The not-so-hidden risks of 'hidden-to-maturity' accounting: on depositor runs and bank resilience

Zachary Feinstein, Grzegorz Halaj and Andreas Sojmark

Papers from arXiv.org

Abstract: We introduce a simple model of depositor runs to capture run risks at financial institutions based on their balance sheet composition. Specifically, we consider a reduced potential to raise capital from liquidity buffers under stress, during a stylized run driven by depositor scrutiny and further fueled by fire sales in response to withdrawals. The setup is inspired by the Silicon Valley Bank meltdown in March 2023 and concerns about the role of held-to-maturity portfolios. In particular, we apply our model to show the build-up of balance sheet vulnerabilities at Silicon Valley Bank before its default. More generally, the model may serve as a tool for analyzing which characteristics of the balance sheet are critical for banking system regulators to adequately assess run risk and resilience. Furthermore, we extend the model to include a tractable optimization problem which addresses the designation of held-to-maturity assets and provides a simple approach to quantifying banks' ability to hold those assets without resorting to remarking. To illustrate this framework, we calibrate the parameters to Silicon Valley Bank's balance sheet data and examine the bank's funding risk and implied risk tolerance in the years 2020--22 leading up to its collapse.

Date: 2024-07, Revised 2026-08
New Economics Papers: this item is included in nep-acc, nep-ban and nep-rmg
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