Why did Charities Aid Foundation CAF Bank's bond portfolio experience paper losses, and how did thei

CAF Bank, which serves over 14,000 charities, faced significant paper losses on its bond portfolio, with the value of its bond holdings being £33.4 million lower than their book value as of April 30. This situation arose due to falling bond valuations, which has been a concern for financial institutions as interest rates rise. However, CAF Bank's unique approach to managing its investments played a crucial role in its resilience during this period of market volatility.

One key aspect of CAF Bank's approach is its commitment to holding bonds until maturity. This means that while the unrealized losses existed, they would only be crystallized if the bank chose to sell the bonds prematurely, which is unlikely unless faced with a liquidity crunch. This strategy contrasts with the situation faced by California-based Silicon Valley Bank (SVB), which experienced a similar bond-related issue. SVB did not have sufficient hedging in place and had not held all of its bonds until maturity, leading to a precarious position as customers withdrew their deposits and the bank struggled to raise capital.

CAF Bank's financial conservative stance and strong balance sheet further contributed to its resilience. The bank's CEO, Alison Taylor, emphasized that their focus on supporting small and medium-sized charities allowed them to be cautious in balance sheet management. This mixed motive, combining profit generation and charitable support, enabled them to prioritize stability over maximizing profits. Despite the paper losses, the bank's overall capital position remained robust, and it even attracted net inflows following the disclosure of its situation.

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