[HN Gopher] Banking in uncertain times
___________________________________________________________________
Banking in uncertain times
Author : tiniuclx
Score : 312 points
Date : 2023-03-15 11:52 UTC (11 hours ago)
(HTM) web link (www.bitsaboutmoney.com)
(TXT) w3m dump (www.bitsaboutmoney.com)
| IntFee588 wrote:
| Not to be conspiratorial, but the situation is much worse than
| the fed is letting on. "Trying to forestall" might be optimistic.
|
| https://www.bloomberg.com/news/articles/2023-03-12/us-moves-...
|
| https://archive.is/FMuYW (archive)
|
| Think of what this means, and how precarious a position the
| nation's banks must be in for the fed to take actions like this.
| We needed to reimplement Glass-Steagall yesterday.
| O__________O wrote:
| Mentioned in the article, Chart 7 from an FDIC report [1] is
| concerning, specifically that currently there are "unrealized
| losses on available-for-sale and held-to-maturity securities
| totaled $620 billion" -- which appears to be not only a recent
| trend, but roughly 10x more than any point in recent history,
| including during 2008.
|
| Is anyone able to provide more context and clarify how
| significant these losses are to the US banking system beyond
| what's covered in the article?
|
| [1]
| https://www.fdic.gov/news/speeches/2023/spfeb2823.html?ref=b...
|
| _________________
|
| EDIT: For the unfamiliar, OP article's author is a notable user
| on HN:
|
| https://news.ycombinator.com/user?id=patio11
| airstrike wrote:
| these are unrealized losses so not necessarily significant if
| just held to maturity or sold when prices are less punishing
|
| they can be an issue if, say, all your depositors decide to
| make huge withdrawals and the bank's immediate cash needs
| balloon, or if they have specific payments they need to make in
| the near term which would force those "available for sale"
| securities to be actually sold
|
| none of this is an inevitable risk. there are ways to hedge
| against rising rates. the current rate hikes, although historic
| in their pace, have also long been anticipated by the market
| and telegraphed by the Fed. that bank administrators failed to
| plan accordingly is honestly baffling
| O__________O wrote:
| Possible I am missing something, but your response appears to
| assume the securities will recover their loses prior to being
| sold and/or that these unrealized losses do become actual
| losses, should banks need to sell securities to meet
| liquidity needs.
|
| Without additional context, seems like wishful thinking to
| believe such losses will ever be recovered. In fact, while I
| might be wrong, those unrealized losses assume current market
| conditions; meaning they do not represent the actual total
| assets at potentially at risk; might be wrong about this.
|
| Am I missing something?
| hn_throwaway_99 wrote:
| > Am I missing something?
|
| Yes. As bonds get closer to their maturity date, the
| discount one would have to sell them at to garner a higher
| prevailing interest rate goes away. That is, the nominal
| loss "naturally" goes away over time. The article kind of
| explains this.
| delfinom wrote:
| They are unrealized losses if the assets are sold at
| market. They are not losses if the assets are held to
| maturity.
| kortilla wrote:
| They are bonds. Unless they default they will eventually
| reach maturity and pay out the original gain.
|
| The problem is that might be a 20% gain 10 years from now,
| so nobody will be willing to buy that bond off of you for
| the price you paid since they can 40% on new 10 year bonds.
|
| The only time a bond price decline is concerning is if you
| have to sell it rather than holding to maturity.
| mikeyouse wrote:
| The point with bonds is that they'll "recover their losses"
| if you hold them to maturity.
|
| Think about three time frames:
|
| Year 0: I buy a new-issue $100 bond paying 1.5% interest
| for $100. I will receive $1.50 every year for 5 years and
| then get $100 back.
|
| Year 3: Interest rates have increased pretty dramatically,
| so 2-year bonds are now paying 3% interest. So for someone
| 'shopping' for a bond that matures in 2 more years, they
| can buy a new-issue one paying 3% or they could buy my
| 5-year with 2-years remaining that is only paying 1.5%.
| Obviously they would buy the new-issue unless I offer a
| substantial price discount. So if I "mark to market" my
| bond, I would have to sell it for something like $85 to be
| equivalent to the new-issue debt. My bond is still paying
| 1.5% and will still pay $100 when it matures, but it's much
| less valuable since the interest stream is smaller. I don't
| sell my bond because I don't want to take the loss.
|
| Year 5: My bond matures and I receive $100 along with the
| final interest payment.
|
| We're talking about step 2 above -- the losses are only
| realized if you sell the instrument, so you don't need to
| "recover" any losses, the underlying debt is still as
| likely to pay out as they were before, it's just a debt
| maturity question.
| airstrike wrote:
| Let's simplify and think about it like owning a stock.
| Maybe you bought it at $100 and it's now worth $80. If you
| were _forced_ to sell it today, you would have a $20 loss.
| But you can wait for it to trade up.
|
| Bonds have the added benefit of a guaranteed principal at
| maturity. So if you buy a bond with $100 face value, it
| _will_ pay that to you at maturity plus some coupon (say,
| 4%) between now and then. For the sake of simplicity, let
| 's assume the bond was issued at par (meaning not at a
| discount or premium), so you paid $100 for that $100 face
| value
|
| As time goes by and interests rate fluctuate, the price of
| that bond in the open market will also vary. When interest
| rates go up, prices go down and yields go up, because
| investors demand a greater return (higher yield) and since
| the "4%" is hardcoded into the bond, the only way to give
| additional yield is by trading your otherwise $100 bond
| for, say, $98.
| bjacokes wrote:
| In 2008 the Fed was _decreasing_ interest rates, which helped
| support asset prices. Banks held a lot of bad loans which were
| worth much less than their balance sheets showed. Both of these
| factors could have caused the unrealized losses in 2008 to look
| somewhat small, but the high leverage at banks caused forced
| asset sales, and the uncertainty around credit losses led to
| asset prices tanking.
|
| In 2023 the situation isn't necessarily worse, but it is
| certainly different. Asset prices seem relatively well-
| understood, in that their declines are a straightforward
| function of interest rates as opposed to an uncertain function
| of credit losses. Bank leverage is less than in 2008 as a
| result of regulation.
|
| If the situation in 2008 was "some banks are _super_ insolvent,
| and it's hard to tell which ones", in 2023 it seems to be "some
| banks are mildly insolvent, and it's fairly clear which ones".
| A mildly insolvent bank can probably stay afloat as long as it
| continues to have access to capital, which the Fed is giving
| them. But if people start withdrawing their deposits from one
| of the mildly insolvent banks, it will become increasingly
| difficult for that bank to dig out of even a small solvency
| hole, so there's still some uncertainty as to whether the Fed
| lifeline is enough to save them.
| fwlr wrote:
| Everyone will say they are "unrealized" losses. Some people
| (let's call them "busters") will argue this means real losses
| that already happened but banks are allowed to pretend it
| hasn't. Other people (let's call them "holders") will argue
| these losses aren't real and will only become real if the bank
| is forced to sell them, while if they manage to hold onto them
| for the full ten years then the losses never become real and
| vanish.
|
| The truth is roughly that both sides are right, and the sum of
| their claims is much weirder than either subset.
|
| The actual instrument in question is a little tough to get your
| head around. The first part is the basic bond mechanism: you
| give the government a thousand bucks, and ten years later they
| give you back that thousand dollars (guaranteed: they can print
| money so they will never default, only risk is they have to
| print so much money to pay you back that the economy explodes,
| and everyone has bigger problems at that point). Why would you
| do this? You wouldn't, there is no upside, you only get back
| what you put in and it'll be worth a little less because of
| inflation by then as well. Nobody does it, so right now what we
| have is not a real financial instrument.
|
| So let's make a first attempt at offering some upside: if you
| let them hold a thousand bucks for ten years, they'll give you
| 10 bucks twice a year. Now you'll take it - unless you think
| you can make more than 20 dollars out of your 1000 dollars each
| year by putting it somewhere else. What controls how much you
| can make on your 1000 dollars elsewhere? A lot of factors that
| all ultimately rest on the interest rate. Okay, so the
| government can't just offer a flat 10 bucks twice a month, they
| have to offer something competitive with the current interest
| rate. But there's the kicker: the _current_ interest rate. Once
| you buy the bond, that amount is fixed, even if the interest
| rate later changes.
|
| If the interest rates go up after you buy a bond, next years
| bonds will be offering higher per-year payments, so your bonds
| are inferior by comparison (they pay the same at the end, but
| less on the way, and they've already paid out some of the
| payments to you) and thus are worth a lot less. This is
| important because aside from holding them you can also sell
| them to someone else for any price you agree on, and whoever
| buys them from you gets the rest of the yearly payments and the
| final payout instead of you. They're a hard thing to sell if
| interest rates have gone up, because you're offering 20 bucks a
| year for five years while the government is offering 50 bucks a
| year for 10 years.
|
| So: the money you get back eventually is worth less than when
| you handed it over because of inflation, but you're getting
| small payments all along the way based on the interest rate at
| the time of the agreement. You care about interest and about
| inflation.
|
| We have to stop for a moment and talk about interest rates and
| inflation. It is generally accepted that an increase in
| interest rates will cause a decrease in inflation a few years
| later. Confusingly, people will also say that interest rates
| move in the _same_ direction as inflation but with a lag. It's
| not that confusing though:
|
| an increase in inflation at time t=0...
|
| ...will cause an increase in interest rates at time t=1...
|
| ...which will cause a decrease in inflation at time t=2...
|
| (...which will cause a decrease in interest rates at time
| t=3...)
|
| (...which will cause an increase in inflation at time t=4, and
| we're back to step 1)
|
| And so the cycle goes.
|
| So in effect, you're betting on this tension between interest
| and inflation resolving in your favor. In practice I believe
| the effect of inflation is smaller than the interest payments,
| so it's also generally believed you always have a way out of
| the bet: just hold for the full ten years and the interest
| payments over that time will more than cover the inflation
| loss.
|
| Except you can't just hold on to the bet, because you're a
| bank, and that thousand dollars you gave to the government is
| not _your_ thousand dollars - it is some customer's deposit,
| and they might want it back. So you better plan to have another
| thousand dollars somewhere else that you can give that
| customer, because the only way you can turn this bond back into
| money before the 10 years is up is selling it. And as mentioned
| before, if interest rates have recently gone up, your bond is
| not going to sell for anywhere close to breaking even.
|
| That's what that unrealized loss figure of 600 billion is: if
| you sold them for market value today, how much would you lose?
| As pointed out in the article, because interest rates were
| extremely low when these bonds were made, their yearly payout
| is very low. Because interest rates have risen _rapidly_ , new
| bonds have much higher yearly payouts. And because interest
| rates have risen _recently_ , we're still in the lag period
| before inflation falls, so the final payout is also worth less
| (once again, I believe the effect of inflation differential is
| smaller here, and the price is I think mostly driven by the
| interest rate differential).
|
| Concretely, right now, you could probably sell those bonds for
| no more than 75 cents on the dollar, and likely closer to 65
| cents. If the Fed keeps raising interest rates like they're
| doing now until the end of the current Presidential term (where
| someone else will get to tell the Fed what to do), we might get
| below 50 cents on the dollar, or even lower.
|
| Banks bought 2 trillion dollars of an asset and right now that
| asset is only worth 1.4 trillion. That is, objectively, a huge
| loss. Point to the busters.
|
| ...But if we just hold the asset long enough, it is worth about
| 2 trillion again. Point to the holders, and this is why we call
| them "unrealized" losses.
|
| ...But if we _can't_ hold the asset (because, say, everyone
| withdraws at the same time), we _have_ to sell at the current
| market rate, and those losses are forced to be realized. Point
| once more to the busters.
|
| ...But if we can rely on the FDIC or the government or other
| banks to step in and cover our withdrawals, we aren't forced to
| sell - we can hold until the value returns, and pay back the
| FDIC or the government or the other banks then. Point once more
| to the holders.
|
| And so it goes, back and forth between the busters and the
| holders. Who is right? In aggregate it's both and neither, but
| at specific times for specific banks it could very visibly be
| one or the other. No wonder it's so confusing!
|
| There's a lot more of these back and forths at every level that
| further complicate things. The government is jacking up
| interest rates so they're causing the pressure... but banks
| know this dynamic exists and didn't prepare for it so they made
| themselves vulnerable to this pressure... but the government
| regulations make these investments much more attractive to
| banks (very roughly: regulations say you only have to put up
| 0-20% of the value of these investments as collateral, for
| other investments it could be 100% or even 400% collateral) so
| the government pushed the banks in this direction... and so
| this cycle goes, too.
|
| The fundamental dynamic is these bonds were an easy investment
| that turned into a giant Sword of Damocles over your head
| that's growing by the day. In ten years you can step out from
| under the Sword, but any day now your depositors might panic
| and drop it on you, but if they do drop it the government might
| catch it before it kills you.
|
| Thus, finally, some insight into the title of the post: very
| uncertain times indeed.
| ajb wrote:
| On the recommendation of maintaining accounts with multiple
| banks, readers at least in the UK should be aware that for the
| purpose of compensation, the important part is not the brand
| name, but whether the banks are part of the same group. This
| isn't so obvious so you need to check the FCSS website if they
| do.
| ouid wrote:
| If you have over 250k in a bank, you might as well withdraw it
| and buy treasury bonds yourself. You'll get a better return, and
| you'll have essentially the same risk profile.
| tfehring wrote:
| > _Banks engage in maturity transformation, in "borrowing short
| and lending long." Deposits are short-term liabilities of the
| bank; while time-locked deposits exist, broadly users can ask for
| them back on demand. Most assets of a bank, the loans or
| securities portfolio, have a much longer duration._
|
| > _Society depends on this mismatch existing. It must exist
| somewhere. The alternative is a much poorer and riskier world,
| which includes dystopian instruments that are so obviously bad
| you'd have to invent names for them._
|
| I guess I'll dispute this. It is useful that this mismatch
| exists, since it (1) lowers the cost of long-term borrowing for
| mortgagors, businesses, and governments and (2) lowers the
| (direct and/or opportunity) cost of holding cash. But I don't
| think society is dependent on this mismatch, and I don't think
| the alternative would be anywhere near as bleak as Patrick
| suggests.
|
| If bank regulators changed capital requirements to require banks
| to fully back deposits with cash equivalents, long-term borrowing
| would be a lot more expensive, but the market would still clear.
| There's already plenty of demand for safe long-term debt, and
| that demand would only increase as long-term interest rates went
| up. E.g., if checking accounts paid -2% interest and CDs paid
| 10%, lenders would put less money in checking and more in CDs,
| even if it meant they would have to sell the CD at a discount if
| they needed liquidity.
|
| Of course, the US government will take any and every opportunity
| it can get to indirectly subsidize mortgages, so this is pretty
| moot in practice.
| Raidion wrote:
| If I have a CD, that CD is often not time locked, it just has a
| penalty for early withdrawal (X months of interest or
| whatever).
|
| If I don't trust that the bank can give me the money, it
| doesn't matter if it's in a CD or checking account, I'm going
| to pull it out (screw the gains) and the liquidity problem
| still exists. The extra months/year of interest don't stop a
| bank run.
|
| This is why I think this can really only be solved by
| government and regulation. Government regulation on the quality
| of investments to make sure that they're really worth X% long
| term. If there is a bank run, government needs to step in with
| the government liquidity, and say "customer gets their money,
| we get your assets". Of course, brokering an auction for these
| amongst other banks is the preferred approach.
|
| There should be a fairly free market around what leverage banks
| are willing to take on as long as the investments that back it
| are regulated and solid. If a company wants to expose their
| shareholders to risk by keeping high levels of leverage, that's
| their problem, but you can't punish depositors for the mistakes
| of the bank. Not saying we shouldn't have any regulations in
| this space, but as long as mistakes impact shareholders and not
| depositors or taxpayers, I think everyone is happy.
| zhte415 wrote:
| The article does something it shouldn't do: Conflate short term
| interest rates with holding 10 year treasuries. At least compare
| like for like. The yield curve has moved up, but not by the 4% in
| the article, and 'up' compared to.. quantitative easing time.
|
| From https://home.treasury.gov/resource-center/data-chart-
| center/...
|
| 2023-03-14: 10Y: 3.64
|
| 2021-03-12: 10Y: 1.64
|
| 2019-03-14: 10Y: 2.63
|
| 2017-03-14: 10Y: 2.60
|
| 2015-03-13: 10Y: 2.13
|
| 2013-03-14: 10Y: 2.04
|
| 2011-03-14: 10Y: 3.36
|
| 2009-03-14: 10Y: 2.89
|
| 2007-03-14: 10Y: 4.53
|
| 2005-03-14: 10Y: 4.52
|
| 2003-03-14: 10Y: 3.72
|
| 2001-03-14: 10Y: 4.84
|
| > We went multiple years without a bank failure, of any size, in
| the United States.
|
| Because short term funding has been next to free.
|
| > The losses banks have taken on their assets are real.
|
| They're not real. That's entirely the point. They're financial
| assets that are locked in to fixed rate returns. If the assets
| were real, they'd be variable rate. Like the chicken feed that
| the author points out is an input to the cost of an egg. The
| variable chicken feed costs feed into the variable price of an
| egg.
|
| When chicken feed costs increase but you're stuck selling the
| eggs at a fixed price, you have a problem. Risk doesn't
| disappear, at best it gets mitigated or bought for the value it
| provides. When mortgages have fixed interest rates, the interest
| rate risk needs to go somewhere.
| vishnugupta wrote:
| > We went multiple years without a bank failure, of any size,
| in the United States.
|
| This is _objectively_ false, unless by "multiple years" he
| means 2 years. The data is out in the public[1] so why not do
| some basic research before putting out claims like that? Basic
| mistakes like this makes me question rest of the article and
| the author's grip on the subject.
|
| https://www.fdic.gov/bank/historical/bank/
| zhte415 wrote:
| Indeed.
| swores wrote:
| To be pedantic, calling two years "multiple years" may be a
| bit misleading, but it's not a mistake considering multiple
| years literally means "two or more years".
| gumby wrote:
| As an account holder I don't even care about the safety of my
| bank, and never have (I have never kept anything like $250K, much
| less more, in a current account for more than a day or two either
| for personal or business accounts).
