This thread has some implied answers to what is happening over at BlockFi, where I’d been confused as to whether they were solvent or not.
There are two forms of solvency / insolvency.
One is whether your balance sheet shows more assets than liabilities. That’s the most basic critical measure for a financial institution.
The other is whether you can pay liabilities *as they come due.*
One is whether your balance sheet shows more assets than liabilities. That’s the most basic critical measure for a financial institution.
The other is whether you can pay liabilities *as they come due.*
You could be balance sheet solvent but cash flow insolvent by e.g. borrowing short and lending long, then having customers withdraw their deposits (your short-term funding) in a bank-run style scenario, where your long-dated loans (assets) would not match those withdrawals.
This is, unfortunately, a very common way for banks to fail historically, and with some more commentary on their losses to 3AC and reading between the lines, I’m pretty confident that they faced a liquidity crisis threatening cash flow insolvency.
Note that internal sentiment seems to be “We did everything right. It was everyone else in the industry who effed up. If you were grading on a curve we deserve at least a B!”
This is why banking crises become crises; systemic risk and contagion turns B into Bankrupt.
This is why banking crises become crises; systemic risk and contagion turns B into Bankrupt.
A frequent feature of them, by the way, is that banks which are insolvent have to sell their assets at fire sale prices, which tends to decrease the price of correlated assets *held by other banks*, which can blow up those banks “without them having done anything wrong.”
When this happens outgoing bank CEOs typically blame extreme and unanticipable market conditions and regulators facepalm and again tighten screws on allowable bank growth rates (plus various other policy levers).
That’s not widely appreciated outside of the community of practice, by the way: banks are “artificially” limited in growth rate because regulators assume that growth rates outside their norms imply someone is outside the risk envelope somewhere.
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