Banks Failing: Is It 2008 Again?

[S209]

ELI5 please. What's mark, and mark to market?

To my understanding, marking an asset to market is the act of reevaluating (marking) the worth of an asset by current market value (market).

An example: I buy a 5 percent stake in a billion dollar company for 50 million dollars. On my books, this asset remains valued at 50 million even if the company’s stock went up or down significantly until I “mark to market”, or adjust the value to market price. If the company I invested in plummets to 200 million dollars, I can have an asset worth only 10 million dollars but my books claim I still have a 50 million dollar asset.

Some people here are arguing that it should be federally required for FDIC banks to adjust their holdings’ values periodically (by “marking to market”) so as to provide a clearer picture of financial health and avoid the risk associated with many losses adding up that are being unaccounted for because they are still being valued at the price they were at which they were purchased. Others maintain that is unreasonable especially with banks who invest heavily in fluctuating securities with fairly stable maturities (assets such as bonds that go up and down in value until they mature at a set time at a set price).

The marking to market of some assets for SVB caused an on-book loss of 1.8B (of course the loss had occurred earlier, we just didn’t know about it) which helped trigger the run on the bank.

[CountValentine]

There are many good points being made. Now both sides need to come up the best of both. Let's see how that works out.
Cue any major/divisive issue. 

[Abey]

To my understanding, marking an asset to market is the act of reevaluating (marking) the worth of an asset by current market value (market).

An example: I buy a 5 percent stake in a billion dollar company for 50 million dollars. On my books, this asset remains valued at 50 million even if the company’s stock went up or down significantly until I “mark to market”, or adjust the value to market price. If the company I invested in plummets to 200 million dollars, I can have an asset worth only 10 million dollars but my books claim I still have a 50 million dollar asset.

Some people here are arguing that it should be federally required for FDIC banks to adjust their holdings’ values periodically (by “marking to market”) so as to provide a clearer picture of financial health and avoid the risk associated with many losses adding up that are being unaccounted for because they are still being valued at the price they were at which they were purchased. Others maintain that is unreasonable especially with banks who invest heavily in fluctuating securities with fairly stable maturities (assets such as bonds that go up and down in value until they mature at a set time at a set price).

The marking to market of some assets for SVB caused an on-book loss of 1.8B (of course the loss had occurred earlier, we just didn’t know about it) which helped trigger the run on the bank.

Great explainer !
And I might add I don’t think you need to mark every asset and am open to different suggestions but how does 7 B in venture debt allow you to stay within financial health limits ? That is not worth a fraction of that but there is no incentives to mark it down.

[aygart]

You are never going to prevent banks from failing in times of greater stress. Some banks are simply not managed well and can make it while the going is good but will fail once the going gets tough.

[S209]

You are never going to prevent banks from failing in times of greater stress. Some banks are simply not managed well and can make it while the going is good but will fail once the going gets tough.

+1

This is true of all other business types as well. Anyone can succeed while it’s easy and a high tide is raising all ships but when harder times come only strong stable businesses stay afloat. Still, regulation can possibly help prevent larger collapses.

[Abey]

You are never going to prevent banks from failing in times of greater stress. Some banks are simply not managed well and can make it while the going is good but will fail once the going gets tough.

True but had it all been in the open it would’ve forced the execs to act a long time ago and slowly damaged them on the way or forced to sell, raise liquidity etc. The way it’s now is that no one knows till it’s too late and the bank run is happening and your entire baking system a heartbeat away from collapse.
We have no problem with banks failing, we have a problem with sudden shock and fear inducing failures.

[haltkup]

1. you are conveniently leaving off the far riskier assets which were def not worth their book value although that wasn’t what caused the crash so let’s move on.

2.I am not assuming, you just saw how they weren’t able to get more and there’s a reason why, Time = Money. I get your point that liquid doesn’t equal value but it is not completely unrelated either and mark their value would shore up balance sheet until that time risk passes and real value realized.

3. I gave suggestion to protect from sudden shifts of volatility but it is clear to me that should the value go down for an extended period of time you should be forced to report that and shore up you balance sheet.

Your ability to predict liquidity needs are only informed by past history and I don’t see how you predict the next crunch, it’s not about % it’s about predicting a million factors that will force you to show up with cash

I don’t see how you say protect from volatility yet all it does is roll the ball further down until it turns into an avalanche.