|
| So it makes no difference to me if the bank sector crashes or
| not. To the degree I care about sectors at all, I'm more likely
| to be concerned about railroad stocks (would interfere with
| goods) or automobiles, even though I don't own any any more
| (employ a lot of people).
| jnwatson wrote:
| So you're making the argument that because you don't personally
| care, it doesn't matter?
| gumby wrote:
| Good question. My example of a car factory closing is also
| one where I don't _personally_ care but do care about the
| jobs loss and (less so but for that matter) the size of its
| impact on the economy. There are many such.
|
| But _banks_ specifically are no longer that important. The US
| federal government now backstops all deposits, as they have
| (for almost a century) underwritten all residential
| mortgages. I don 't think that's a bad thing at all;
| overwhelmingly most people's interaction with the bank is a
| current account (checking/savings); and overwhelmingly most
| peoples' liquidity is less than the FDIC limit, not that that
| limit may be meaningful any more. The development of the FDIC
| was a crucial and early product of the New Deal and
| stabilized the system significantly. Thus, for this crucial
| function, I couldn't care less if banks themselves succeed or
| fail. Like food safety, judging the risk profile of a deposit
| taking institution is beyond the capability of most people to
| evaluate.
|
| But what about the residual functions of banks? They are
| mostly unbundled at this point. You don't need to get a
| credit card from your bank and most people carry such cards
| that don't come from their bank. In consumer loans (mortgages
| and small business loans) a local bank arguably knows the
| local market better than a megabank, and credit unions
| demonstrate this. But these days banks operate more like
| mortgage origination companies since the mortgages are
| bundled into MBSs. That's a function that need not be
| provided by banks at all! Instead have them be sold by
| brokerages the way insurance is sold. Safe deposit boxes, to
| the point they still exist, are outside banks these days. And
| so on.
|
| Of course there are jobs, but retail banks only employ a
| couple of million in the US (about 20% of the whole financial
| sector, which is smaller than manufacturing, constuction, and
| other fields). An unbundling as I'm talking about would
| probably not affect employment much.
|
| So yes, I don't care much about the banking sector at all.
| peripitea wrote:
| The bank sector does not crash in a vacuum. If it crashed it
| would have a massive impact on your life, regardless of how
| much you hold in your personal account. The last paragraph from
| this very article gets at that: "Why do I believe (disclosing
| investment in any banks) is an irrational disclosure, despite
| general support for this ritual? Because I live in a society,
| which is sufficient information for you to know that I'm
| structurally levered long to the stability of the banking
| system, much like you are."
| gumby wrote:
| I replied to jnwatson's comment to explain why I don't think
| retail banks (from your single-branch local to Wells, Fargo)
| are that important to the financial system any more.
| peripitea wrote:
| I am so confused haha. We just saw a large-but-not-that-
| large bank fail, and got a small glimpse of the chaos it
| might cause if the government had not stepped in to
| backstop deposits above and beyond the $250k FDIC limit --
| missed payroll, companies going out of business, mass
| layoffs, etc. And you don't think the entire sector
| crashing would impact you? I guess I'd ask, do you
| recognize that's a tiny minority opinion, and if so what
| insight do you think you have that everyone else (including
| experts who are well aware of all the facts about how the
| industry has evolved that you laid out in your other
| comment) is missing?
| dorianG4 wrote:
| Time to disrupt banking by making it go the way of rotary phones.
|
| Foisting belief someone like paulg is worth billions given cherry
| picked math that makes it so does not make paulg special.
|
| It's traditional political corruption embedded in the minds of
| inept and infirm, shell shocked by war, made paranoid by cold
| wars, that makes the rich rich.
|
| It's policing society to make us all believe Elon or Billy G are
| wealthy.
|
| Propaganda and information shaping from war era government
| research was gifted to university and converted into behavioral
| economics, advertising, and marketing programs. Americans are
| oblivious they're just eating their own farts and BS.
| benevol wrote:
| Basically, we "simply" need the "Next-gen Bitcoin" -
| userfriendly, fast, lean in resources.
| Redoubts wrote:
| > This realization creeped in around the edges with e.g. Byrne
| Hobart on February 23rd noting that one of the U.S.'s largest
| banks was recently technically insolvent but almost certainly in
| a survivable way.
|
| If you're wondering what this was, presumably this is the
| moneyshot of the paywall blog
|
| https://twitter.com/byrnehobart/status/1628779894183272452
| alecco wrote:
| Just use a MM account at a bank/institution using Federal Reserve
| deposits. It sucks to concentrate on the large big institutions
| but it's the only safe move right now.
|
| Note, the Federal reserve has now insane liabilities. But they
| can print money so they will never default. If your payroll and
| expenses are in USD nominal you are covered.
|
| If you go, aha! but how do you safely protect your funds from
| inflation and Fed's money printer? Good luck with that. The
| system is rigged. "It's a big club and you ain't in it".
| ragnot wrote:
| The answer to the inflation question traditionally has been to
| short the US dollar via investing in real estate with loans.
| airstrike wrote:
| it feels a bit too late to do that, though
| 127 wrote:
| Liquidity coverage ratios EU vs. US: US has been stagnant for a
| decade, while EU has almost doubled. (Lobbyist casts money
| against government. It's very effective.)
| pearjuice wrote:
| What I still do not understand is why the whole SVB episode isn't
| a bailout and didn't just introduce much more risk into the
| system. Yes, the stock went to 0 and investors did not get
| compensated (if they didn't already cash out when they saw it
| coming due to inside information) but the gaping hole in the
| books was filled due to government intervention and explicitly
| lifting the 250K FDIC limit.
|
| Why would any bank look at SVB and NOT think "oh, time to take
| more risk for more profit; the government will prop up the FDIC
| limit if we fail anyway". Saying that taxpayers won't pay for
| this is a joke too. The burden of filling the insurance gap won't
| come out of the pocket of other banks or their shareholders. Even
| though the FDIC receives no federal funding on paper, they seem
| to be fully invested in treasury securities and can borrow
| directly from the treasury, against rates not available to the
| common Joe. It's a perverse relation which the taxpayer
| contributes to.
| gregw2 wrote:
| The moral hazard risk you mention is real. But likewise no bank
| can rest easy for two reasons: 1) the lending programs setup to
| backstop banks (not depositors) in the current situation expire
| in a year. Not all the bank supports can be expected in
| perpetuity. Regulators buy themselves time to assess true risk
| of payroll services, Fintech FOB, and the like. 2) Per recent
| history the first (Bank) victim may get a pass but not the
| second victim. Bear Stearns was saved, Lehman wasn't. A
| complacent bank bets that the moral hazard criers won't have
| the upper hand at the particular+unknown timeframe their bank
| needs a handout.
| wil421 wrote:
| Wouldn't the FDIC or whoever absorbs the treasury notes be able
| to get a majority of the money back? Less inflation,
| opportunity costs, and the like.
| _heimdall wrote:
| It is a a bailout, this time a bailout of unsecured investors
| of the bank that were holding deposits at the bank rather than
| shareholders. And yes though the line is being drawn today with
| investors vs. depositors, depositors are actually a form of
| unsecured investor.
|
| As to why it doesn't introduce more risk, it very well could.
| So far they have either slowed down a train wreck or prevented
| one. Bank issues in the last week have seemed more tied to
| depositors getting spooked and withdrawing or transferring
| money, the real question is whether other banks are so full of
| unrealized losses that the shift from a market depositing $5T
| in newly printed money to an economy spending more than it
| earns will break the banks.
| lukas099 wrote:
| Matt Levine's Money Stuff talked about this yesterday. I'll
| post a couple of the relevant paragraphs.
|
| > The regulators' response to SVB -- guaranteeing all
| depositors, but also the Fed's Bank Term Funding Program to
| finance other banks' bond portfolios at par[7] -- increases the
| value of _other_ banks' optionality, which encourages them to
| take more risk, because their deposits are safer. (I suppose
| this is the real moral hazard concern.) And so there should be
| more regulatory and supervisory changes to tamp down the other
| banks' risks.
|
| > [...]
|
| > [T]he post-SVB actions have made bank deposits a lot safer,
| which is a nice windfall for the shareholders of every other
| regional bank that has a lot of losses on held-to-maturity
| securities. And so in exchange for that windfall the regulators
| should regulate those banks much more strictly, which will make
| them actually safer (and reduce the government's exposure to
| their risks), but will also reduce their profitability.
| em500 wrote:
| Emeritus a University of Chicago finance professor John
| Cochrane has been screaming for years that the whole design
| of more and more regulations combined with all sorts of
| implicit ex-post creditor insurance is structurally unstable
| and all but guarantees bank runs and collapses every decade
| or so. That the only thing that can work is much higher
| capital (not reserve!) requirements, i.e., a lot higher
| shareholder equity vs debt on the balance sheet. He mentions
| that existing bank regulations already number hundreds of
| thousands of pages, yet the regulators apparently got
| blindsided by duration/convexity risk which is CFA / MBA
| finance textbook material. Just like generals, regulators are
| always fighting the previous crisis.
| ajross wrote:
| > but the gaping hole in the books was filled due to government
| intervention and explicitly lifting the 250K FDIC limit.
|
| That's not the correct analysis. It was a liquidity crunch, not
| a "hole" in the sense of a debt. In some sense the bank always
| had the assets, just not in a form they could pay out as a
| withdrawal. So when everyone wanted out at once they ran out of
| cash and got seized by the FDIC.
|
| That's not to say there won't be any losses at all. There
| likely will as the successor bank liquifies holdings and makes
| whole the folks who want out. And yes: those losses are (as
| reported currently) not going to be borne by depositors at all.
| Currently the idea is that they'll be rolled into fees on other
| banks, which is part of the FDIC insurance regime. So we all
| collectively pay for it, just not via taxes per se.
| kasey_junk wrote:
| The bailout to the banks is two fold. First the direct bailout
| in form loan guarantees. The moral hazard on those are limited
| by the time limit on when the assets had to have been bought
| (in the past) and on how long they can be used (a year).
|
| The second is a third or fourth order bailout of banks. By
| moving the goal posts on depositors responsibilities to "none
| if you are a powerful lobby", risky banks no longer have the
| second most important limit on their riskiness (depositors
| managing their own risk and due diligence). That leaves only
| the equity holders to do the diligence.
|
| I think the reason people aren't calling it a bailout is that
| it puts all the pressure on equity. Which maybe what we as a
| society wants but it's certainly a big change to the existing
| regime.
| skwirl wrote:
| I don't think it's a big change. I think very few people are
| qualified to do due diligence on their banks. It's a bit like
| expecting people to inspect bridges before they drive over
| them. It's a piece of financial infrastructure that we expect
| to just work. It would be a big change to _not_ have that
| expectation, and would likely result in the collapse of the
| regional banking system as people flock to the Big Four
| "systemically important banks" which have stricter regulatory
| requirements and the implicit backing of the federal
| government. We are seeing a lot of that flocking despite the
| actions of treasury on Sunday.
|
| Moody's gave SVB an A rating until they were already
| collapsing. The State of California said SVB was financially
| sound until March 8.
|
| And the problem is, even if it were possible to know the
| health of a bank as a depositor, a sound bank that people
| come to believe may be unsound collapses in a bank run the
| instant that the realization occurs, so you would lose your
| money anyway even though the bank was sound when you first
| deposited unless you got in early on the run.
| kasey_junk wrote:
| > I don't think it's a big change
|
| This is a big part of the problem in tech apparently. It
| _is_ a big change and in other industries it is very common
| for large cash holders to do normal due diligence on their
| banks and to have technology and procedures to mitigate the
| counterparty risk.
|
| The flocking concern was literally cited as one of the
| problems with "too big to fail" in 2008 and it happened!
| Lots of corporate & governmental treasurers took that as a
| clue to move to larger banks.
|
| Bank runs start because someone notices and publishes that
| a bank is insolvent, not the other way around. In this case
| it was because a bunch of supposedly sophisticated actors
| realized it too late.
| duxup wrote:
| > Why would any bank look at SVB and NOT think "oh, time to
| take more risk for more profit; the government will prop up the
| FDIC limit if we fail anyway".
|
| Because they don't want the stock to go to 0?
|
| I think most businesses and investors would not want that.
|
| We've seen bank stocks drop, it is in those banks interest to
| show they're not taking chances like SBV.
| Gys wrote:
| Then why is (was?) there a limit of 250k anyway?
| duxup wrote:
| Does it matter in regards to what I said?
| skwirl wrote:
| To prevent bank runs.
| patio11 wrote:
| There has been, over the nearly century we've had the
| institution, many many waves of feelings regarding it. That
| said, three prominent ones: the amount one needs to
| reserve, and therefore the rates one needs to charge banks
| to build the reserve, are sensitive to what portion of the
| sector is actually insured. There exists a sense that rich,
| sophisticated people and entities can arrange for their own
| risk management at their own expense rather than a society-
| wide program with implicit government backstopping.
| Finally, there is frequently strong disinterest in either
| the reality or the appearance of public funds being used to
| backstop the banking industry.
|
| And so that is the reason for the limit. It gets bumped up
| every few years, partially due to inflation and partially
| due to the increasing wealth of the upper middle class and
| retirees, who the insurance fund is primarily aimed at
| motivating. It would not be effective in its aims if "local
| elites" at the typical community bank felt like they still
| shouldered run risk, and local elites in 2023 are
| substantially wealthier than they were in 1945.
| marcosdumay wrote:
| To guarantee the FDIC itself doesn't fail.
| jjoonathan wrote:
| Yes, banks as organizations still have the correct
| incentives. I'm not sure management does, but 1. it's the
| responsibility of owners to keep management under control and
| 2. if management doesn't care about investors surely they
| would care even less about depositors.
| pearjuice wrote:
| They don't want the stock to go to 0, but they don't want to
| miss potential returns either. When the FDIC will cover all
| depositors, investors (from a purely capitalistic
| perspective) would demand to use as much of their capital as
| possible to maximize returns. As we've seen numerous times
| before in the past, a large quantity of investors is myopic
| and regulatory oversight often comes too late or after the
| fact.
| ascotan wrote:
| It's a bailout of the depositors not the bank.
| eternalban wrote:
| > explicitly lifting the 250K FDIC limit.
|
| The _desperation_ of that action speaks volumes about what they
| faced (and we don 't know). Having no limits for FDIC will stem
| panic in the short term at the cost of (practically guaranteed)
| mid and long term hazard that this decision will directly
| engender.
| skwirl wrote:
| >Why would any bank look at SVB and NOT think "oh, time to take
| more risk for more profit; the government will prop up the FDIC
| limit if we fail anyway".
|
| This makes zero difference to the bank. The bank doesn't get
| saved by the FDIC limit, as you know. What happens after the
| bank fails - whether the depositors are made whole or not - is
| immaterial to the people who owned the bank, who now see their
| asset (the bank) worth $0.
|
| If you want to make a moral hazard argument with respect to the
| FDIC, you'd have to make it with respect to the actions of
| depositors.
|
| Also, WRT the $250k limit, that's the minimum they will
| guarantee. They have always tried, and in recent decades always
| succeeded, in making depositors whole one way or another,
| usually without spending much (if anything) from their
| insurance fund. The $250k is the worst case scenario.
| ericpauley wrote:
| Levine considered this yesterday as well. If you model bank
| shares as calls on underlying assets it clearly favors
| risktaking:
| https://www.bloomberg.com/opinion/articles/2023-03-14/svb-
| to...
| pearjuice wrote:
| Given the bank's yield is some sort of formula with regards
| to how much and succesful they are in investing/loaning-out
| the capital of their depositors. Then how is it not a moral
| hazard, when the bank gets a signal that the FDIC will cover
| all this capital, regardless what the bank does with it? Even
| if the bank asset can go to 0, in the end the vehicle used to
| prop up this asset will come from the depositors. If I
| (depositor) give you (bank) 100$ and someone else (FDIC)
| tells you "do whatever you want with that money, if you lose
| it I'll give it back to the depositor" - you could basically
| go to the casino and put it all on red. Even if you would
| also lose your own 100$ in the process (you risked 200$), you
| would probably take on more risk simply because my capital
| isn't at risk but the returns will be yours.
|
| Hyperbole yes, but the moral hazard seems to be with the bank
| (and the investors therein), not the depositors or their
| actions. Or I misunderstood you.
| skwirl wrote:
| I think there's a real misunderstanding here with the
| distinction between banks, depositors, and what protections
| apply to each. The scenario (betting on red) is illegal,
| but assuming it was not, it doesn't matter to the bank
| whether or not its depositors have their deposits
| protected.
|
| I can kind of assume what your misunderstanding is, but
| it's not completely clear. I think you are assuming that if
| the deposits are protected, the bank gets to keep the
| deposits and continue running. This isn't how it works,
| though. As soon as the bank becomes insolvent (loses its
| bet on red), the bank is shut down and its shareholders are
| wiped out. The FDIC sets up a new, government run bank to
| hold and guarantee the deposits, and then tries to find
| another bank to sell the failed bank's deposits and loans.
| Right now there is no Silicon Valley Bank. If you had
| deposits there, they are now held by Silicon Valley Bridge
| Bank, N.A, which is a new bank operated by the FDIC.
| pearjuice wrote:
| As I said, the scenario outlined is hyperbole...
| Practically, they won't actually bet on red but use all
| kinds of financial instruments to achieve the largest
| amount of yield possible with the depositors capital at
| their disposal. I'm aware the bank is wiped out and the
| deposits are no longer managed by SVB. None of this
| refutes the point that until the bank goes bust, the bank
| will try to maximize yield and shareholder returns with
| the cost being their own capital. The depositors capital,
| is an extra with no cost. As far as I am aware,
| shareholder profits won't get clawed back. Now that the
| $250K FDIC barrier has been lifted, the moral hazard is
| that the bank (not SVB which no longer exists, but any
| other bank) is no longer responsible for whatever happens
| with the capital of their customers - even if they would
| go completely bust; the FDIC will fix it.
