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As financial products, rather than bank services, long-term securities like bonds have a sale value that can be (and often is) entirely different from the face value or estimated face value, and the transition from one format to the other can be very expensive. The best-known reasons for a discount over the face value is credit risk, that of the contract not being fully fulfilled (such as for bankruptcy, default, death, etc).
Traditionally, some assets were considered very-close-to-perfect for that sort of risk, for which you'd also get very little interest on them. Patio11 uses "marketable Treasury securities" as an example of something that you can almost always sell with very little slippage as recently as July of last year, with long-term known-good home mortgages just under that. And quite a lot of banks had a lot of this class of product: SVB was higher at ~50-60%, but a lot of very traditional banks have around 20-30%. While these are virtually always going to pay out, their sale value depends on other options.
Almost all of those options are downstream of target rates set by the Federal Reserve. In a variety of complicated ways, the Fed will offer or encourage people to offer loans at certain rates, or tell people that they can get a certain rate of interest for leaving money in their reserve accounts; most normal-people long-term loans face some further >2% (sometimes much more, if your credit sucks or the loan duration is weird) rate above that. If these change rapidly, the sales values of loans from before the change can get weird, because there are often going to be better options for your cash.
Today, someone buying 10-year treasury bonds (uh, 'note') is comparing a 2020 bond at 1.5% (or even 0.6%!), or at 2023 bond at 3.5%-4% (or even a seven-year 2023 bond at those rates). You might still make that first purchase, if only because there aren't infinite stock of the latter. But you're not going to get anywhere near the same offers as you did in 2020, even as the final value of the bond is still the same. And the same goes for non-t-bill loans.
In many cases, this is a pretty big discount now. Banks have to actually mark on their sheets the losses for available-for-sale securities (the brown lines), but they don't have to mark hold-to-maturity ones (the blue lines) unless they have to sell them or anything else in the same portfolio. But from a strict definition of liquidity, both count. And that chart -- from the Fed! -- says that they've lost about 600 billion USD. Not all of that's 'real', in the sense that a lot of the hold-to-maturity stuff (and even a small amount of the available-for-sale stuff) will actually get held to maturity and cashed out at its actual face value, or at least held until the "this cashes out soon" is worth more than the "the rate sucks" bit. But the more people have to sell in the short term, the more 'real' it gets.
Which wouldn't be that bad, except 600 billion is about 1/3rd of the 2 trillion dollars that makes up all equity in the US banking sector period. That's not quite as apples-to-apples comparison, and a lot of it's really localized (again, SVB had nearly twice the exposure as the average bank), and even if all the equity vanished that's the non-depositor money. And if nobody calls the pot, it doesn't real. But it's a big chunk of what's available for day-to-day operations.
Who has lost it? The fed or the entire bond market? That's what I'm confused about.
It's from here, but it's of FDIC-insured organizations, mostly banks.
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