, both too much cash and too little cash are problems.
Too much cash has a negative impact on the bank’s earnings. Too little cash leaves the bank vulnerable to a run. Bank executives need to balance these competing interests.
In looking yet again at the details of SVB’s financial statements, you can see the seeds of a problem all the way back to Dec 2021. At that point, their cash on hand was 7.7% of their deposits. That was roughly unchanged at 8.0% of deposits at the end of 2022.
By comparison Bank of America (a large bank I picked at random) had 16.8% and 11.9%, respectively.
There’s another comparison to be made in investments held to maturity. SVB had 51% of deposits invested in this category at the end of 2021, and 52% at the end of 2022. B of A had 33% and 33%, respectively.
You generally get a higher interest rate when you invest in longer dated bonds. That is the normal yield curve. And a higher interest rate on your bonds gives banks more profit.
Both of these metrics indicate that SVB was pushing profits pretty hard, while B of A was run a bit more conservatively over that time frame.
–Peter
Not redefined. Disconnect between ownership; cash from deposits, or from the earnings of the bank.
Deposits are a liability on a bank balance sheet:
You originally said that cash is a liability. Cash reserves are not a liability. You were conflating cash reserves and deposits. Words have meanings and you are disseminating.
Well, if cash is a liability, deposits are assets. It is those deposits that make money for the bank. If it makes money, that’s an asset, right?
–Peter
This sentence is hilarious. I know it’s an autocorrect issue, but still … it’s funny.
(it was probably supposed to be dissembling)
Doesn’t matter Pops5 knows his accounting.
The malapropism happens orally, too.
Pete