| 4gotunameagain wrote:
| Given the fact that the losses will not be realised unless
| depositors massively withdraw (i.e bank run), what is the role of
| media (including youtube, blogs etc) in this ?
|
| If we didn't have a system which deliberately amplifies catchy
| headlines such as "banks are failing" wouldn't that bank run be
| avoided ?
| JumpinJack_Cash wrote:
| There need to be a separation between funds transaction and
| investing. Just like the separation between Church and State or
| Investment Banking and Commercial Banking.
|
| Currently there isn't because you are forced to invest if you
| want to be able to transact. As a matter of fact the figure you
| see in your checking account is expressed in dollars but that is
| false because those are IOUs from the bank exressed in dollars.
| You are defacto investing in the loan portfolio of your
| commercial bank.
|
| It's a very different thing.
|
| Maybe CBDC will allow all of us to 'bank with the Fed' so we will
| know for sure that those dollars are real and not being put to
| work in any way , shape or form.
| lliamander wrote:
| So, I'm a layman here, but I feel like he makes narrow banking
| (i.e. full-reserve or maturity-matched banking) sound more
| dangerous than it probably is, for instance:
|
| > Take an exploding mortgage, the only way to finance homes in a
| dystopian alternate universe. It's like the mortgages you are
| familiar with, except it is callable on demand by the bank. If
| you get the call and can't repay the mortgage by the close of the
| day, you lose your house. What did you do wrong to make the
| mortgage explode? Literally nothing; exploding mortgages just
| explode sometimes. Keeps you on your toes.
|
| It sounds to me like this could simply be solved with mortgage
| insurance. Granted, that insurance might be more expensive than
| it is now, but when a mortgage explodes you end up owning your
| house outright. Seems like not a bad deal. To reduce _their_ risk
| (and consequently the cost of the insurance) the insurer would
| probably take on responsibility for finding alternate lending in
| the case of the loan being called, and the home owner would never
| hear about it until after the new lending was secured.
|
| I'm sure there would be other problems, but it is not at all
| clear to me that those problems are worse than the ones we have
| now.
| Pet_Ant wrote:
| I mean maybe we should require large companies to split their
| accounts across several banks, I mean what is the real overhead
| here?
| czbond wrote:
| That really is a CFO's job. To assess risk, and distribute it.
| Larger amounts in larger banks are swept across multiple
| branches transparently to reduce the account holders risks for
| individual branch failures.
|
| However, the FDIC limit is REALLY low in today's terms. $250k
| limit was set in 2010. The money stock has been printed 143%
| more since 2010. To me that is about $607k in today's dollars.
| every wrote:
| Long, entertaining and informative...
| spir wrote:
| Stablecoins are conspicuous in their absence in patio11's post.
| Personally, I believe that patio11's loathing of crypto has made
| him incurious about its potential. But that's not the point here.
| The point is that stablecoins are about to become a Very Good
| Deal for ordinary people:
|
| In the near future, stablecoins like USDC will become immune to
| bank runs because the US Dollar reserves backing them will be
| held in vehicles that don't loan out the reserves and hold short-
| duration treasuries directly with the Treasury Department.
|
| At the same time, any person or entity with USDC in their wallet
| has instant, 24/7 access to global markets at their sole
| discretion, without intermediaries.
|
| On Ethereum today, anyone can buy Coinbase stock, treasuries, an
| S&P 500 index, and real estate.
|
| In short, the UX of stablecoins is becoming vastly superior to
| bank deposits because you'll be immune to bank runs, control your
| own money, and have instant access to global markets, including
| for low-risk yield on your stablecoins, such as in treasuries or
| over-collateralized lending.
| jameshart wrote:
| How do you create an institution which can guarantee that it
| will always be able to take the results of its short term
| treasuries maturing, and convert that back into more short term
| treasuries, forever?
|
| That sounds like the financial equivalent of a perpetual motion
| machine.
|
| If an institution has no choice but to buy short term
| treasuries, why wouldn't sellers increase the price that
| institution has to pay?
| KaiserPro wrote:
| > Stablecoins are conspicuous in their absence in patio11's
| post.
|
| Stablecoins are just fractional reserve banking but with a thin
| veneer of tech, and a massive narrative to differentiate them
| from standard fiat currency.
|
| You're far better off just buying commodities directly, at
| least where your value is located is much more transparent.
|
| Stablecoins are basically "trust me bro its worth this much,
| and will never drop, just don't trade too much and make me
| defend the peg."
| spir wrote:
| The reason this is not true is because the best stablecoins,
| like American-run USDC, have excellent transparency and are
| backed 1:1 in cash and short-duration treasuries, with no
| fractional reserve system.
|
| https://www.circle.com/en/transparency
| ranger207 wrote:
| Patrick didn't talk about stablecoins, but Matt Levine did in
| Monday's newsletter[0].
|
| Fundamentally, Tether and banks have the same problem: does
| everyone believe that that bank still has enough money to pay
| you your deposits? If not, then bank run. Does everyone believe
| that Tether has enough money to back each coin with $1? If not,
| then run on Tether. Banks are regulated, so there's supposed to
| be a bunch of people keeping track of the bank's reserves to
| see if they have enough money to back deposits. Tether "solves"
| the problem by not telling anyone what their reserves are, so
| nobody can figure out if Tether truly has the money to back
| each coin at $1 or not.
|
| [0] https://archive.is/l4nLU
| notShabu wrote:
| A good point is individuals could be better off if they could
| open an account at the Fed and have access to "real" dollars
| rather than the numbers that are just bank IOUs
|
| Stablecoins are closer in this direction than banks but only if
| they actually maintain 1:1 reserves. One advantage is that b/c
| they are protocols there is less need to seek returns to make
| payroll, rent, and profit. Another is more transparency.
|
| But also... at this point such a stablecoin is basically a
| CBDC...
| bix6 wrote:
| Vastly superior except there is zero insurance, reserves are
| held within the traditional banking system and it can depeg at
| any time...
| pjc50 wrote:
| This is essentially fanfiction, as stablecoins so far have been
| very opaque about what they do with their reserves. Especially
| Tether.
|
| (largely because the mechanics of holding $60bn in treasuries
| would attract some questions about KYC which stablecoins are
| unable to answer)
| rabf wrote:
| Circle and Tether can freeze their stablecoins for AML/KYC
| and to stop criminal exploits on chain, and have done this
| many times in the past. Also to change to regular fiat you
| will be doing that via a regulated entity which will have
| done the appropriate AML/KYC checks on you.
| misssocrates wrote:
| The fanfiction is that banks can be trusted. USDC and Tether
| as of now have a better track record than even some big banks
| like SVB.
| pjc50 wrote:
| What's Tether's holding breakdown? How do you know they're
| not exposed to the same bond duration issue?
| swores wrote:
| Tether has existed for under a decade, USDC is less than 5
| years old, and SVB died after 39 years.
|
| Yes technically "still alive" is better than "just died",
| but can you really call it a "better track record" when
| Tether is so opaque that we wouldn't be able to spot if it
| was about to die until it actually happens? If Tether died
| tomorrow it would undeniably have a worse track record than
| SVB, if it dies in a decade then it survived half as long
| as SVB.
|
| Unless you have some insight into the actual behind the
| scenes finances of Tether I don't see how you can make that
| judgement.
|
| And as to this claim from your GP's comment:
|
| > _In the near future, stablecoins like USDC will become
| immune to bank runs because the US Dollar reserves backing
| them will be held in vehicles that don 't loan out the
| reserves and hold short-duration treasuries directly with
| the Treasury Department._
|
| Circle (USDC) literally had $3.3B cash deposited at SVB,
| and presumably more accounts at other banks, so they're
| exposed directly to potential problems caused by those
| banks. More importantly they could decide tomorrow,
| assuming they haven't already, to make the exact same poor
| choices as any bank could.
|
| There's nothing stopping them moving 95% of their assets
| tomorrow into 10 year treasury bonds other than that it
| would be a bad idea, but both they and banks are equally
| motivated to avoid bad ideas, so it seems to be an
| unwarranted hope that those in charge of Circle will make
| better decisions than those in charge of any bank, rather
| than any specific feature of USDC that makes it impossible
| for them to make the exact same mistake SVB made?
|
| And that's even before considering that if it had been USDC
| rather than SVB that made the mistake already, FDIC
| wouldn't have come running in to fix anything as they try
| to with failed banks.
|
| Am I missing something about USDC that actually makes it a
| safer bet, other than apparently having more faith in their
| management team than in the management teams of various
| banks?
| spir wrote:
| You're right that internationally-run Tether (USDT) is the
| largest stablecoin and has opaque reserves.
|
| However, American-run USDC is growing faster and has
| excellent transparency:
|
| https://www.circle.com/en/transparency
| overthrow wrote:
| It's also worth noting that the US government itself
| sometimes uses USDC when there is no better option. If
| there were any doubts of USDC's legitimacy, the government
| would be trying to shut it down (see: USDT), not using it
| for transfers.
|
| https://www.nasdaq.com/articles/us-government-enlists-
| usdc-f...
|
| https://www.circle.com/blog/circle-partners-with-
| bolivarian-...
| michael1999 wrote:
| A bank deposit is a stablecoin.
|
| SVB blew up because it was a bad stablecoin.
| mtoner23 wrote:
| USDC may have instant 24/7 access to global markets. But why
| did the price of USDC drop to 90 cents this weekend. It isn't
| immune bank runs.
| polux33 wrote:
| The price on the "secondary market" dropped below 90 cents on
| the dollar.
|
| Circle before and after the SVB crisis (which happened during
| a friday night and through the weekend) continued to
| issue/redeem their tokens at par with the dollar.
|
| It is market sentiment which temporarily devalued USDC.
|
| You would have obtained exactly the same thing if US dollars
| held in SVB bank accounts were denominated in a virtual
| currency named "USD-SVB" and a 24/7 blockchain operating the
| transactions.
|
| Before/After the crisis each USD-SVB would be reedemable for
| $1 but DURING the crisis I bet you my house those USD-SVB
| would have fallen like a rock on the dollar.
|
| I know it's good to be anti-crypto on HN but please, try to
| not completely close your mind to the subject
| lifty wrote:
| They held cash at SVB. They will probably smarten up and
| start holding short term treasuries and avoid as much as
| possible bank liabilities. Just a guess.
| rabf wrote:
| Tha majority of their reserves were in short term
| tresuries, only a fraction of thier reserves were stored in
| 4 different banks as cash in order to be able process
| redemtions.
| lifty wrote:
| So I guess for them the only option for their short term
| redemption buffer is to keep money in the 4 systemically
| important banks. There are no other options. Relevant
| note, FED won't approve full reserve banks (several
| tried) as they might suck too many deposits out of the
| rest of the banks, posing a risk to the other banks.
| spir wrote:
| You're right, last weekend, USDC dropped to a low of ~$0.88.
|
| However note
|
| - SVB was closed on a Friday (as is the FDIC's custom). This
| meant that USDC could not process redemptions over the
| weekend as banks were closed, and this created fear in the
| market.
|
| - USDC had 8% of their reserves trapped in SVB. The fair
| market value of USDC would have been $0.92 if all SVB
| deposits were lost, which was never likely.
|
| - crucially, USDC operator Circle has acknowledged the need
| to transition to a "full reserve" model where reserves aren't
| subject to bank runs.
| https://twitter.com/jerallaire/status/1635548066185871360
|
| - over the weekend, USDC did lose its $1 peg and trade as low
| as ~$0.88. However, all USDC holders were able to maintain
| access their USDC to do whatever they wanted with it, which
| is a lot better than SVB depositors frozen and waiting to see
| what happened.
| [deleted]
| lordfrito wrote:
| > _stablecoins are about to become a Very Good Deal for
| ordinary people_
|
| > _the UX of stablecoins is becoming vastly superior to
| bank deposits because you 'll be immune to bank runs,
| control your own money, and have instant access to global
| markets, including for low-risk yield on your stablecoins,
| such as in treasuries or over-collateralized lending_
|
| I disagree, but OK
|
| > _over the weekend, USDC did lose its $1 peg and trade as
| low as ~$0.88_
|
| Hmmm doesn't seem like a Very Good Deal for an ordinary
| person.
|
| > _However note_
|
| Oh, now I see what you're doing. It's a Very Good Deal,
| except reasons
|
| > _However, all USDC holders were able to maintain access
| their USDC to do whatever they wanted with it_
|
| So it might have dropped 12%, but they still had access.
| That's a win to you?
|
| Your definition of _stable_ is vastly different than mine.
|
| My FDIC backed bank account is guaranteed not to lose
| value.
|
| I don't understand the cognitive dissonance on display
| here.
| spir wrote:
| For your objection to refute my thesis, you'd need to
| explain how a world with stablecoins that are immune to
| bank runs, where those stablecoins are held in next-gen
| wallets and can be swapped into any asset in the world
| 24/7 any time you want at the click of a button, is not a
| superior UX vs. today's bank deposits.
| halfnormalform wrote:
| In order to refute your thesis, we have to explain why
| your imaginary situation is not superior to reality? How
| about it's completely made up?
| lordfrito wrote:
| > _you 'd need to explain how a world with stablecoins
| that are immune to bank runs..._
|
| Wait... _I_ need to explain this? I don 't even believe
| in it.
|
| I'm not really interested in arguing theoretical
| constructs. You yourself admitted that just last weekend
| a stablecoin dropped to 88 cents on the dollar (while my
| bank dollars were still worth one dollar each).
|
| Before _I_ prove anything, why don 't you start by
| proving (heck just demonstrate) a long term _stable_
| stablecoin. Just saying it 's stable doesn't make it so.
|
| I have dollar deposit protections now. Love or hate the
| fed, at least you're dealing with a known quantity, and a
| boatload of laws that are actually (historically
| demonstrable) enforceable.
|
| There are no regulations or protections in the crypto
| space, only a bunch of hollow promises.
|
| Until the crypto community can actually demonstrate long
| term stability (and stable _audited_ reserves) of any so
| called "stable" coin, I'm not interested in discussing
| financial theocraticals, let alone moving my dollars out
| of my FDIC insured bank accounts.
| spir wrote:
| Over the weekend, before an FDIC settlement was
| announced, uninsured SVB deposits were reportedly trading
| between $0.75 and $0.90 among private sellers.
|
| In other words, both USDC and uninsured SVB deposits had
| the same market response over the weekend. But every USDC
| holder had unfettered access, whereas only large SVB
| depositors were able to access the informal market of
| private sellers.
|
| I want you to remember this interaction because by the
| end of the decade, there will be over $1 trillion of USD
| stablecoins in circulation (in today's dollars), and at
| least one of the five largest banks in America will run a
| major stablecoin product of some kind, such as their own
| stablecoin, redemptions for an existing coin, or consumer
| on/off-ramps to the crypto financial system.
| lordfrito wrote:
| > _before an FDIC settlement was announced, uninsured SVB
| deposits were reportedly trading between $0.75 and $0.90_
|
| The key point is that those were _uninsured_ deposits.
|
| Anyone under FDIC protection was fine.
|
| At _best_ a stablecoin is like an uninsured bank deposit,
| in an unregulated bank. No thanks, I 'll stick to FDIC
| coverage.
| selimthegrim wrote:
| > theocraticals
|
| This is an excellent Freudian slip
| lordfrito wrote:
| Whoopsie! Good catch.
| snarf21 wrote:
| Except that 99.9% of people will buy "stable" coins on
| Coinbase. Not your keys, not your crypto. If Coinbase gets
| leveraged or goes the way of SFB, you have _literally_ the same
| non-immunity as a bank run except you also don 't get FDIC
| backstops.
| brvsft wrote:
| SFB? You mean SVB? SBF?
| snarf21 wrote:
| Sorry, I meant SBF but transposed.
| spir wrote:
| You're right, stablecoins held custodially in an entity could
| be subject to similar contagion.
|
| Yet, non-custodial holding is becoming much easier and safer.
|
| Crucially, wallets are improving a lot, and a spectrum of
| custodial options is developing, with rich tradeoffs in eg.
| safety and self-sovereignty.
|
| For example https://www.coinbase.com/blog/how-smart-
| cryptography-makes-c...
| lordnacho wrote:
| As a former trading desk guy I struggle to see how the system
| allows things to be marked-to-cost. Or rather, why is it that we
| allow a bank to not mark-to-market a security for which there is
| a liquid market?
|
| Allowing the bank to pretend it has more assets than it actually
| has seems to be an invitation to hide risk. If they had to MTM
| their underwater bonds, they would would have been pushed to
| raise capital earlier, or they would have cut their losses
| earlier.
|
| It should be straight up "I have these deposit liabilities, I
| have this book of assets, oops, my assets are down a bit, lets do
| something about it". Instead of "I'm gonna run the gauntlet and
| hope the business survives until these bonds come in".
| gumby wrote:
| > As a former trading desk guy I struggle to see how the system
| allows things to be marked-to-cost. Or rather, why is it that
| we allow a bank to not mark-to-market a security for which
| there is a liquid market?
|
| Many of their assets aren't really fungible either. Mortgages
| are the canonical example: yes they can now be turned into MBS,
| but your local credit union just issues and holds them). The
| same is true of the commercial loan to the local stationary
| business. As far as I know those aren't bundleable into
| commercial paper securities. The debtors do the same: they
| don't treat their loan as having any market value at all beyond
| what it had when issued. House prices generally don't mark to
| market except in places with property tax assessment.
| landemva wrote:
| > your local credit union just issues and holds them
| [mortgages]
|
| I was on BoD of a CU. About the only thing we didn't resell
| were loans which did not conform. The business was to
| originate, quickly resell, and do some more.
| echion wrote:
| > why is it that we allow a bank to not mark-to-market a
| security for which there is a liquid market?
|
| Because at maturity, the bank gets back its money. So it is
| perfectly valid to say "in ten years, this $100m bond is worth
| $100m...and I intend to hold it for ten years, so it's worth
| $100m [equivalent] today". The "I intend to hold it" is the
| relevant part of the valuation, though.
