“Liquidity” vs “solvency” in bank runs
and some notes on Silicon Valley Bank
Originally posted to LessWrong.
epistemic status: Reference post, then some evidenced speculation about emerging current events (as of 2023-03-12 morning).
A "liquidity" crisis
There's one kind of "bank run" where the story, in stylized terms, starts like this:
- A bank opens up and offers 4%/ann interest on customer deposits.
- 100 people each deposit $75 to the bank.
- The bank uses $7,500 to buy government debt that will pay back $10,000 in five years. Let's call this "$10,000-par of Treasury notes", and call that a 5%/ann interest rate for simplicity. (Normally, government debt pays off a bit every month and then a large amount at the end, but that's just the same thing as having a portfolio of single-payout (or "zero coupon") notes with different sizes and maturity dates, and the single-payout notes are easier to think about, so I'm going to use them