1) not in scope of conversation, Risky assets are valued at fair value and any institution worth its weight would only have minimal exposure to those assets (% of assets/equity/revenue etc)
2) time =money, it’s the future value created(par will pay 110 rather than 105) that is being discounted not current value where a binding contract exists to pay par value.. you want that uncontrolled market dynamics of discounting rate to impact sound risk management and investments due diligence. (in extreme example, look at some banks like Schwab that lost significant MV to bounce back today, what is the true MV?)
3) don’t agree, even if for extended period, it will amortize back. However provisions are in place to mark down for expected losses (look up CECL)
4) you just dismissed the entire actuarial/data science/predictive modeling industry by saying past history can’t be used for setting requirements for events that never happened 

[WayBackMachine]

https://hefkervelt.blogspot.com/2023/03/understanding-collapse-of-silicon.html#more

[Abey]

1) not in scope of conversation, Risky assets are valued at fair value and any institution worth its weight would only have minimal exposure to those assets (% of assets/equity/revenue etc)
2) time =money, it’s the future value created(par will pay 110 rather than 105) that is being discounted not current value where a binding contract exists to pay par value.. you want that uncontrolled market dynamics of discounting rate to impact sound risk management and investments due diligence. (in extreme example, look at some banks like Schwab that lost significant MV to bounce back today, what is the true MV?)
3) don’t agree, even if for extended period, it will amortize back. However provisions are in place to mark down for expected losses (look up CECL)
4) you just dismissed the entire actuarial/data science/predictive modeling industry by saying past history can’t be used for setting requirements for events that never happened 

1. Is SVB an institution worth its weight? It was until a few days ago. The honor system doesn’t work, there isn’t an incentive. No matter the size, a small snowflake starts an avalanche.

2.The sound risk management failed to predict the time risk mismatch which is basic in risk management (re Schwab I suggested a time buffer, if Schwab stays down for 2 months do you still think we can value it based on the “analyst “ price ? ) Values need to more closely reflect real market value no matter how “safe “ they are.
4. The entire predictive industry + rating industry (ROTFL Moody’s cutting bank ratings today)  failed to predict this so obviously their methods need rethinking.
After ‘08 we though better liquidity levels will prevent systemic risk and it would’ve perhaps prevented the ‘08 crisis but didn’t prevent this one and your idea of further raising % will probably not prevent the next crunch. Which is why I say we need more honesty and realistic insight on these balance sheets.

My suggestions are open for adjustments to banks needs but to continue down this road and not change the opacity in balance sheets will probably bring a different unpredictable failure in our banks sooner or later


We need a poll @Abey or @holtkup for treasury secretary 🤣🤣🤣 ?

[haltkup]

Conversation is starting to go in circles so I may need to wind it down…
1) svb was pretty bad at risk management (did not have a cro any hedging and they certainly had no sophistication in their modeling etc) and yes I am aware of companies that made mint on cds picked up last year. (Not my institution we don’t play in the field and I was not aware), and yes your suggestion of MTM would not help them, only bring about the demise quicker
2)some truth hence ALM etc, scwab is not a good example because it’s equity so it’s MTM but it’s paper should not have to be marked down even if for extended period of time unless default probs increases, hence CECL (oh I agree with your time buffer, “till maturity” if it has no risk of default)
4) this is so off base, don’t know where to start. 
Finally the system is “still” working, we are in the midst of the worst bond market rout in U.S. history (all fed induced) and the losses have been contained because we do not use MTM. (Fed may be pushing envelope too much and we may get systimatic risk impacting other sectors, unless you can suggest a better way to remove the excess money supply)Your method would create so much more havoc and we would have seen hundreds of defaults throughout the entire financial ecosystem already (bank’s insurance pension funds etc)

[CountValentine]

[Abey]