| kmod wrote:
| Welcome to a non-zero interest rate environment. "$100m
| equivalent today" is not $100m -- the term to search for is
| "net present value". These considerations are _precisely_
| what marking to market captures
| echion wrote:
| > the term to search for is "net present value"
|
| I understand NPV. I'd edit my post to put "$100m equivalent
| [NPV] today" to makes it clearer what was meant by
| "equivalent", but it's too late, and that's precisely what
| I nodded to with "equivalent" -- no need for jargon to get
| the sense across.
|
| > These considerations are precisely what marking to market
| captures.
|
| Of course. And they are -- in theory -- exactly what GP
| seemed to be asking about. Valuing an instrument at its NPV
| (NOT MTM) is perfectly reasonable...as a starting point. GP
| was questioning that. As everyone has pointed out, and
| anyone who's bootstrapped a yield curve or traded bonds (I
| have) knows, there are a ton of nuance and caveats to this,
| but the GP was not dealing with those and they are not
| relevant to GP's primary point/question.
| s1artibartfast wrote:
| If those assets are in your hold to maturity portfolio,
| they are still worth $100m. This return is guaranteed
| unless the Federal Bank defaults on those treasuries.
| kmod wrote:
| $100m _future dollars_ , which are less valuable than
| present dollars.
| s1artibartfast wrote:
| $100m future dollars are still still $100m dollars. It is
| the value of the dollar that is changing, not the number
| of them that you hold.
|
| The day you are paid, you will still get handed exactly
| $100m million.
|
| Every day between now and then you will still have
| exactly $100m in bond holdings. How many cheeseburgers
| you can buy with that number of dollars may change from
| day to day, but the number of dollars will not.
| morelisp wrote:
| You don't need to appeal to cheeseburgers to not want to
| value 100 future dollars at 100 current dollars, if you
| can buy 100 future dollars for 80 current dollars, which
| is essentially what happened when rates rose.
|
| (Someone else is offering 100 future for 80 current
| because they have a forecast about cheeseburgers, sure.
| But you don't have to agree with that forecast to take
| their deal; the deal looks even better for you if you
| don't agree.)
| s1artibartfast wrote:
| The whole point of HTM as an asset class is that you dont
| plan to sell it.
|
| Think of how you would report a non-transferable asset
| with maturation on your balance sheet?
|
| How would you report savings in a CD with a steep early
| exit penalty?
|
| Herein lies the difference between a list of assets, and
| a list of asset liquidation value.
| daveguy wrote:
| That's hedging against inflation (which is definitely
| something they should have been doing for long term
| bonds). Interest rates directly affect the sale price of
| a bond, and it could have been hedged against, but it
| wasn't required. They won't do it unless it's required.
| Banks over 50 billion need to be regulated again (and
| they should lower it to 10 billion too).
| bjacokes wrote:
| You're saying that if a bank paid $100m for low-yielding
| bonds in 2021 which are now worth $80m, those bonds
| should be valued at $100m on the bank's balance sheet.
| What if a different bank pays $80m today for the same
| bonds? Should they be able to show an immediate $20m
| increase in their book value because those bonds are
| "worth $100m"?
| flakeoil wrote:
| This thread with NPV is confusing the liquidity issue
| with the profit of the bond investment. The issue for
| this bank was not if this was a good or bad investment in
| the long run (these bonds might very well turn out to be
| a good investment the day they are paid back on), the
| issue here is that the bank's customers wanted to
| withdraw their money and there was not enough
| liquidity/cash in the bank so they had to sell something
| and the best/only thing they could sell was the bonds
| which right now were worth only $80m and the customer
| wanted their $100m.
| s1artibartfast wrote:
| Yes and yes, if they are allocated for HTM.
|
| If you put cash in a a CD with a 1 year lock in, do you
| list it at current value or subtract a withdraw penalty.
|
| Do you subtract early withdrawal penalties when
| calculating the balance in your 401k?
|
| At the end of the day, a list of your asset values is not
| the same as how much you could liquidate those assets for
| today.
|
| That would be a list of liquidatable assets.
|
| HTM assets are called out separately on the balance sheet
| specifically to highlight that they cannot be easily
| liquidated.
| prewett wrote:
| The problem is that they are _worth_ $100m if held to
| maturity (you get your $100m back, ergo their value is
| $100m if held to maturity), but the current _price_ is
| $80m, because who wants to buy a bond at 0% when you
| could get around 5% at the next Treasury auction.
| bjacokes wrote:
| They're worth $80m today, and then maybe $82m next year,
| $84m the year after, and so on until they're worth $100m
| at maturity. (Obviously these numbers depend on current
| and future interest rates, and you'd be earning some
| interest in the meantime).
|
| As I was trying to point out to the parent commenter,
| conflating "$100m today" with "$100m at maturity" leads
| to clear contradictions, like saying that a bank could
| earn $20m on paper simply by buying bonds trading below
| par value. Or to put it another way - if bank A holds
| $100m face value of 10-year bonds yielding 4%, and bank B
| holds $100m face value of 10-year bonds yielding 2% (but
| worth, say, $80m at market price), how can you claim that
| those banks are on equally good footing?
|
| Valuing liquid bonds at par value is pretty clearly a
| hack to reduce volatility and increase confidence in
| banks' balance sheets, even if some people in the
| comments seem to view it as a more logical way of
| accounting. (Although to be clear, I don't mind companies
| doing their own fuzzy math as long as they give investors
| enough information to do proper due diligence. It's
| similar to the non-GAAP earnings that a lot of tech
| companies report.)
| s1artibartfast wrote:
| >As I was trying to point out to the parent commenter,
| conflating "$100m today" with "$100m at maturity" leads
| to clear contradictions, like saying that a bank could
| earn $20m on paper simply by buying bonds trading below
| par value. Or to put it another way - if bank A holds
| $100m face value of 10-year bonds yielding 4%, and bank B
| holds $100m face value of 10-year bonds yielding 2% (but
| worth, say, $80m at market price), how can you claim that
| those banks are on equally good footing?
|
| Equal assets should never be thought to mean equal
| footing. The banks will show the same number for assets
| locked up for 10 years, but the banks will also show that
| they have different returns listed on their finalcial
| statement for the HTM assets, and different revenue from
| capital!
|
| You cant and shouldnt expect to bank comparison to be
| easily reduced to a single measure, or for that measure
| to tell you something that is captured elsewhere.
|
| It is like expecting an athlete's height to tell you
| something about their speed or strength.
|
| HTM assets tell you the nominal value of assets they are
| holding to maturity.
|
| It is not intended to show how much they could raise if
| they had to liquidate it today. It is not intended to
| show what that yield is for their bonds.
|
| There are separate line items for that.
|
| If you change the valuation of the bonds to market value,
| then you lose sight of the mature value of those bonds.
|
| Replacing athlete height with athlete BMI tells you
| something different.
| mikewarot wrote:
| Not only that, but the value could drop even more if an
| inflationary spiral happens... Bank prime loan rates have
| been higher than 20% in the past, which means a $100m
| bond 5 years out could go as low as $33m in value... a
| 67% haircut!
|
| Clearly, US Treasuries carry risk that's not been
| accounted for.
| landemva wrote:
| > US Treasuries carry risk that's not been accounted for.
|
| US treasury debt is approximately the safest. The risk
| was that SVB might need cash before the bonds matured.
| The regulations encouraged SBV to do this. Now the Fed
| put is re-imagined, and we shuffle on while mumbling
| 'nobody could have imagined'.
| pg314 wrote:
| > If those assets are in your hold to maturity portfolio,
| they are still worth $100m.
|
| They are still worth $100m _at maturity_. $100m in ten
| years is (usually) worth less than $100m now. Do you
| really want to pretend that a ten year bond you purchased
| when inflation and the interest rate were near zero, is
| worth the same when inflation and the interest rate go up
| to say 10%? What about inflation of 100%? In nominal
| terms you'll get back your capital, but in real terms you
| will get back only one thousandth.
|
| To correctly value them now you need to calculate the
| NPV.
| [deleted]
| s1artibartfast wrote:
| In real terms, you will get back exactly a hundred
| million. In the npv at that date will be exactly 100
| million.
|
| $1 after inflation is still $1. It is just that the value
| of $1 is now different.
|
| As long as you hold to maturity, the number of dollars
| does not change.
|
| If you report your Holdings in terms of dollars, they are
| always accurate as long as you hold.
|
| If someone tells you they have $100 maturing in 10 years,
| it is Trivial for you to do the npv calculation yourself
| with your speculative model of what inflation will look
| like over the next 10 years.
| pg314 wrote:
| > In real terms, you will get back exactly a hundred
| million.
|
| In _nominal_ terms. In _real_ terms you have to adjust
| for inflation. [1] is a starting point if you want to
| read more.
|
| > As long as you hold to maturity, the number of dollars
| does not change.
|
| A dollar now is not the same as a dollar 10 years from
| now. [2]
|
| [1] https://en.wikipedia.org/wiki/Real_versus_nominal_val
| ue_(eco... [2]
| https://en.wikipedia.org/wiki/Time_preference
| s1artibartfast wrote:
| I think we are misaligned on the reference time for the
| real valuation.
|
| If you buy a 10 year bond today, you will get $100m
| dollars in 2023.
|
| In 2033, that $100m will have a real value of $100m 2033
| dollars on your balance sheet.
|
| HTM assets are reported in the nominal purchase price
| today, which is also the real dollar value if you
| calculated it on the day of maturity.
|
| I agree that if you estimated the _net present value_ of
| $100m 2033 dollars, it would be worth less in terms of
| 2023 dollars.
|
| This brings us back to your earlier question
|
| >Do you really want to pretend that a ten year bond you
| purchased when inflation and the interest rate were near
| zero, is worth the same when inflation and the interest
| rate go up to say 10%? What about inflation of 100%? In
| nominal terms you'll get back your capital, but in real
| terms you will get back only one thousandth.
|
| YES! This way the asset sheet is always correct in how
| much you will get for the asset. If you have a $100
| nominal bond it is worth $100 dollars. That is true
| today, and that will be true on the day of maturity. It
| will be true every day in between. The dollar value of
| the asset remains constant at the time of reporting.
|
| Why would you want to report the net present value of
| that asset at maturation - which sounds like what you are
| suggesting?
|
| The point of listing your bonds on your balance sheet
| isn't to estimate profit or returns, it is to list your
| current asset allocation.
|
| You have a separate line item for revenue coming from
| those bonds. You have a separate model entirely for
| calculating ROI and profitability.
|
| If you made a spreadsheet of your current asset
| allocation today, how would you list money locked in a 10
| yr CD. As the dollar amount in the account, the value if
| you were forced to pull it out and pay a penalty, or some
| time shifted valuation?
| chordalkeyboard wrote:
| > In real terms, you will get back exactly a hundred
| million. In the npv at that date will be exactly 100
| million.
|
| you wrote 'real terms' when you meant 'nominal terms.'
|
| > $1 after inflation is still $1. It is just that the
| value of $1 is now different.
|
| That is why we distinguish between 'real value' and
| 'nominal value.'
| s1artibartfast wrote:
| >> $1 after inflation is still $1. It is just that the
| value of $1 is now different.
|
| >That is why we distinguish between 'real value' and
| 'nominal value.'
|
| What will the real value of a $1 bond be on your balance
| sheet the day it matures? exactly $1
| chordalkeyboard wrote:
| > What will the real value of a $1 bond be on your
| balance sheet the day it matures? exactly $1
|
| The real value _in future-date dollars_ will be $1. In
| present-day dollars it is likely to be less, the ability
| to refer to which distinction is the purpose of the
| formal difference between nominal and real value.
| s1artibartfast wrote:
| I agree. The difference between the two converges to zero
| as your your comparison time frames go to zero.
|
| Initial time for real dollar caluculation can be
| anything. You can ask what your real dollar salary is
| relative to 1950, or relative to 1951, or yesterday.
|
| You can ask what was the real dollar salary in 1951
| relative to 1950, or 2051 compared to 2050.
|
| While I meant to write real dollars, I wish I wrote
| nominal, based on how much confusion it caused.
|
| I still stand by the idea that it is silly, and not very
| useful to put a future return on investment _on an asset
| list_ in to 2023 dollars using a 10 year inflation
| projection.
|
| Then the reported asset would fluctuate based on your
| model, and you already know exactly where it will end on
| the maturation date.
| chordalkeyboard wrote:
| > Initial time for real dollar caluculation can be
| anything. You can ask what your real dollar salary is
| relative to 1950, or relative to 1951, or yesterday.
|
| Regardless of which day's dollars we use as a baseline
| for comparison, a bond issued under at a lower interest
| rate is discounted relative to the same bond issued later
| at a higher interest rate. Quibbling about how we express
| this valuation suggests you don't understand this
| difference, but this difference is important to
| understanding the current day banking crisis.
|
| > While I meant to write real dollars, I wish I wrote
| nominal, based on how much confusion it caused.
|
| You still seem unaware that these meanings and words are
| a very well understood convention that you violated. The
| only confusion was the confusion you had in the meanings
| you assigned to the words.
|
| > I still stand by the idea that it is silly, and not
| very useful to put a future return on investment on an
| asset list in to 2023 dollars using a 10 year inflation
| projection.
|
| The main thing is that these valuation rules exist for
| reasons and while we could debate which rules are good
| etc., understanding the basics of bond valuation and the
| common terminology we use to discuss them is a minimum
| prerequisite and I'm still working on getting you on
| board with the basic terminology every one else is using.
|
| There isn't much discussion to be had without a common
| vocabulary.
| s1artibartfast wrote:
| Im fine with your terminology and reference. The current
| date (or that of reporting) can be the reference time for
| a real dollar valuation.
|
| I fully understand how bond market prices are impacted by
| interest rates. What most people seem ignorant of is the
| fact that bonds are not simply market trades asset, but
| are also have a value at maturity. Most people don't seem
| to know that HTM assets are reported separate from
| securities available for sale, which _ARE_ tracked at
| market value.
|
| It seems obvious to me that if you never intend to sell a
| bond, the maturity value is a measure of interest.
|
| Do you have anything else to add to the discussion, or
| was that your only point?
| jameshart wrote:
| You can't _calculate_ NPV. You can only _estimate_ it.
|
| You _can_ value something at its current market value, if
| the asset is one that has such a thing. And fair market
| value will generally correspond to what you would
| estimate to be net present value, plus whatever risk
| premiums and holding costs and so on that the market is
| accounting for.
| pg314 wrote:
| > You can't calculate NPV. You can only estimate it.
|
| According to Merrian-Webster [1]:
|
| calculate: 1 b: to reckon by exercise of practical
| judgment : ESTIMATE
|
| [1] https://www.merriam-webster.com/dictionary/calculate
| jameshart wrote:
| Okay, weird bit of pedantry - pretty sure that if a math
| test asks you to 'calculate the product of 127 and 954'
| you wouldn't get many marks for answering 'about
| 100,000', but feel free to staple a copy of the
| dictionary definition to your exam paper and see if that
| works for you.
|
| But sure, let me clarify it to: you can't calculate a
| _precise_ NPV.
|
| You can only estimate one.
|
| Which, when we are trying to do things like 'calculate
| the total assets a bank has', makes the net present value
| of their assets a not very reliable number to use.
| pg314 wrote:
| > Okay, weird bit of pedantry - pretty sure that if a
| math test asks you to 'calculate the product of 127 and
| 954' you wouldn't get many marks for answering 'about
| 100,000', but feel free to staple a copy of the
| dictionary definition to your exam paper and see if that
| works for you.
|
| I wasn't taking a math test. I was saying something about
| NPV using a common meaning of an English word. You chose
| to ascribe a different meaning to that word, and
| pedantically - and incorrectly - tried to correct me.
| SilasX wrote:
| The problem, though, is that it's not necessarily 100% up to
| them whether they'll hold it to maturity, since withdrawals
| can force them to liquidate it. It seems like they should
| have a ruling forcing the use of some formula that factors in
| this possibility.
| shapefrog wrote:
| Except the treasury desk is paying 5% to the person who gave
| you the $100m to buy the bond that is paying you and interest
| rate of 1%.
| tnel77 wrote:
| Maybe both metrics would be useful. "If we had to sell today,
| this is our situation. If these bonds are held to maturity,
| this will be our situation."
|
| Seems like that would allow an investor to see the state of
| the bank more clearly.
| echion wrote:
| Definitely. And SVB's financial reporting / balance sheet
| showed this problem beforehand, AIUI.
| [deleted]
| UncleMeat wrote:
| But the entire point of computing current assets is to
| understand the effects of rapid withdrawals from the bank. If
| you are trying to predict the future value of the bank or how
| much money they will make then looking at the value at
| maturity makes sense. But the regulatory system doesn't (or
| shouldn't) care about that. The regulatory system should be
| concerned with estimating and mitigating the risk of sudden
| bank failure.
| stanleydrew wrote:
| I believe this is what various "stress tests" are for. If
| your bank is a certain size you have to basically do
| scenario planning for situations like "what if 25% of your
| deposits leave overnight and you have to sell securities
| that you didn't plan to sell?" As I understand the
| situation, SVB was just under the required size to submit
| to those stress tests.
| insonable wrote:
| The original asset threshold over which banks were
| subject to "enhanced prudential standards" in the 2010
| Dodd-Frank bill was $50B. In 2018 the requirement was
| amended to >$250B in assets, or at the discretion of the
| Fed for banks over $100B. SVB was reportedly at $210B in
| assets.
| andrekandre wrote:
| this one?
|
| https://www.cnbc.com/2018/05/24/trump-signs-bank-bill-
| rollin...
| bostik wrote:
| And SVB were one of the banks lobbying for that
| amendment. At the time they were falling close to the
| $50B limit themselves.
|
| So they certainly would have known at the time that being
| subject to the stricter regulations would have hurt their
| profitability.
| fwlr wrote:
| There are smaller tests for liquidity, but the specific
| major stress test that SVB lobbied themselves out of is
| the DFAST (the Dodd Frank Act Stress Test) and it does
| not test liquidity. It takes the scenario of an adverse
| economic situation and comes up with a bunch of
| hypothetical numbers you might see for major economic
| variables - "the unemployment rate will be this, the
| default rate will be that, etc," - and then banks have to
| run their books according to those hypothetical numbers
| and report back what their capital would look like in
| that situation. If it looks bad, they have to take action
| to make their capital more secure. Nowhere does it
| simulate a situation where depositors leave en masse.
