> mark to market value of their assets should be greater than liabilities which makes them solvent. SVB was insolvent
SVB wasn’t insolvent if they held their assets to maturity though. The issue was that the market to market vale was significantly lower than the hold to maturity value.
The difference was still a liquidity issue. It was magnified by the fact that the market value of their assets was dropping precipitously.
It's a solvency issue, not a liquidity issue, and HTM accounting does not reflect economic reality. Let's say that I have $1000 cash, but owe $1200 due tomorrow. I assume you'll agree I'm insolvent.
I can take my cash and purchase a 10-year zero-coupon Treasury paying ~4%; so my $1000 now buys me a payment of 1000*(1.04)^10 = $1480 in ten years. Would you say that I'm solvent now?
NPV is what matters for solvency; a cash flow later is worth less than the same cash flow now. Interest rates were ~zero for long enough that everyone seems to have forgotten this, but I guess Peter Thiel didn't.
I do agree that so far, the SVB's HTM accounting seems to have been entirely compliant. Indeed, I think those rules are the root cause of the failure--if the SVB had been forced to mark to market, then they'd have recognized the loss earlier, causing them to raise equity (or wind down less abruptly) before the hole got so deep.
Regulators can draft whatever they want, but if their rules depart too much from economic reality then bad stuff tends to happen. I think that's what happened here.
SVB wasn’t insolvent if they held their assets to maturity though. The issue was that the market to market vale was significantly lower than the hold to maturity value.
The difference was still a liquidity issue. It was magnified by the fact that the market value of their assets was dropping precipitously.