On Friday, March 10, 2023, the Federal Home Loan Bank of San Francisco received a request from Silicon Valley Bank for $20 billion in advances. The next morning the bank was in receivership. The treasurer's pre-stress liquidity buffer had assumed deposit run-off rates calibrated on 2008 data; actual outflows were 4-5x faster, accelerated by mobile banking and viral social media. Stress-test assumptions are not academic: they are the live wire between solvency and resolution.
A bank's securities portfolio answers two competing demands. The liquidity portion holds short-duration, high-credit-quality assets that can be sold or repo'd at par on a bad day: Treasury bills, agency mortgage-backed security (MBS), central-bank reserves. The earnings portion reaches for yield with longer corporates, municipal bonds, and structured products. The mix depends on the yield curve, the bank's loan book duration, regulatory liquidity ratios, and management's appetite for unrealized P&L volatility.
Money-market instruments (Treasury bills, commercial paper, certificates of deposit, federal funds sold, repos) sit in the liquidity bucket.
Common mistakes
- Treating end-of-day liquidity as the binding constraint. Daily-frequency reports show net positions at 4 PM. Intraday throughput risk is invisible on those reports. A bank can end every day with positive reserves and still fail an 11 AM payment because a counterparty's incoming payment was delayed.
- Using historical deposit run-off rates without checking the deposit base. SVB's 2008-calibrated retail run-off assumptions failed in 2023 because the deposit base was tech firms with mobile banking, not 2008 mass-market retail. Trap: a question gives you 2008 stress-test parameters for a 2024 bank with high-net-worth or institutional depositors.
- Forgetting that HTM securities are not a liquidity source. Selling one HTM bond reclassifies the entire HTM book to AFS, forcing mark-to-market across the portfolio. SVB had $90B HTM with $15B unrealized loss; that pool was a liquidity asset only on paper.
Bottom line
- Investment function trades liquidity reserve (short Treasuries, agencies, HQLA) against earnings supplement (longer corporates, MBS, munis); HTM classification freezes the earnings book and selling one HTM bond reclassifies the entire pool to AFS at mark-to-market.
- Reserve management balances liquidity supply (deposits, maturing securities, repo) against demand (loan demand, deposit run-off, drawn lines) via three diagnostics: sources-and-uses, structure-of-funds, and liquidity indicators.
- Intraday liquidity is throughput risk: peak usage often runs 3-5x end-of-day and Fedwire, CHAPS, and CHIPS settle gross, so banks need real-time funds-in/funds-out monitoring (BIS 2013 tools, seven dimensions).
- Liquidity stress testing runs idiosyncratic, market-wide, and combined scenarios over 7-365-day horizons; behavioral assumptions on deposit run-off, contingent commitments, and counterparty pulls drive the result.
Exam shortcut
When a question asks for net stressed outflow, build a table. Run-off rate × deposit category for each, sum, add contingent drawdowns, subtract reliable inflows. The answer choices often differ on whether contingent drawdowns are included or whether HTM securities are netted as inflows. Both are traps; HTM does not net.
The full lesson (about 3,504 words, 23 min read) adds 2 worked examples, all 6 common mistakes, a self-check, free in the app.
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