|
| There _are_ liquidity tests and SVB was probably failing
| them (which is probably why the FDIC was paying close
| attention to them), but that specific test you've heard
| about is not related.
| insonable wrote:
| Domestic-focused banks with over $250B in assets need to
| comply with the Basel III inspired (I think?) LCR of
| enough high-quality liquid assets to cover 30 bad days of
| withdrawals. What is the requirement for banks under
| $250B? Another Q would be, did they sell their extension-
| risk suffering bond portfolio because those bonds didn't
| qualify as HQLA? I mean they'd seem to me to be liquid
| and high-quality just as they were, but any sales would
| harm their balance sheet right?
| fifticon wrote:
| to my understanding, they themselves lobbied legislators
| to put them under that size (by increasing the ceiling).
| codeflo wrote:
| > The "I intend to hold it" is the relevant part of the
| valuation, though.
|
| It's really not, at least not mathematically. That intentions
| play a role is purely an artifact of regulations.
| echion wrote:
| > > relevant
|
| > not mathematically
|
| Agreed. I don't think the GP was asking a mathematical
| question, so "relevant" meant "to explain why MTM
| accounting is not the only way".
| hn_throwaway_99 wrote:
| > The "I intend to hold it" is the relevant part of the
| valuation, though.
|
| Yup, and definitely anticipate there will be major new
| regulations in this area. A _huge_ part of SVB 's book of
| bonds were categorized as "Hold to Maturity". And, legally,
| if you mark bonds as HTM, you _are not allowed_ to hedge
| against their interest rate risk. Basically, the regulations
| say that if you 're hedging against interest rate risk, you
| don't really intend to hold to maturity, so you need to put
| them in the "Available for Sale" category.
|
| The fact that SVB had such a huge book of bonds at paltry
| rates with no/minimal hedging is just awful risk management.
| daydream wrote:
| > And, legally, if you mark bonds as HTM, you are not
| allowed to hedge against their interest rate risk.
| Basically, the regulations say that if you're hedging
| against interest rate risk, you don't really intend to hold
| to maturity, so you need to put them in the "Available for
| Sale" category.
|
| This seems like an important point that I haven't seen
| mentioned elsewhere. Lots of folks have been like "these
| people are morons they didn't hedge their crappy bonds."
| Can you write more about this?
| hn_throwaway_99 wrote:
| Well, "these people are morons they didn't hedge their
| crappy bonds" is pretty much correct. Here's a good
| explainer on the topic: https://corporatefinanceinstitute
| .com/resources/accounting/h... .
|
| But it's not _just_ that they didn 't hedge their
| interest rate risk, it's also that they assumed that
| their deposit base would continue to stay the same or
| grow. The problem is that their highly correlated deposit
| base of tech startups actually all needed to take their
| money out at the same time when they couldn't get
| additional funding.
|
| Thus, it's important to understand that banks themselves
| make the choice of whether a bond goes into the "held to
| maturity" or "available for sale" bucket. I'm not a bank
| compliance officer so I don't know the rules about how
| much they're allowed to put in each bucket, but one
| problem was that SVB incorrectly estimated how much
| liquidity they would need because they didn't plan for
| the risk of their deposits all needing to be drawn down
| simultaneously.
| landemva wrote:
| They went overweight in long duration bonds to get a
| little more yield. Terrible timing when interest rates
| were at 1000-year lows, but it kept the bonuses flowing
| and the stock compensation in the green.
| dragonwriter wrote:
| > Yup, and definitely anticipate there will be major new
| regulations in this area.
|
| It already happened. The new regulation is that the Fed now
| has a liquidity backstop for banks holding this asset
| class, using cash loans with a set maximum term against the
| par value.
|
| Apparently the Fed decided "if we treat it this way for
| capital adequacy, and we provide liquidity backstops for
| banks for other asset classes based on how they are valued
| for capital adequacy, maybe we should do the same thing
| here, since otherwise adequate capital can easily and
| suddenly become inadequate."
| bryananderson wrote:
| This backstop only applies to existing holdings. Banks
| can't go out today and load up on hold-to-maturity assets
| and expect the Fed to backstop them tomorrow with loans
| at par value. Presumably the next step is to regulate HTM
| holdings so that this won't be necessary again, or else
| you're creating a moral hazard.
| jasode wrote:
| _> So it is perfectly valid to say "in ten years, this $100m
| bond is worth $100m...and I intend to hold it for ten years,
| so it's worth $100m [equivalent] today". _
|
| But that valuation model is not perfectly valid. It's only
| partially valid under limited scenarios.
|
| As many comments have already pointed out, the issue is the
| bank has customers with _demand deposits_. The customers can
| demand withdrawal of their money anytime -- without advanced
| notice. In other words, SVB is not a hedge fund that has the
| customers ' deposits contractually locked up for 10 years.
|
| Therefore, the "10 year bond held to maturity" assumption
| becomes invalid if the bank has to _sell them prematurely at
| distressed discount prices_ -- to meet liquidity requirements
| of demand deposits.
|
| You can't use value securities as _" mark-to-intended-
| optimal-future"_ as an alternative to _" mark-to-market"_ for
| purposes of insolvency risk calculations.
| jnwatson wrote:
| Exactly. If you have a portfolio of 100% HTM bonds, your
| income schedule is completely predictable, down to the cent
| at every moment in time.
|
| But your deposit demand is unpredictable and must be
| modeled. I don't think even Taleb would have the scenario
| of "on Friday, you'll lose $40b of deposits." The bank
| would have had to be sitting on billions of T-bills, which
| ain't gonna happen.
|
| It seems like every bank is a tweet away from destruction.
| dragonwriter wrote:
| > But that valuation model is not perfectly valid. It's
| only partially valid under limited scenarios.
|
| Its valid _under the applicable regulations_. However, it
| is one case where having adequate capital under those rules
| was not backstopped by available liquidity measures from
| the Fed.
|
| One thing that seems to be generating less commentary is
| that, in the wake of the SVB collapse, and virtually
| simultaneously to the announcement of the systemic risk
| exception for SVB by the FDIC/Treasury/Fed, the Federal
| Reserve _also_ announced a generally-available liquidity
| backstop program for this kind of hold-to-maturity assets.
|
| > You can't use value securities as "mark-to-intended-
| optimal-future" as an alternative to "mark-to-market" for
| purposes of insolvency risk calculations.
|
| To the extent that refers to valuing the class of assets at
| issue at their par value, and to the extent that that was
| true last week, its not now.
| s1artibartfast wrote:
| >You can't use value securities as "mark-to-intended-
| optimal-future" as an alternative to "mark-to-market" for
| purposes of insolvency risk calculations.
|
| I think this is exactly correct, but I dont think that is
| the purpose and scenario reported on their financial
| statements. I think it is fine to report valuation in terms
| of "mark-to-solvent future", as long as the appropriate
| data is provided to enable insolvency risk calculations,
| and the "mark-to-solvent future" model is not presented or
| confused with a insolvency risk model.
|
| If an investor does not understand how HTM assets are
| accounted per regulation, but they are accurately reported,
| confusing the models is an investor error, not a bank
| reporting error.
|
| My understanding is that banks provide clear reporting, and
| are transparent with their HTM portfolio.
|
| HTM securities are typically reported as separate
| noncurrent assets; they have an amortized cost on a
| company's financial statements.
| timcavel wrote:
| [dead]
| revel wrote:
| There are liquidity, jurisdiction and tax considerations that
| go into bond accounting. Under both US GAAP and IFRS you can't
| flip between held to maturity, available for sale and m2m asset
| classification advantageously. I think this is ok -- it's
| impractical and misleading for a bank to value every liability
| and asset by rebaselining value constantly. How would you
| determine fair value for a bespoke security anyway? No matter
| what you did it would be largely guesswork anyway. This change
| would make banks more difficult to value and increase
| volatility since performance would be even more heavily driven
| by market conditions. In my opinion, accounting statements
| aren't really the right place for the kind of disclosure you're
| looking for.
|
| The Basel accords are supposed to establish a risk-oriented way
| of measuring and controlling capital risk limits across asset
| classes. SVB and other regional banks fought heavily against
| being subject to this kind of oversight. I think it makes more
| sense to rework Basel 4 based on this failure rather than
| change the accounting standards.
| kmod wrote:
| Many types of institutions have to mark to market on a
| ~constant basis, so it's not impossible. Yes there are
| certain asset classes (private companies, for example) that
| don't have easy or reliable marks (but people still do it
| anyway!). But at least for SVB the issue was not determining
| the market value, but that the market value was bad.
| bombcar wrote:
| It seems to me (being uneducated in the matter) that if a bank
| is holding US government debt (treasuries) as "hold to
| maturity" that the US Government should have _some_ ability to
| offer a line of credit against those assets for cases like this
| one was.
|
| Or that the bank should be able to say "depositor X transferred
| $100 million to Chase, so we sent Chase a wire for $10 million
| and treasuries marked HTM worth $90 million" or something.
| hnfong wrote:
| > It seems to me (being uneducated in the matter) that if a
| bank is holding US government debt (treasuries) as "hold to
| maturity" that the US Government should have some ability to
| offer a line of credit against those assets for cases like
| this one was.
|
| Yes, the Fed basically did this.
|
| See the recently (Sunday) announced "Bank Term Funding
| Program", which basically says if banks hold securities from
| the Federal government, the Federal Reserve will accept it as
| collateral for a loan, the collateral valued at par.
|
| https://www.federalreserve.gov/newsevents/pressreleases/mone.
| ..
| s1artibartfast wrote:
| There is a world of difference between the FDIC offering
| loans to be paid with interest on securities and forcing
| other Banks to accept it in lieu of real currency.
|
| The Proposal is closer to the idea that you should be able
| to pay your cash debt with stock valued at your purchase
| price, and not at the current market price.
|
| It would mean that a bank that owes another bank $100 could
| instead pay with Bond currently valued at $50, and then go
| out on the market and buy two identical new bonds with the
| money they saved.
| NovemberWhiskey wrote:
| You don't even need the government to do it; the thing you're
| talking about is called repo. A bank agrees to sell high-
| quality collateral to another bank and then buy it back the
| next day for a little more (the level of interest paid gives
| us SOFR: the Secured Overnight Funding Rate).
|
| The repo market is vast and generally massively liquid;
| trillions of dollars of funding per day.
| marcosdumay wrote:
| > US Government should have some ability to offer a line of
| credit against those assets
|
| What is the difference between what you are saying and just
| buying back the bonds before maturity?
|
| Anyway, governments do usually have all kinds of lines of
| credit against bonds. And when there is a difference, it's
| for the benefit of the government.
| bombcar wrote:
| It would be some form of emergency credit or something
| similar to the interbank loans, basically doing what
| they've had to do with FDIC anyway.
|
| Or the bank could have bought TIPS instead, I guess.
| marcosdumay wrote:
| > basically doing what they've had to do with FDIC anyway
|
| AFAIK, the thing the FDIC does is confiscate banks. Do
| they do anything else?
| bombcar wrote:
| FDIC uses funds from the member banks and backstopped by
| the government to make depositors whole.
|
| In this case, _all_ depositors with no limit.
| marcosdumay wrote:
| The interaction between the FDIC and a problematic bank
| is simply that the FDIC confiscates it. AFAIK, that's the
| only one they are allowed to have.
|
| They don't lend money, don't put money in it, don't do
| anything else. They take the bank for themselves, and
| then proceed to pay the depositors.
| s1artibartfast wrote:
| >Or that the bank should be able to say "depositor X
| transferred $100 million to Chase, so we sent Chase a wire
| for $10 million and treasuries marked HTM worth $90 million"
| or something.
|
| Why? HTM bonds are not cash so they are not interchangeable.
| This is like if you were forced to accept a 10 year IOU in
| place of cash from your employer.
| bombcar wrote:
| Regulations that required banks (directly or indirectly) to
| buy government bonds should also require the banks to
| accept interchange of them when needed.
|
| Banks exist at the whim of the gov't, it can require things
| for stability.
| s1artibartfast wrote:
| Sure, Governments can do anything they want. They can
| round people up and put them in gas Chambers. I'm just
| saying it's a bad idea and don't think the fact that the
| government _can_ do it has any bearing on if it _should_
| do it.
|
| With your proposition, I think it would be a terrible
| idea and reduce stability. I don't see how letting Banks
| unload bad assets on each other does anything to help the
| situation. The Bad Assets just follow the customer
| wherever they go and some unlucky Bank get stuck with
| them when the customer converts their cash to something
| like stocks or buys a cheeseburger.
|
| At best, you have just turned bonds into the same thing
| as cash, defeating the purpose of bonds to begin with.
| You buy a bond and are paid interest because you can't
| use it as cash.
|
| At worst it would be chaos. Everyone buys bonds and holds
| them when the value is good. When the value is bad,
| everyone forces each other to take over their bad
| Investments.
| alexpotato wrote:
| I'm surprised no one has already mentioned this series of
| events:
|
| - Enron used "creative" accounting and mark to something style
| procedures to create fake valuations
|
| - They go out of business.
|
| - Regulators say, "Hey! Now you need to mark to market always!"
|
| - 2008 happens. Markets for things like CDOs and CDSs dry up
| almost overnight. At the very least most of the liquidity is
| gone and spreads get VERY big
|
| - B/c of the above coupled with rules of "you need to mark to
| market" and "if value falls X% you have to sell", lots of
| selling happens in low liquidity environments and therefore
| prices fall more, the downward cycle begins
|
| - Post 2008, people realize that "mark to market, always!"
| maybe isn't the best idea.
|
| - I would imagine, that's why the Govt is saying "Ok, we will
| pretend that your assets are worth par value". They don't want
| to trigger the downward spiral.
|
| It's also interesting to note that the Govt made money on many
| of the assets they bought in 2008 at well below par value. The
| implication is that those assets were undervalued when they
| bought them. Again, I would imagine this is a selling point of
| the idea "the par value is probably not that bad price to pay
| for these things now".
| Scoundreller wrote:
| > At the very least most of the liquidity is gone and spreads
| get VERY big
|
| Isn't this just a way of saying "nobody wants to pay what I
| want to pay me?". Unless it's actually worthless, there's a
| buyer, you just may not like the price.
|
| The liquidity on my used socks is gone and spreads are very
| BIG. Why yes, I won't sell for less than what I paid for them
| new, but it's the market that's failed, not my insane pricing
| demands.
| funnymony wrote:
| House of cards is bad, but in the mean time consider such
| hypothetical situations - gov orders you, that you MUST
| sell a suburban house:
|
| - within next 15 minutes - within a year
|
| Each time frame will definitely result in different price.
| All of them will be what market was willing to pay, but
| prices are somehow still different.
|
| Forced sell does have an impact.
| lordnacho wrote:
| > B/c of the above coupled with rules of "you need to mark to
| market" and "if value falls X% you have to sell", lots of
| selling happens in low liquidity environments and therefore
| prices fall more, the downward cycle begins
|
| This is a _good_ thing. We don't want a house of cards that's
| so fragile as soon as it looks like it it's going to fall
| down, we pour glue all over it and prop it up with cardboard.
|
| Assets need to fall in value so that the next guy can have a
| chance to thrive. Some bank collapsing is an opportunity for
| some of the younger folks to buy up a piece, or leave with a
| team and a book of customers.
|
| We should have this happen regularly so that it isn't an
| earthquake each time.
| anonymouse008 wrote:
| You know as well as I that the reason is that cash was able to
| sit in banks without losing money as a depositor. That
| gentleman's agreement is gone, due a set of actors'
| individualistic and uncooperative actions.
| ouid wrote:
| There is a massive conflation of insolvency and illiquidity
| going on here, because the distinction requires more
| mathematical finesse than most people have.
|
| A bank is illiquid if its holdings require time to sell at
| "market price". Selling things like mortgages requires time
| because the buyer has to perform due diligence. If i have to
| sell mortgages right now, I'm going to be getting an awful
| price for them.
|
| OTOH, i can sell treasuries in a fraction of a second at the
| ask price minus epsilon. It's not a liquidity problem, its an
| assets < liabilities problem, (as you clearly state, I'm just
| frustrated by the discussion here).
| HWR_14 wrote:
| As I understand it, banks have some assets that are marked-to-
| market, and others that are assumed to be held to maturity.
| Their classification is determined when they are purchased, but
| there are rules governing the mix.
|
| To some degree this makes sense, because if the maturity
| timelines and classification are correct the bank is only
| losing opportunity cost and inflation-adjusted dollars. Not
| actual dollars.
|
| Meanwhile, if they need money from the fed it is offered
| against collateral based on mark-to-market value.
| NovemberWhiskey wrote:
| Isn't the short answer that if you made banks be flat interest
| rate delta, it would be impossible to make money as a bank -
| and therefore there would be no banks?
|
| If a bank that makes a mortgage loan has to buy an interest
| rate swap that zeros out the interest rate risk on that loan,
| then the replicating portfolio is basically ... nothing ...
| right?
|
| Banks have to be long duration risk to be useful.
| landemva wrote:
| Banks would charge fees for services.
| whatever1 wrote:
| So in a downturn all of the banks would just seem insolvent.
|
| What is the alternative ? To have the banks trading on a
| millisecond basis so that the mark to market value of assets is
| positive ? What about the transaction fees ?
| shawndrost wrote:
| The basic job of a retail bank is to fund long-term loans with
| short-term deposits. A bank which is doing this optimally is
| still curiously vulnerable to bank runs. If all short-term
| deposits decide to redeem at once, that collective decision
| might render the bank insolvent and incapable of returning
| deposits at par, because not all long-term loans can be
| immediately redeemed/sold at par. In the normal course of
| business, nobody thinks too hard about this. Asking such an
| institution to MTM (which is intrinsically about immediate
| redemption/sale value) is asking everyone to document and
| consider a bank's inability to immediately redeem all
| depositors. We're doing more of that, which has pros and cons.
| (Recent MTM disclosures set off the SVB run in advance of a
| planned SVB equity fundraise.)