Conversation is starting to go in circles so I may need to wind it down…
1) svb was pretty bad at risk management (did not have a cro any hedging and they certainly had no sophistication in their modeling etc) and yes I am aware of companies that made mint on cds picked up last year. (Not my institution we don’t play in the field and I was not aware), and yes your suggestion of MTM would not help them, only bring about the demise quicker
2)some truth hence ALM etc, scwab is not a good example because it’s equity so it’s MTM but it’s paper should not have to be marked down even if for extended period of time unless default probs increases, hence CECL (oh I agree with your time buffer, “till maturity” if it has no risk of default)
4) this is so off base, don’t know where to start. 
Finally the system is “still” working, we are in the midst of the worst bond market rout in U.S. history (all fed induced) and the losses have been contained because we do not use MTM. (Fed may be pushing envelope too much and we may get systimatic risk impacting other sectors, unless you can suggest a better way to remove the excess money supply)Your method would create so much more havoc and we would have seen hundreds of defaults throughout the entire financial ecosystem already (bank’s insurance pension funds etc)

Agree on circularity going on here… it’s good to hash out different opinions . would it bring the demise slowly into view instead of all at once ? Can we know what type of institution you work at?

[haltkup]

Rather not get in to it. I try to stay away from online conversations, but did engage here because it has been on topic, civil, and hopefully educational for all of us. (I have found it helpful)
I think that yes but not worth it for the stability of markets. Think about an example the other way, when rates drop, it makes the balance sheet look great, but at the same time no true gains unless sold but reinvestment yields tank which really impact cash flows going forward. You are safe from stress scenario at the moment but way more at risk in the future. (Side point, I believe that was what really happened to svb rates dropped making these start ups (and other sectors) which are based on discounted cash flows look like they are valued correctly but in truth they were way overvalued. As rates increased these companies could not justify valuations, hence funding dried up therefore significant cash burn and no new deposits)

[Sam 77]

https://www.zerohedge.com/news/2023-03-14/it-2008-all-over-again

[aygart]

https://www.zerohedge.com/news/2023-03-14/it-2008-all-over-again

Basically the sky is falling and buy my newsletter

[Abey]

Rather not get in to it. I try to stay away from online conversations, but did engage here because it has been on topic, civil, and hopefully educational for all of us. (I have found it helpful)
I think that yes but not worth it for the stability of markets. Think about an example the other way, when rates drop, it makes the balance sheet look great, but at the same time no true gains unless sold but reinvestment yields tank which really impact cash flows going forward. You are safe from stress scenario at the moment but way more at risk in the future. (Side point, I believe that was what really happened to svb rates dropped making these start ups (and other sectors) which are based on discounted cash flows look like they are valued correctly but in truth they were way overvalued. As rates increased these companies could not justify valuations, hence funding dried up therefore significant cash burn and no new deposits)

I have found it super enlightening as well ! I don't see why you say the risk is not worth it (what are those risks ? ), we just witnessed the near collapse of the system a little capping of their yield upside wont kill them and we can buffer and classify different assets etc we don't always need to peg to last sale but somewhat closer to real market value. To your side point that is exactly what I'm trying to point out yesterday it was MBS today its VC's with huge cash inflows you wont predict the next nail in the road but a realistic view of the balance sheet will bring these issues slowly to forth giving you plenty of time and incentive to correct them. Great discussion @haltkup

[Abey]

I have found it super enlightening as well ! I don't see why you say the risk is not worth it (what are those risks ? ), we just witnessed the near collapse of the system a little capping of their yield upside wont kill them and we can buffer and classify different assets etc we don't always need to peg to last sale but somewhat closer to real market value. To your side point that is exactly what I'm trying to point out yesterday it was MBS today its VC's with huge cash inflows you wont predict the next nail in the road but a realistic view of the balance sheet will bring these issues slowly to forth giving you plenty of time and incentive to correct them. Great discussion @haltkup

And one last thing, as you see market action today the problem is the assets not the proverbial nail in the road who happens to pop their illusion of time safety and liquidity. Value the assets= remove the illusion.

[CountValentine]

What is not talked about is should the depositors do their due diligence when choosing where to deposit their money?

[zh cohen]

Should the depositors do their due diligence when choosing where to deposit their money?

I believe that major companies, who are depositing millions of dollars, should. I don't think your average Joe who is opening a checking account should need to (which is the point of the $250k FDIC insurance).

[ExGingi]

I believe that major companies, who are depositing millions of dollars, should. I don't think your average Joe who is opening a checking account should need to (which is the point of the $250k FDIC insurance).

I totally disagree. Non-interest-bearing [business] accounts should have unlimited protection. It's essential for trust in the system for a proper functioning economy. It's ridiculous to burden businesses with the duty of probing and investigating the banks.