If they have to liquidate their assets (mbs/treasuries) they’ll probably create at least some slippage, moreso in MBS, that may prevent them from recouping their value at current prices. Alternatively they can try to hold to maturity or spread out their selling but that will make depositors illiquid
I don't think that holding to maturity really solves the fundamental problem though. The reason the MBS have lost value is because they have a low coupon compared to what you can get now. To execute the hold to maturity strategy, they would have to pay the depositors interest with the coupons from the MBS.
Under ZIRP, the depositors weren't getting anything, and so making 1.5% on MBS was fine. In the current interest rate environment, depositors won't be satisfied with a zero yield on their deposit accounts, and the MBS don't pay enough to cover it, so either they lose depositors because they're not paying competitive interest, or they take a loss every day because their investments don't cover the cost of the deposits.
Ultimately keeping the bonds on the books as HTM just spreads out the loss over the lifetime of the bonds rather than recognizing it right when interest rates change, but the result is the same.
Oh fully agreed. They fundamentally lost depositors’ money by making bad investments - holding to maturity is just a way to argue that depositors will be made whole. The depositors may as well just be given the bonds/mbs themselves and allowed to hold to maturity or sell them to meet immediate needs.