|
| Finance is an imaginary staircase that only works until we look
| down and freak out. We don't document the robustness of the
| stairs because the stairs aren't real.
| Scoundreller wrote:
| > basic job of a retail bank is to fund long-term loans with
| short-term deposits.
|
| CDs are a thing. Unpopular because their rates sucked but
| that hasn't always been the case.
|
| Long-term loans become like short term loans closer to
| maturity. A mature bank should have a fair amount maturing
| every year, mortgages 24 or 23 or whatever years ago. Along
| with some early repayments or reissuances from people moving.
| Or 4 years ago for a vehicle, etc.
| shapefrog wrote:
| You just know that all the losing trades went from the _hold-
| to-sell-for-a-profit_ book to the _hold-to-maturity_ book.
|
| In the olde days that was the bottom drawer where you would
| stuff the losing tickets at the end of the day and hope that
| they were in the money tomorrow.
| [deleted]
| piepiethesailor wrote:
| I highly recommend watching Mark Meldrums video from yesterday
| that answers your question.
| dorianG4 wrote:
| The answer is simple of course, which is why no one does
| anything; the political and finance systems are in cahoots to
| enrich themselves and so such common sense policing to insure
| the stability of the system everyone relies on is not allowed.
|
| Finance crimes are low tech and have not evolved much as they
| don't need to; there's no policing.
|
| Have a go at it, elites scream communism and the like, and rile
| up the 2nd Amendment fan boys, only to throw the ones that go
| over the line in jail to keep up appearances.
|
| I've been noting and watching this same social ebb and flow
| since the 80s. The kids/teens then who soaked that reality up
| live it still today. IMO memory is why we had a mini-Reagan in
| Trump grow so popular.
|
| The reason such things you point out are allowed is they've
| always been allowed from the perspective of those benefiting
| from them. If the system was stable and accountable to the
| masses, the phony winners rich off mathematical inference but
| too inept to keep themselves alive would of course be subject
| to a terrible regime should _elites_ be required to pull on
| their boot straps; a figurative identity of being coddled is
| all they know!
| bhgtopt wrote:
| Talking about the detail is wasting the effort when the problem
| is located at higher level, which is, the whole system is built
| in a socialism territory, started when Gold is by planning
| (major element of socialism), taken away from banking industry.
| [deleted]
| ianferrel wrote:
| >Or rather, why is it that we allow a bank to not mark-to-
| market a security for which there is a liquid market?
|
| I agree with your main point.
|
| You'd have to be careful with regulation around this, because
| what you might end up with is banks preferentially seeking
| assets for which there is _not_ a liquid market so they can
| pretend they are worth more. That 's... not an obvious
| improvement.
| medo-bear wrote:
| people should divest from crypto and invest into the good old
| banking system
| meghan_rain wrote:
| In defense of bailouts, we need to acknowledge the systemic risks
| that a failing bank can pose to the broader economy. If we let a
| major bank collapse without intervention, the consequences could
| be far-reaching and have negative ripple effects throughout the
| financial system. By stepping in and providing a bailout, the
| government helps to maintain confidence and stability, ensuring
| that the entire system doesn't collapse under the weight of panic
| and mistrust.
| GrinningFool wrote:
| Was this ChatGPT?
| meghan_rain wrote:
| No, why? Or how even? Is there an Hackernews API for it?
| mooreds wrote:
| Read this all the way to the disclaimers at the bottom. It's just
| a fantastic piece of writing, digging deep into some of the
| unseen structures that underlie our society.
|
| I'm not close enough to the banking system to judge the truth of
| it, but it was beautiful.
|
| PS If you are on email lists, make sure to respond occasionally
| to the author. It's hard out there and they are shouting into the
| void. If a piece makes you smile/think/learn, tell them!
| photochemsyn wrote:
| It seems to avoid discussing a rather basic issue, which is
| that as Fed interest rates rose, the interest rates on deposits
| (i.e. individual savings accounts) did not increase at all due
| to bank executives wanting to harvest more of that pie for
| themselves. Hence people seem to have an incentive to move
| money out of banks and into money market accounts that were
| giving much higher returns on those deposits.
|
| The history here is illuminating: (Jan 1 2023)
|
| > "During the 1980s, savings rates climbed as high as 8%.
| Deregulation caused deposit interest rates to stay higher than
| financial institutions could sustainably support, which
| contributed to banking failures during that decade. In the
| 1990s, savings account rates decreased significantly, typically
| sitting between 4% and 5%. The 2000s kicked off with a
| recession, and savings rates fell to between 1% and 2%.
| Following the financial crisis of 2008, savings account
| interest rates fell to historic lows--below 0.25%."
|
| https://www.forbes.com/advisor/banking/savings/history-of-sa...
|
| See also: https://twitter.com/biancoresearch
| vkou wrote:
| It avoids discussing it because neither SVB nor most other
| banks offered their customers interest rate increases.
| makomk wrote:
| It's not discussed here, but banks probably couldn't increase
| their interest rates to be competitive with money market
| accounts etc because the whole root cause of the problem is
| that their deposits were backed up with long-term fixed
| interest rate bonds that paid substantially below the rate
| that someone could get by buying a bond now, and therefore
| below the return on money market accounts etc. How bad of a
| problem this is depends on how sensitive to interest rates
| the banks' customers actually are.
| lifty wrote:
| I have been seeing conflicting opinions from people in the
| financial know-how. On one hand, patio11 says that you can ignore
| this and that the banking system is very resilient. On the other
| hand, him and others mentions that you need to use 3rd party
| providers in order to distribute your deposits in order to have
| full insurance coverage. Is there any way for a non sophisticated
| person to avoid these headaches? Otherwise why is this so
| different than the knowledge required to self custody crypto-
| assets?
| nervousvarun wrote:
| Apologies in advance if I'm missing some context here but from
| my understanding it's pretty straight-forward: in the U.S. an
| individual is insured by the FDIC up to $250K. So anything you
| have over that in the one account is "susceptible" to bank
| failure losses (and even then it's not guaranteed that you'd
| lose your $...just possible).
|
| So if you have $1M parked in one account then you're at risk.
| $250K parked in 4 accounts caries zero risk.
| leetrout wrote:
| Per person per account type.
|
| Joint accounts are covered at 500k
|
| When a revocable trust owner names five or fewer
| beneficiaries, the owner's trust deposits are insured up to
| $250,000 for each unique beneficiary
|
| So 4 people = $1m
|
| https://www.fdic.gov/resources/deposit-
| insurance/brochures/i...
| dsr_ wrote:
| If you are storing more than $250K (the standard insurance
| limit), then you need to distribute your deposits. It is as
| simple as opening accounts in N/250000 banks, although if you
| are close to an integer or expect the cash to increase
| substantially, you might want more than that.
|
| So for individual people, this affects... maybe 5%. It
| certainly affects small companies, but those are entities that
| we, as a society, expect to have good financial advisors. (It
| turns out that many of them do not.)
|
| Every bank and credit union I've ever dealt with has
| prominently placed the FDIC or NCUA insurance terms on their
| paperwork, website and physical doors. When you sign up for an
| account with a brokerage/bank, they are always explicit about
| what accounts, if any, are protected savings and which are
| unprotected investment accounts.
| mikeyouse wrote:
| It's just not remotely practical to keep dozens of banks
| accounts with $250k in them for most companies. Many payrolls
| are larger than that, if you're renting a venue for an event,
| it'll be larger than that. Obviously well-staffed finance
| teams _could_ shuffle funds endlessly, but there 's just no
| economic value to creating treasury jobs for the sake of it.
| We'd be much better off just upping the FDIC limit to
| something like $5M and mandating better quality assets for
| the insured portion of bank deposits.
| forsakenTadpole wrote:
| recently had a call with Fidelity about this. many places
| including Fidelity will automatically split your cash
| between many banks on the bank end. for Fidelity the money
| in my Cash Management account will be split into up to 20
| different banks which means that up to $5 million is FDIC
| insured. https://www.fidelity.com/why-
| fidelity/safeguarding-your-acco...
| jnwatson wrote:
| It seems like a hack that really should be built into the
| system.
|
| It is insurance only for those in-the-know.
| ericpauley wrote:
| The idea is that if you're keeping 250k+ in cash sitting
| around you should probably be in-the-know. Deposit sweep
| accounts are incredibly easy to use, Fidelity lets you
| open one in ~5 minutes. Further, this isn't just some
| hack, as distributing funds around many banks makes each
| individual bank less brittle.
| Analemma_ wrote:
| If you have more than $250,000 in cash, keeping it in checking
| accounts is just dumb. Open a TreasuryDirect account and start
| buying T-bills... they're paying 5% right now, way more than a
| checking account.
| phphphphp wrote:
| Pretty much nobody has enough cash held in a bank account for
| this to be a concern. People were worried about SVB _because_
| it was so overrepresented with accounts of more than the
| insured limit _because_ it was used by cash-rich technology
| companies. A normal person, even if they're rich, probably has
| most of their net worth in assets (real estate, investments)
| and is not holding cash.
|
| Just don't exceed the insured amount in a single bank, and if
| you do need to have more than $250k in cash... either open a
| second account at a different bank or donate it.
| em500 wrote:
| Banks are slow moving institutions. I think most have not yet
| come to grips with the idea of a bunch of 20-somethings
| getting handed millions of $ for a nice plan but with $0
| revenue. OTOH, SVB was supposed to be specialized in such
| cases.
| leetrout wrote:
| Why should someone donate their savings?
|
| Putting money in the stock market is not the answer for
| everyone and their savings.
| pjc50 wrote:
| > Is there any way for a non sophisticated person to avoid
| these headaches?
|
| On your own account, once you reach $250k in _cash_ (not
| pensions or home equity etc) you 're basically in the financial
| 1% and you're sort of expected to be either sophisticated or
| speak to a "wealth management" firm.
|
| As a business it's more complicated in the intermediate zone
| before you can hire a Treasury Officer to deal with this, which
| is basically patio11's argument.
| gabesullice wrote:
| I think that advice was meant for different audiences. If
| you're a W2 employee who has modest savings, you're in the
| class of people who can safely choose not to add/remove/change
| any of your banking relationships. You are who the FDIC was
| designed to protect. If you're feeling like you must "do
| something" then open another checking account somewhere and
| keep a month's expenses there. That redundancy is probably
| worthwhile in good times and bad.
|
| If you're an owner and you need over 250k to be liquid on daily
| to weekly timescales, but hiring a three people to manage
| manage your bank accounts sounds unaffordable, you should find
| a 3rd party that can do that "cash sweep" thing for you.
| vishnugupta wrote:
| If you are over $250K limit and need that money under 2-3 years
| then T-bills is the way to go. I haven't used it as I'm not a
| US resident but I hear that it's straightforward.
|
| Beyond 3 years it makes sense to spread it among Index fund,
| gold ETF etc., depending on your need, risk appetite etc., But
| then we are venturing into "investment" and not "safe keeping".
|
| https://www.treasurydirect.gov/marketable-securities/treasur...
| Redoubts wrote:
| Not gonna lie, I feel like I've been reading this like a Rudin
| book, going back and over each paragraph again.
|
| This is probably the companion report to have on hand while
| reading:
|
| https://www.fdic.gov/analysis/quarterly-banking-profile/inde...
|
| In particular
|
| * Chart 8. Number and Assets of Banks on the "Problem Bank List"
|
| * (Chart 13.) Unrealized Gains (Losses) on Investment Securities
|
| Sadly, "Results are published approximately 55 days after the end
| of each quarter (i.e., 55 days after March 31, June 30, September
| 30, and December 31)." So there's nothing super new. Bit it
| strikes me that Chart 13 is going bonkers on unrealized losses,
| but Chart 8 isn't quite matching the same (assets in problem
| banks, and # of problem banks is going down since rate hikes??).
|
| Really wanna see that number for 2023Q1. But the quote
|
| > about a quarter of all equity in the banking sector has been
| vaporized by one line item.
|
| Struck me as pretty wild.
| coryfklein wrote:
| Money quote:
|
| > Regulators then heard the numbers, did a bit of modeling in
| Excel, and then went into wartime execution mode. Regulators
| have, of course, not declared this war, because it is a war on
| the public's perception of reality, and to declare war is to
| surrender.
|
| SO MUCH of this drama is really a war on perception more than
| anything else. Banks being "underwater" on 10 year treasuries is
| only a problem *if everyone thinks its a problem* and if everyone
| just goes about their daily business ignoring this story, then
| after 10 years all the bonds mature and nobody is the wiser.
| NovemberWhiskey wrote:
| > _The U.S. banking system lost $620 billion. Six hundred twenty
| billion dollars. That is a loss no less real than if money had
| been loaned out to borrowers who defaulted_
|
| Uh, no. That's just nonsense. If you lend money to a borrower who
| defaults, you immediately lose your principal and future
| interest, subject to whatever recovery rate you achieve. It's an
| actual, _realized_ loss.
|
| Banks have masses of _unrealized_ losses on their long-dated
| Treasury holdings, but if you hold those bonds to maturity, you
| 're going to get your principal and your interest.
|
| It should be pretty clear those are Not The Same. The clue is in
| the word "realized", right?
| colinsane wrote:
| now we're getting into weird philosophical questions: if every
| bank had sold these treasuries (realizing the loss) and used
| the proceeds to buy similar treasuries, their portfolio would
| be basically the same: same present value (obviously), and same
| to within a few percent future cashflows. at any layer above
| the balance sheet, these two worlds are difficult to
| distinguish. so what makes one "real" and the other not?
| peripitea wrote:
| The term "real" is overloaded. The author is clearly using a
| meaning here that is different from the one you are using, but
| that is intentional. His usage makes sense in the context of
| that particular segment of his writing. From an equity
| perspective, those losses are very real whether they are
| realized or not.
| chordalkeyboard wrote:
| As Schumpeter predicted, the complexity of our economy is has
| outstripped our language and consequently our ability to
| understand it.
| daydream wrote:
| > The losses banks have taken on their assets are real. They
| already happened. They are survivable if banks remain liquid.
|
| But... they aren't real yet? They haven't been realized. If held
| to maturity they will be paid back in full.
|
| Which I know the author is fully aware of. So I don't understand
| this point.
|
| > I would suggest one has at least one backup financial
| institution. If one hypothetically does not, I would observe that
| opening bank accounts rounds to free. Thousands of perfectly good
| financial institutions exist.
|
| Some people have investment accounts with brokerages like
| Fidelity or Schwab. Many brokerages (including the two mentioned)
| offer cash management accounts. They offer deposit insurance
| similar to FDIC and will give you tools similar to checking
| accounts. Debit cards, checks, bill pay, etc.
|
| They can be excellent backup accounts that don't add the
| additional overhead (however small) of yet another company to
| deal with.
| nostrebored wrote:
| > But... they aren't real yet?
|
| Barring something extremely abnormal happening, aren't low-
| yield bonds seeing real losses already due to inflation?
|
| Like it doesn't have to be the spot price we're talking about,
| aren't many of them toxic already and others expected to track
| there?
| bombcar wrote:
| This is true, but there can be a lot of slight of hand when
| talking about dollars and future dollars.
|
| Banks run on nominal dollars, and SVB would have remained
| capitalized if withdrawals hadn't overwhelmed their ability
| to get ready cash, which caused them to sell at a loss, which
| spooked everyone, causing a run.
| nostrebored wrote:
| Right, but if they're expected to be toxic you would mark
| them down nominally as well. It's not like the real losses
| aren't also nominal when realized.
|
| And whether the metric you care about is the real losses or
| the expected nominal value at maturity depends on whether
| inflation continues to raise. As this also suggests
| interest rates increase, you get hammered on both sides.
| s1artibartfast wrote:
| No, because they still are with the same number of
| dollars, it it just that the dollar itself is worth less
| that it was.
|
| If you say you have $100 worth of bonds, this is accurate
| at all points of time you hold it. What you can buy with
| $100 may be changing from year to year.
| klooney wrote:
| > aren't low-yield bonds seeing real losses already due to
| inflation?
|
| But bank deposits aren't in inflation adjusted dollars.
| echion wrote:
| > > The losses banks have taken on their assets are real. They
| already happened. They are survivable if banks remain liquid.
|
| > But... they aren't real yet? [...] So I don't understand this
| point.
|
| If people withdraw their deposits, the bank will have to
| deliver the money somehow...by selling the assets that have
| lost money. So the point is that although, if nobody withdraws,
| the losses are survivable, if enough people withdraw, the
| losses are not survivable. As soon as depositors realise this
| situation, they will withdraw their money. So that's the
| problem.
| daydream wrote:
| Yes, if the bonds must be sold to cover withdrawals then the
| losses become realized (real) at that point. But not before.
| bostik wrote:
| From all the information I've gathered, there is an
| unstated aspect to this.
|
| If _any number_ of HTM bonds are sold to cover withdrawals,
| then _all of them_ must be revalued and losses realised on
| the whole lot.
| jnwatson wrote:
| What. That's insane. Essentially, if your deposit
| modeling is off just a little bit, you're dead.
| jijji wrote:
| banks investing in bonds that then get reduced in value, turning
| into losses, as the fed increases its rates seems like a bad
| investment from the very beginning... every month there are
| property tax auctions for property that happens every where in
| every state in different ways, and I remember when I used to go
| there in person before they moved to the online method in my
| state, I would meet with people who worked at specific retail
| banks and they would invest cash into property as long as the
| bidding met a margin of 33% of whatever the value of the property
| might have been worth at that time... That's a pretty safe bet,
| as property doesn't degrade the same way that a bond, stock or
| investment loan might degrade if someone defaults on it... I'm
| not sure why people like SVB would be not doing the same thing
| maybe it's too tricky for them to figure out or they're happy
| investing most of their money into wineries which apparently is
| what has happened.... not sure but it seems like when you're
| sitting on a pile of cash there's better ways to invest your
| money with a lot better returns....
| A4ET8a8uTh0 wrote:
| "This is a temporary program; banks can only tap this liquidity
| for about a year. In the ordinary course, bank runs don't last
| for a year; they either cause an institution to fail very quickly
| or peter out. But the other reason this is time-bounded is to
| defang the moral hazard, on behalf of both banks and their
| customers. (Moral hazard in insurance is when the existence of
| insurance makes it incentive-compatible for you to be imprudent
| in your own risk taking, expecting someone else to bear the
| consequences.)"
