[bjacokes]

You're saying that if a bank paid $100m for low-yielding bonds in 2021 which are now worth $80m, those bonds should be valued at $100m on the bank's balance sheet. What if a different bank pays $80m today for the same bonds? Should they be able to show an immediate $20m increase in their book value because those bonds are "worth $100m"?

[flakeoil]

This thread with NPV is confusing the liquidity issue with the profit of the bond investment. The issue for this bank was not if this was a good or bad investment in the long run (these bonds might very well turn out to be a good investment the day they are paid back on), the issue here is that the bank's customers wanted to withdraw their money and there was not enough liquidity/cash in the bank so they had to sell something and the best/only thing they could sell was the bonds which right now were worth only $80m and the customer wanted their $100m.

[prewett]

The problem is that they are worth $100m if held to maturity (you get your $100m back, ergo their value is $100m if held to maturity), but the current price is $80m, because who wants to buy a bond at 0% when you could get around 5% at the next Treasury auction.

[bjacokes]

They're worth $80m today, and then maybe $82m next year, $84m the year after, and so on until they're worth $100m at maturity. (Obviously these numbers depend on current and future interest rates, and you'd be earning some interest in the meantime).

As I was trying to point out to the parent commenter, conflating "$100m today" with "$100m at maturity" leads to clear contradictions, like saying that a bank could earn $20m on paper simply by buying bonds trading below par value. Or to put it another way – if bank A holds $100m face value of 10-year bonds yielding 4%, and bank B holds $100m face value of 10-year bonds yielding 2% (but worth, say, $80m at market price), how can you claim that those banks are on equally good footing?

Valuing liquid bonds at par value is pretty clearly a hack to reduce volatility and increase confidence in banks' balance sheets, even if some people in the comments seem to view it as a more logical way of accounting. (Although to be clear, I don't mind companies doing their own fuzzy math as long as they give investors enough information to do proper due diligence. It's similar to the non-GAAP earnings that a lot of tech companies report.)

[s1artibartfast]

>As I was trying to point out to the parent commenter, conflating "$100m today" with "$100m at maturity" leads to clear contradictions, like saying that a bank could earn $20m on paper simply by buying bonds trading below par value. Or to put it another way – if bank A holds $100m face value of 10-year bonds yielding 4%, and bank B holds $100m face value of 10-year bonds yielding 2% (but worth, say, $80m at market price), how can you claim that those banks are on equally good footing?

Equal assets should never be thought to mean equal footing. The banks will show the same number for assets locked up for 10 years, but the banks will also show that they have different returns listed on their finalcial statement for the HTM assets, and different revenue from capital!

You cant and shouldnt expect to bank comparison to be easily reduced to a single measure, or for that measure to tell you something that is captured elsewhere.

It is like expecting an athlete's height to tell you something about their speed or strength.

HTM assets tell you the nominal value of assets they are holding to maturity.

It is not intended to show how much they could raise if they had to liquidate it today. It is not intended to show what that yield is for their bonds.

There are separate line items for that.

If you change the valuation of the bonds to market value, then you lose sight of the mature value of those bonds.

Replacing athlete height with athlete BMI tells you something different.

[mikewarot]

Not only that, but the value could drop even more if an inflationary spiral happens... Bank prime loan rates have been higher than 20% in the past, which means a $100m bond 5 years out could go as low as $33m in value... a 67% haircut!

Clearly, US Treasuries carry risk that's not been accounted for.

[landemva]

> US Treasuries carry risk that's not been accounted for.

US treasury debt is approximately the safest. The risk was that SVB might need cash before the bonds matured. The regulations encouraged SBV to do this. Now the Fed put is re-imagined, and we shuffle on while mumbling 'nobody could have imagined'.

[s1artibartfast]

Yes and yes, if they are allocated for HTM.

If you put cash in a a CD with a 1 year lock in, do you list it at current value or subtract a withdraw penalty.

Do you subtract early withdrawal penalties when calculating the balance in your 401k?

At the end of the day, a list of your asset values is not the same as how much you could liquidate those assets for today.

That would be a list of liquidatable assets.

HTM assets are called out separately on the balance sheet specifically to highlight that they cannot be easily liquidated.