What’s crazy to me is the fed hasn’t been raising rates out of the blue. What the fuck was this bank doing the last two years during every raise? They should have been rebalancing.
I think what probably happened is that, for whatever reason (hubris, incompetence, some bull thesis) they didn’t sell their HTM assets during interest rate increases until it got to a point that taking a loss on them would have forced them to recalculate their reserves such that they were lower than deposits (ie insolvent). Technically they were allowed to do this because they get to count the maturity price as reserves rather than the market price. Selling at a loss at any point would have fixed the problem but force them to lower their reserve calculations and realize a loss.
Once their HTM assets’ market price fell enough that rebalancing would force them to admit to insolvency by recomputing their reserves, they literally could not do anything with them except hold and pray that they make it, which may have just made things worse. Who knows how long they’d really been underwater
Say they have 90B deposits and 100B in long term treasuries
Once that 100B falls to 95B due to interest rate hikes they could sell them all and buy 95B of short term treasuries instead, insulating them from any further rate hikes
Once their HTM assets’ market price fell enough that rebalancing would force them to admit to insolvency by recomputing their reserves, they literally could not do anything with them except hold and pray that they make it, which may have just made things worse. Who knows how long they’d really been underwater