|
| This is likely the most important part. FED, Treasury and
| administration bought some time, but what happens after one year
| is anyone's guess.
| [deleted]
| zie wrote:
| That was the Fed and treasuries way of telling all the owners
| of banks across the US, take the beating or else.
|
| If the banks listen and take the beating, invest more equity
| and re-adjust their banking practices to handle interest rate
| risk, nothing exciting happens.
|
| If the banks don't heed the klaxon call, they will likely get
| wiped to zero and cease to be owners of banks anymore(because
| the FDIC will take the bank over and say enough).
| Depositors/customers of the banks will probably be just fine
| though. The FDIC will either find a new set of owners or
| dissolve it and move customers to new banks that did take the
| beating.
|
| I imagine some idiots will try and call the bluff, get wiped to
| zero and hopefully learn something in the process, if only to
| not be a bank owner anymore.
| A4ET8a8uTh0 wrote:
| I will admit that I did not think about it in those terms,
| but that is why I like to come here ; you are exposed to
| different perspectives.
|
| Do you think this is a way for FED to raise the rates further
| despite the interest risk you mentioned since failure of SVB
| put next interest hike into question[1]?
|
| edited for clarity
|
| [1]https://www.marketwatch.com/story/bank-fallout-undermines-
| fe...
| zie wrote:
| I think the Feds are going to keep fighting inflation. Will
| they rate hike or not I have no idea, but I'd be very
| surprised if they lowered rates right away.
|
| Unless the economy really goes bonkers stupid and crashes
| hard, I really don't see them lowering rates anytime this
| year and maybe not next.
|
| A few banks that were arguably stupid crashing and burning?
| Well that's part of the expected cost of fighting
| inflation.
| konne88 wrote:
| He seems to say that the fractional reserve system is the only
| way society can work. But is that actually true? Quite a few
| banks (e.g. Brex) now allow you to keep your money in a money
| market fund, which invests in short term US treasuries that are
| protected by the full faith and credit of the US government.
| Importantly, in this setup, you own all the assets and the bank
| just acts as a custodian. And you tend to get better interest.
| That just seems so much saner than the bank being allowed to
| invest your money in risky and illiquid assets, and then we just
| hope that those investments don't lose too much money, or that a
| lot of people don't want to withdraw their money all at once.
| notShabu wrote:
| It's the only way to _keep_ society working. Most of the money
| that exists today (over 90%) is actually bank IOUs kept in
| their database and is what people see when they log on into
| their accounts.
|
| Without a fractional reserve system, the liquidity that drives
| all economic activity grinds to a halt as everyone fights over
| the few remaining real dollars rather than managing their
| deployed capital.
|
| Banks basically act to multiply the amount of money in the
| world _today_ by creating promises about the _future_ that act
| as a bridge that moves money from the future into the present.
| That money then flows into restaurants, dog walkers, software
| engineers, etc... Inflation is kept in check b /c the promises
| force the money to be paid back to the bank via monthly loan
| repayments.
|
| Banks that only hold short term reserves or cash equivalents
| like Brex don't act as this multiplier. Going forward it's
| likely small banks will move towards this model as only the big
| banks that are too big to fail (b/c they are necessary as
| multipliers) can afford to take on the risk of longer term
| investments or creating loans.
| KaiserPro wrote:
| A traditional bank used to take people's deposits and loan them
| to other for a fee. the fee would then be returned on aggregate
| to depositors less the cost of business and profit. this is so
| called fractional reserve banking.
|
| But that doesn't really provide that much interest to
| depositors, in this age of loose money supply.
|
| So there are more exotic functions that "investment" banks
| fiddle with. Ie trading on the stock market (regulated betting)
| buying companies, and trading on futures and other pure bets.
|
| The problem is that banks are bigger, and have more depositors.
| So when one pops, other go because they are all doing the same
| shady shit to make profit.
|
| In the UK there are still a few building societies that offer
| traditional, boring, consumer banking and mortgages. But they
| are now large national behemoths.
|
| But to your point, Brex is a payment manager/facilitator. Its
| not really offering banking, its more a service to manage
| expenditure. This might seem like pedantry, but its different
| enough to make the point.
| konne88 wrote:
| I would disagree that Brex (and many others in the space)
| aren't offering banking. I can deposit money, I can withdraw
| it, I have a credit card, I earn interest, etc, they seem to
| offer everything a traditional bank would.
|
| To your point about risky investments, like stocks, I agree
| that that's very sketchy. But I think even very prudent banks
| that don't invest in stocks etc still take on a lot of risk,
| like we see with the bank collapses caused by the high
| interest rates these days.
| kasey_junk wrote:
| I like this and it rings true for the most part to my experience.
|
| But I find 2 parts of it troubling. First 'patio11 seems to have
| bought into the goalpost movement around depositor obligations in
| the banking regime. It maybe that as a society we don't want any
| depositors, no matter how big, to have no concern about
| counterparty risk (or maybe move the bar higher) but that's not
| the assumption built into the system now and it's not obvious on
| its face or in the essay that it should change.
|
| Second, the appeal to FBO operators falls flat. Large custodial
| firms have existed for decades and being able to provide a
| beneficiary list on the weekend is something they build and
| staffed for. That it is difficult for other technology firms to
| do so says more about the choices those firms are making than an
| intrinsic problem with the existing system.
| floathub wrote:
| The claim that, "when interest rates rise, all asset prices must
| fall" seems, uhm, somewhat off. If this were true, it would be
| trivial to stop and reverse inflation (i.e. deflate) with any
| increase in interest rates (?).
|
| While it's certainly useful to think about prices as signals
| that, "embed an interest rate derivative", it seems a stretch to
| claim every single one of those derivatives is perfectly
| negatively correlated with interest rate changes.
|
| [EDIT: change "interest price" to "interest rate"]
| Der_Einzige wrote:
| Not sure why you wrote this since nearly all prices are falling
| right now, directly due to interest rate hikes.
|
| How could you conclude that an interest rate hikes _wouldn 't_
| reduce all asset prices?
| Camus134 wrote:
| "If this were true, it would be trivial to stop and reverse
| inflation (i.e. deflate) with any increase in interest rates"
|
| Well, that is the strategy of the Fed. Raise interest rates
| when we experience too much inflation.
| floathub wrote:
| The Fed strategy is to reduce the rate of growth (1st
| derivative) or prices, not reduce the actual price level
| (which would be deflationary). And that's non-trivial for
| many reasons, including the fact that not every price signal
| responds the same to short term interest rate movements.
| 1980phipsi wrote:
| The mechanism is mentioned by another, but the idea is that
| higher interest rates reduce the present value of future cash
| flows, resulting in lower asset prices. However, this analysis
| is holding everything equal, which is not true in real life.
| For instance, if higher interest rates are due to higher
| inflation expectations reflecting stronger nominal growth, then
| some assets might do better in such an environment.
|
| Your second argument is that it would be trivial to stop and
| reverse inflation if it were true, but even if it were true it
| would not be so easy. The way we measure inflation is based on
| the prices paid for goods and services of consumer goods. If
| the only change from an interest rate hike were on asset
| prices, then this doesn't directly impact prices of consumer
| goods.
| dkjaudyeqooe wrote:
| It's basically true. A simple example is housing. People will
| generally borrow as much as they're allowed and spend all of
| that on the best house they can afford. That tends to raise
| property prices as the borrowed money chases housing stock.
| That's been very evident these last years.
|
| The opposite occurs when interest rates go up, people can no
| longer borrow enough to pay asking prices, demand falls and
| prices fall to meet demand.
|
| There are obviously other factors involved but the basic
| relationship holds.
| mjdesa wrote:
| > The claim that, "when interest rates rise, all asset prices
| must fall" seems, uhm, somewhat off.
|
| It's a necessary condition of the discounted cash flow asset
| pricing model.
|
| https://en.wikipedia.org/wiki/Discounted_cash_flow?wprov=sft...
| floathub wrote:
| Yes, a future stream of cash flows will be worth less now if
| interest rates rise, because the time value of money has
| changed. But not every asset (let alone every price)
| represents a future stream of cash flows.
|
| Monetary policy could be performed by a couple of NAND gates
| if it were genuinely the case that any interest rates rise
| would necessarily lower the price of _everything._
| greesil wrote:
| Bond prices fall. Not all assets.
| peripitea wrote:
| Yes, but you don't want to deflate for other (often worse)
| reasons. So could they raise interest rates to 10% and kill
| inflation? Easily. The trick is in raising them to the
| appropriate level to curb inflation without suffocating the
| economy.
| vishnugupta wrote:
| > it would be trivial to stop and reverse inflation (i.e.
| deflate) with any increase in interest rates (?).
|
| As trivial as it sounds it is exactly _the_ premise with which
| fed operates. Their mandate is price stability (~2% inflation)
| with low unemployment rate. And interest rate is a key lever
| they have. So yes they are going to keep rising rates until
| they see inflation come down to around 2%. They harp on this at
| every FOMC meeting[1]. They believe raising rates to around
| 4.75% will bring down inflation to 2%.
|
| Will be interesting to see how it plays out.
|
| [1]
| https://www.federalreserve.gov/newsevents/pressreleases/mone...
| jgilias wrote:
| That was on February 1st though. They also have a mandate to
| keep the financial system stable.
| lordnacho wrote:
| > The claim that, "when interest rates rise, all asset prices
| must fall" seems, uhm, somewhat off.
|
| Of course there are instruments like interest rate derivatives
| where you can make money when rates rise, but he's talking
| about ordinary assets like bonds and equities.
|
| The reason all prices do indeed embed an interest rate is that
| all future cash flows need to be valued somehow, and those
| values go down as interest rates go up. So your equity that
| (somehow) is guaranteed to pay 10c next year is worth less if
| interest rates go up, just like if it were a bond.
| bubbleRefuge wrote:
| There is allot of financial illiteracy regarding the banking
| system. For example, heard an NPR reporter this morning talking
| about a bank not having money to loan because of depositors
| fleeing. These are vestiges of the Gold standard. There is no
| loanable funds market. That is, the funding for loans does not
| come from deposits. It comes from thin air. Banks create loans
| which then become deposits. So called "Bank Money" . In order to
| create loans and stay in the lending business, banks are required
| to have certain levels of capital.
|
| * The Fed has control of quantity of money . No. The Fed controls
| the direction of interest rates via interest rate policy or
| simply put the Fed determines the price of money.
| zhte415 wrote:
| > There is allot of financial illiteracy regarding the banking
| system.
|
| And nor does the balance sheet become inexplicably unbalanced.
| It issues bills, a liability, which will cancel out as an asset
| unless it sells them, or takes a value from it's balance sheet
| capital, or gets interbank funding (which still balances,
| because that's another bank's asset).
|
| You're not wrong a bank can fund it's lending, indeed there's
| that often cited BoE paper all about it, but that funding
| doesn't come from thin air.
| bubbleRefuge wrote:
| The accounting is like this. Bank A is in compliance for the
| current period of time under examination (capital requirments
| and reserve requirements). Bank A makes a loan L1 to person
| B. This is a contract. Bank A has an asset in L1 on its
| balance sheet(this improves its capital ratio) and person B
| has L1 on her balance sheet as a liability. Person B makes a
| deposit of L1 amount into Bank B. Bank B has a liability of
| L1. Person B has an asset of L1 which is her deposit which
| she owns. Finally, Bank A makes a reserve payment to Bank B
| of L1. These reserves come out of the reserve account that
| each bank has at the Fed. The reserves maybe borrowed in the
| Federal Funds market on demand so long as the bank is in
| compliance.
| dancingvoid wrote:
| I'll add that the reserve requirement is currently zero.
|
| https://www.federalreserve.gov/monetarypolicy/reservereq.htm
| zhte415 wrote:
| It might be worth adding that regulatory capital requirements
| are not zero:
| https://www.federalreserve.gov/publications/large-bank-
| capit...
| vishnugupta wrote:
| +1.
|
| To add, the vast amount of money that's circulating is created
| by banks. As I keep harping, refer to this article by BoE for
| details.
|
| https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/m...
| anononaut wrote:
| I'll add that approximately 97% of US dollars are created in
| this way.
|
| https://positivemoney.org/how-money-%20works/how-banks-%20cr...
| O__________O wrote:
| Stating obvious, this is only true until debts exceed a
| leverage US government has to inject currency it magically
| creates or utilize other financial tools it has available. At
| the point they are unable to do so, that's no longer the case,
| system reaches a critical point for which recovery will take
| real assets at fair market value on the global market.
|
| Ironically, US's down fall may be its own failure to believe
| itself.
| bubbleRefuge wrote:
| If Banks make bad loans and those loans( or investments) are
| marked to market bringing the bank out of compliance with
| Capital requirements, then it gets shutdown.
| makomk wrote:
| Banks do create money out of thin air, but depositors fleeing
| does in fact limit their ability to loan money. Here's how that
| works: every time a bank loans money, they create an asset (the
| repayment they're owed) and a matching liability (the actual
| money sitting in someone's account). So long as this stays
| within the bank or outflows match with inflows, everything
| works. However, if money starts flowing out of the bank overall
| for whatever reason then the trick no longer works - and that
| includes if the money is being transferred out by customers
| other than the ones being lent to, such as their employees or
| suppliers. The main consequences of this are usually that one
| bank can't be substantially more aggressive in lending or offer
| substantially different interest rates than everone else, which
| of course affects demand to borrow money from the bank.
| Acumen321 wrote:
| This is a very popular but false 'take the gist of it as true'
| misunderstanding.
|
| Yes, banks do "create" money. No, it is not out of thin air. It
| absolutely does come from deposits.
|
| An example of how banks "create" money, is person A has $100. A
| deposits it. The bank lends that $100 to B. Now B has $100, but
| A also still thinks they have $100, even though they just have
| a number on a piece of paper.
|
| They system goes from acting as if $100 exists, to acting as if
| $200 exists, but really there is only $100, and an IOU for
| $100.
|
| That is what bank money "creation" is. It is not from thin air.
|
| People get confused because "money", as in fiat currency, is
| also a Government IOU. But the above principle is true for
| gold, bitcoin, or any asset, and they wouldn't get mixed up the
| same way thinking banks create gold out of thin air.
|
| It is a starkly different thing than how the Government creates
| money.
| bubbleRefuge wrote:
| There is not a dependency on deposits in order create loans.
| This is false. Banks can make loans to the extend of demand
| for loans at the banks terms. Deposits have nothing to do
| with it in terms of funding. The bank must be in compliance
| with capital requirements and reserve requirement in order to
| be in the federal reserve system . As Mosler says (founder of
| MMT) The loan guy does not call the deposit guy at the bank
| before making a loan.
| __MatrixMan__ wrote:
| I went in search of the capital requirements, just to get a
| feel for what limits do exist--since they're no longer
| directly connected to deposits. I found them: https://www.e
| cfr.gov/current/title-12/chapter-I/part-3/subpa...
|
| But then my eyes glazed over and I remembered that I am not
| proficient in this language. Presumably the following
| requirements do place some limits on how much money they
| can have created?
|
| > A common equity tier 1 capital ratio of 4.5 percent.
|
| > A tier 1 capital ratio of 6 percent.
|
| > A total capital ratio of 8 percent.
|
| > A leverage ratio of 4 percent.
| bubbleRefuge wrote:
| Every time a good loan is made. Thats an asset for the
| bank.
| Acumen321 wrote:
| The loan guy absolutely does need to make sure the bank has
| the cash to make the loan. You can't loan more money than
| you have. What happens when B goes to withdraw it from the
| bank to buy a car or house if it isn't there?
|
| If banks can loan more than they have by say borrowing the
| money at a lower rate than they lend it, that invalidates
| your basic premise of banks creating money. They wouldn't
| have created it, they would have borrowed it.
| cm_silva wrote:
| Weird, and I thought fractional reserve banking was a
| thing.
|
| https://en.m.wikipedia.org/wiki/Fractional-
| reserve_banking
| Acumen321 wrote:
| It is (was) a thing, the idea works exactly the same way.
| Person A deposits $100, bank lends $90 to B, $10 goes to
| reserve (if 10% reserve rate). System thinks there is
| $190 instead of $100, so money is "created".
|
| As of 2020 in the US the reserve rate is 0%: https://www.
| federalreserve.gov/monetarypolicy/reservereq.htm
| bubbleRefuge wrote:
| Person A does not need to make a deposit to fund load for
| Person B. If bank is in compliance they can make the
| loan.
| bubbleRefuge wrote:
| see my other reply on the balance sheet operations above.
| Acumen321 wrote:
| There are many problems with your understanding, but the
| simplest total failure of your model is that if the bank
| did just get the money from somewhere else to lend, it is
| not creating it.
|
| You are not describing the bank "creating" money, which
| they actually _do_ as per how I described. You are
| describing the bank borrowing money.
| bubbleRefuge wrote:
| I disagree . And language can get tricky here. You don't
| need deposit amounts in order to make loans. There is a
| bunch of gymnastics under the hood of the transaction I
| described but none of it requires consumer deposits.
| Acumen321 wrote:
| You start a bank, I come to take out a loan and I want it
| in cash since I am buying a used car this afternoon. You
| have no cash since you said you don't need it, are just
| going to create it. Where does the cash come from? If you
| get it somewhere else, like the FED, you clearly aren't
| creating it, the FED is, right?
|
| If you need to involve the FED (which you don't as per
| how I described) then the FED creates the money, not the
| banks. This invalidates your entire premise.
| bubbleRefuge wrote:
| Moving the goal posts. Loans are contracts that create
| deposits. What you do with your deposit is a separate
| operation.
| bubbleRefuge wrote:
| Additionally, if you take my example above and change
| bank B to bank A which is completely feasible in the real
| world, then it is thin air.
| 2143 wrote:
| I just don't get this about the system in the US.
