Concerning the issue of OTTI (It hurts like a UTI; but stands for “other than temporary impairment”): I believe FASB will revisit this concept because of the unique interest rate transition that we are in (see other discussions).

Acutely relevant to this discussion, though, is the topic of uninsured deposits, which ran and triggered SIVB’s liquidity crisis.

Among the requirements of ASC 320 is a quarterly evaluation of underwater debt securities even if you intend to hold them through the expected recovery of value. Even with this intent, “the entity must next determine whether it is more likely than not that it will be required to sell the impaired debt security before recovery of its amortized cost basis.”

To be clear, the expected recovery of MBS with underling coupons of around 2.5% is very long.

Any bank with more than 100% of liquid assets in uninsured deposits has to entertain the possibility (Fed facility notwithstanding) that it is “likely” that they will need to sell them before they recover. If so, there are a few banks that in reality are no longer “well capitalized” under “Prompt Corrective Action” definitions.

Market data as of 3/21/2023