|
| If you keep creating money out of thin air -- which as per my
| admittedly naive understanding is equivalent to just printing
| money without giving back anything in return -- wouldn't it
| ultimately lead to a collapse or a hyper inflation? Like it did
| in Venezuela a few years ago (???).
|
| Why is the US seemingly immune to this kind of thing?
| pearjuice wrote:
| >Why is the US seemingly immune to this kind of thing?
|
| See https://en.wikipedia.org/wiki/List_of_countries_by_milita
| ry_...
|
| Not trying to be a low-effort reply but any Economy 101
| textbook will theorize that it's impossible. Practically, the
| world is too dependent on the USD in one way or another. If
| they try to break loose, they might get confronted with those
| military expenditures which is a good enough incentive to
| keep using USD as a global reserve currency.
| notahacker wrote:
| No, really, this argument is even worse ignorance than the
| gold standard stuff, because it isn't true even as an
| oversimplification or historical detail.
|
| The difference between Venezuela and any relatively stable
| country (the US is one of many, some of which have tiny
| armies and pacifist foreign policies) isn't military
| spending or reserve currency status, it's that the money in
| the country with the stable currency is created as a debt
| which the borrower and bank has to be repay in future (with
| the central bank also intervening if it thinks too many
| borrowers and banks are taking on debts) whereas the money
| in places like Venezuela is being created to pay off debts.
| pearjuice wrote:
| >which the borrower and bank has to be repay in future
|
| And when do you expect this debt to be repaid back? If
| you cycle all the way back, at some point the money is
| created out of thin air backed by nothing but believe
| that the US will not default. It's not ignorance but
| reality that as long as you are the strongest arm in the
| room nobody is going to challenge you into paying back
| your debts. Yes, on paper it's all economically sound and
| "basic accounting" but the reality of the situation is
| that if America would not be able to defend its position
| as "stable country", nobody would accept their debt
| denoted in the currency they create themselves.
| notahacker wrote:
| > And when do you expect this debt to be repaid back?
|
| According to the terms of the loan or repo or maturity
| date of the bond. The money isn't "backed by nothing"
| it's backed by the productive capacity of an economy, and
| virtually all of it is created by market demand for
| credit, not the demand of the US government.
|
| > It's not ignorance but reality that as long as you are
| the strongest arm in the room nobody is going to
| challenge you into paying back your debts.
|
| It's _absolutely_ ignorance to base your arguments about
| how a monetary system works on the assumption that the US
| is the only country in the world with a stable currency
| and modern central banking. The majority of the developed
| world is not "the strongest arm in the room" and people
| happily use those countries' currency and buy up their
| domestic-currency-denominated sovereign debt without any
| worries about hyperinflation or their military.
|
| The military is of significance only to the extent that
| the dollar wouldn't be worth very much if the US was on
| the verge of being annexed by Mexico, but Venezuela has a
| military that prevents it from being annexed by Colombia
| too, and its military spending in excess of its
| productivity is still a cause of rather than a solution
| to its problems
| alxmng wrote:
| Because:
|
| 1) taxation destroys money.
|
| 2) new money can be absorbed by economic growth. Imagine you
| have $100 in an economy and 100 apples. $100 is added, so
| there's $200/100 apples. Inflation might occur. But if you
| make 100 more apples, so there's $200/200 apples, the ratio
| of money to goods didn't change, and you wouldn't get
| inflation. That's an extremely contrived example, but it gets
| the point across.
|
| Considering both of those factors, I hope it's understandable
| that printing money doesn't _necessarily_ cause inflation.
| bubbleRefuge wrote:
| 100% . Exactly and if "money" lands in the accounts of
| agents (people, businesses) who do not spend it, its not
| inflationary. If I have 10 trillion dollars in my account,
| but I do not use it. Its not inflationary. This is called a
| demand leakage. Savings is a demand leakage.
| Counterintuitive.
| hnuser847 wrote:
| Even in this example where inflation doesn't occur,
| consumers will never benefit from the productivity gains
| that allowed producers to make more apples. Something
| clearly changed that allowed more apples to be produced.
| Maybe a significant amount of capital was invested in more
| machines, or a new, faster growing cultivar of apple was
| developed. In any case, the entire benefit of the free
| market economy is that competition creates an arm race for
| better products at lower prices. When the central bank
| steps in and creates a bunch of new money, it destroys any
| benefit of increasing productivity, since apples with
| always be $1, regardless of whether 100 are produced or
| 1,000.
| bubbleRefuge wrote:
| Central Banks allow us to pay each other and regulate
| banks to operate in the best interest of the economy by
| making 'good' loans. You are describing a gold standard
| or fixed monetary system. These systems have lead to
| deflationary collapses time and again. Without getting
| off of the gold standard as it was defined we would have
| never funded WW2 which was the larges money printing
| event in US history equating to 22% of GDP in government
| deficits.
| alxmng wrote:
| Yes, this is an important point: it matters how new money
| is created. $100 isn't created and given to everyone.
| It's created and given to the apple producers to make
| more apples. This is government spending.
| notahacker wrote:
| Sure, that's why no consumers have ever benefited from
| any productivity gains ever...
|
| Central banks don't fix the price of apples. They simply
| make it possible/easier for cultivators of apples to
| obtain capital to invest in more machines or developing
| new cultivars of apples. The alternative is that
| cultivators have to try to find the capital by borrowing
| more expensively from a fixed supply of stored wealth.
| From the point of view of people holding the stored
| wealth, the arms race for better products at lower prices
| becomes a zero sum game where it's a winning move not to
| just hold onto the cash and let other people take the
| risks. Unsurprisingly, this does not benefit consumers,
| or the productive.
| pclmulqdq wrote:
| Hence the new budget designed to tax everyone to the gills.
| The fed and the government is coming to terms with the fact
| that they can't magically conjure up growth.
| bubbleRefuge wrote:
| See WW2 for insight.
| HWR_14 wrote:
| In US the fed determines how much money is printed. The EU,
| UK, Japan, Switzerland, and China have similar central banks.
| Most countries do, but those are some major players (I left
| some out). Basically, if you print the right amount of money,
| it works. So they get smart Econ experts to guess how much
| money to print. And as long as they get close enough it
| doesn't cause hyperinflation.
| CraigJPerry wrote:
| This isn't an accurate description of the mechanics of
| money printing in the US, the UK or the EU.
| HWR_14 wrote:
| Interpreting "printing money" to replace the more
| technical "controlling the size of the monetary base[1]"
| seems reasonable. How is that incorrect?
|
| Unless you're talking about literal printing press
| operations, "the fed tries to tweak the money supply to
| control inflation as one of its dual mandates" seems like
| an absolute correct, if simple, explanation of why we
| don't have hyperinflation.
|
| (I know tone is hard to convey. I am serious about
| learning if I have a misunderstanding)
|
| [1] https://www.stlouisfed.org/on-the-
| economy/2018/july/federal-...
| CraigJPerry wrote:
| >> Interpreting "printing money" to replace the more
| technical "controlling the size of the monetary base[1]"
|
| These are different things.
|
| Printed money is cash (or currency) and it represents a
| small amount of the total money in use, just under 3% in
| the UK. I don't have the figure to hand for the US but
| it's comparable, less than an order of magnitude
| difference. Printing money isn't a significant driver of
| the size of the monetary base, currency is (more or less)
| printed to replace the notes & coins that are guessed to
| have been lost or damaged. Talk about printing money,
| especially as a means to expand the monetary base, is
| usually misguided.
|
| The monetary base consists of currency in circulation +
| reserve balances.
|
| Reserve balances in the US, since March 2020 (Fed reserve
| requirements changed to 0%), refers only to the balance
| recorded in the account at the central bank for a given
| commerical bank (or other approved user of reserves).
| Reserves are money but they're a special kind of money
| that can't be spent in the economy. They're only usable
| by the central bank and institutions who are licenced to
| hold reserves at the central bank (predominantly
| commercial banks). They're not phyiscal (reserves used to
| include actual cash in the vault back when there were
| reserve requirements). Reserves, like most money today,
| just exist as rows in a DB on a computer.
|
| There's an unlimited supply of reserves available to
| commercial banks (via the discount window), they are
| created on demand as needed from nothing by the central
| bank and charged at the discount rate in unlimited
| supply. A commercial bank today cannot run out of
| reserves.
|
| >> the fed tries to tweak the money supply
|
| The fed doesn't control much of the money supply, most of
| our money is created as commercial banks issue new loans.
| There's a common misunderstanding that commercial banks
| operate as intermediaries lending deposits, but they
| don't.
| bubbleRefuge wrote:
| 100% + I'd expand by saying the Fed uses its operations
| to control the price of money, which is interest rates,
| not the supply of money. The supply of money has many
| factors such as how many loans are created, etc. Taxes
| paid. etc beyond the Feds operational control.
| jnwatson wrote:
| That's a rather pedantic interpretation. Yes the Fed
| doesn't run the printing press, and it doesn't set M1,
| but it controls the levers.
|
| That's like saying to the police officer: "I didn't
| speed, I merely pressed on this pedal that's connected to
| a rod that opened a valve providing more fuel to the
| engine that's connected to the wheels".
| bubbleRefuge wrote:
| The Fed logically cannot target both monetary aggregates
| and interest rate levels at the same time. Its impossible
| by definition. They operate interest rate policy by
| buying and selling assets (treasuries and Interest on
| reserve accounts) in order to hit a target. These
| operations affect monetary aggregates.
| CraigJPerry wrote:
| How does the fed control the levers?
|
| Customer approaches commercial bank for a loan, bank
| assesses credit worthiness[1] and choses to make the
| loan. New money was "printed" into the economy.
|
| What levers did the fed pull?
|
| Also what function does the fed have in the tax part the
| GP mentioned?
|
| [1] the bank has other depts looking at capitalisation
| constraints, another dept managing day to day operations
| of the reserve account, perhaps another dept managing
| funding sources etc. but the loan making function doesn't
| consult them before creating new money to make the loan
| jnwatson wrote:
| The most obvious, direct lever is they set the reserve
| requirement ratio. The bank isn't going to make the loan
| if they don't have the reserve.
|
| The next mechanism is setting the Fed funds rate and
| discount rate. That will very directly incentivize the
| bank to loan more or less money.
|
| The third is the ability to buy whatever asset it deems
| necessary to support the economy. Quantitative easing
| almost directly impacts money supply.
| bubbleRefuge wrote:
| reserve requirements are based on deposits/liabilities.
| Capital requirements are what allows or disallows a bank
| from making loans.
| CraigJPerry wrote:
| >> they set the reserve requirement ratio
|
| No that doesn't exist anymore: https://www.federalreserve
| .gov/monetarypolicy/reservereq.htm
|
| >> The bank isn't going to make the loan if they don't
| have the reserve
|
| The bank has unlimited reserves since the central bank
| will issue reserves via the discount window in unlimited
| quantities.
|
| Loan making is capital constrained, not reserve (or
| deposit!) constrained.
|
| >> That will very directly incentivize the bank to loan
| more or less money
|
| No. This is ignoring what's happened over the past 14
| years.
|
| >> Quantitative easing almost directly impacts money
| supply
|
| Again - this is a statement that isn't supported by what
| we've seen happen since the GFC.
| [deleted]
| CraigJPerry wrote:
| There's over-confidence espoused by economists, the idea that
| we can measure inflation with any kind of precision is
| challenging, never mind building on top of this shaky
| foundation that there are behaviours which regardless of
| circumstance will lead to a given outcome such as hyper
| inflation.
|
| This is not to say that hyper inflation isnt a severe risk,
| it is. it's to say that the mechanisms through which it's
| created or avoided are not well understood nor proven.
| notahacker wrote:
| The money is mostly created as debt, with the obligation to
| repay _more_ money. So it 's not "not giving anything back in
| return".
|
| A company wants some money to fund business expansion. So it
| borrows $1m with a promise to pay $1.06m back, which it can
| fund because it has customers. The bank in turn can fund this
| by borrowing $1m and promising to pay back $1.03m (when
| lending activity increases this money comes from the Fed,
| albeit normally indirectly via its bond market activity).
| It's not free money for the business: if they don't sell
| enough stuff they go bankrupt. It's not free money for the
| bank: if enough of it's customers don't pay they also get
| bankrupt. So the money created is based on market
| participants believing that the additional money will result
| in additional economic activity
|
| Additionally, you've got the Fed actively intervening on a
| day-to-day basis to fix that base interest rate for borrowing
| and on a month-to-month basis to increase it if it thinks
| people are borrowing too much and prices are going up too
| fast
| 2143 wrote:
| Makes sense. Thanks!
| bubbleRefuge wrote:
| Banks in compliance can create loans on demand. They don't
| need to borrow the funds.
| notahacker wrote:
| Yes in normal circumstances they won't need to
| immediately borrow the full outstanding amount of the
| loan to convert it to cash, but the fact they _can_
| borrow PS1m in reserves at that rate to the extent
| capital weighting rules or withdrawal demands require it
| is critical to why the PS1m credit they add in the
| borrower 's account is treated as money by other banks
| and their customers. As is the detail that the bank's
| profit is only the difference between the interest rate
| paid by the business and the bank: the bit they create
| "from thin air" isn't their asset, it's a liability they
| may be required to borrow to pay some other bank or
| customer.
| bubbleRefuge wrote:
| If the bank that creates the loan and subsequent deposit
| is the same bank, then its like creating money out of
| thin air, as they would be responsible for the reserve
| requirement imposed on them by that deposit. Reserve
| requirements can be zero and usually don't have to be met
| until the next accounting period. So there are not
| funding constraints on making loans.
| notahacker wrote:
| I never argued there were funding constraints on making
| loans (there are capital constraints, but they're
| fuzzier). But the deposit is the bank's _liability_ , not
| its asset (unlike, say, an organization having the
| ability to mint coins or cryptotokens for its own use
| from thin air; much more like Amazon's ability to create
| as many $10 vouchers as it wants, provided it's got a way
| of paying its vendors when people try to spend the
| vouchers). The only reason anybody else treats the
| increased number in the customer's bank account as
| "money" equivalent to cash is that the bank can borrow
| currency if and when it needs it (and remain solvent
| because eventually the customer will pay the bank back)
| bubbleRefuge wrote:
| Yeah. Sounds good. The bank needs reserves, order federal
| money, base, or inside money(call it what you want) to
| meet deposit liabilities when they are called such as
| when the deposit owner writes a check to another bank or
| when funds are withdrawn for cash.
| WorkerBee28474 wrote:
| "This was complicated by some banks finding it surprisingly
| difficult to add numbers quickly... We have a report of Friday
| outflows, but it gets crunched by an ETL job which only finishes
| halfway through Saturday, and Cindy who understands all of this
| is on vacation, and... and eventually very serious people said
| Figure Addition The #*(%#( Out And Call Me Back Soonest"
|
| As someone who has written ETL jobs for banks, this hits home.
| SilasX wrote:
| I thought financial companies had regulations against
| bottlenecks like that? Something like, every employee has to
| have their access turned off for one uninterrupted week, to
| ensure they didn't leave something in that depends on them or
| they're controlling a (fraudulent) process no one else knows
| about?
| WorkerBee28474 wrote:
| Yes, the week (two weeks, IME) is a thing. As are contractor
| term limits. They reduce key man risk and keep knowledge
| internal. Still, it's possible to write a script to do
| something and then just not touch it for years. It keeps
| chugging away, and the mental model of how it works is lost
| to time or employee churn, and nothing goes wrong enough that
| anyone has to dig in and really understand it again.
| Scoundreller wrote:
| Also doesn't help when they never documented a thing and
| nobody cracked down on that because "it would slow down
| their unit's productivity".
| echion wrote:
| First, the article is a great explanation of what's going on.
| "Maturity Transformation" explains the cause. "Trying to
| forestall a banking crisis" is a great discussion of the
| important next stage of the non-headline-grabbing solution.
|
| Just wondering about this "desert" word, in context:
|
| > I am very frustrated by political arguments about desert, which
| start with an enemies list and celebrate when the enemies suffer
| misfortune for their sins like using the banking system.
|
| Anyone know what "desert" refers to?
| progrus wrote:
| I believe this is a British person saying "during dessert"?
| progrus wrote:
| Nope, guess not.
| patio11 wrote:
| Per Merriam-Webster, which for the benefit of international
| HNers I will mention is a well-known English dictionary: "the
| quality or fact of meriting reward or punishment"
| airstrike wrote:
| This seems like a good opportunity to plug the American
| Heritage Dictionary, which in my experience is at least a
| couple notches better than Merriam-Webster despite their
| website being stuck in 1999 (maybe that's a good thing?)
|
| https://ahdictionary.com/word/search.html?q=desert
|
| _de*sert (di-zurt)_
|
| _n._
|
| _1. (often "deserts") Something that is deserved or merited,
| especially a punishment: They got their just deserts when the
| scheme was finally uncovered._
|
| _2. The state or fact of deserving reward or punishment._
| nightpool wrote:
| Also a good opportunity to plug Webster's original English
| dictionary, which has a lot of very florid and evocative
| definitions that make it much more fun to open a dictionary
| https://webstersdictionary1828.com/Dictionary/desert
|
| > DESERT, noun > > 1. A deserving; that which gives a right
| to reward or demands, or which renders liable to
| punishment; merit or demerit; that which entitles to a
| recompense of equal to the offense; good conferred, or evil
| done, which merits an equivalent return. A wise legislature
| will reward or punish men according to their deserts. > >
| 2. That which is deserved; reward or punishment merited. In
| a future life, every man will receive his desert
|
| S/o to https://jsomers.net/blog/dictionary for opening my
| eyes here
| Kye wrote:
| I think it's interesting that their treatment of singular
| they is more thorough than Merriam-Webster's, manages to
| address people on the dissenting side with some empathy,
| and still recognizes that its widespread usage[0] means it
| would be silly to not include that usage.
|
| https://ahdictionary.com/word/search.html?q=they
|
| [0] To the point that even people complaining about it use
| singular they _in_ their complaints without realizing it.
| tetrep wrote:
| A deserving; that which makes one deserving of reward or
| punishment; merit or demerit; good conferred, or evil
| inflicted, which merits an equivalent return: as, to reward or
| punish men according to their deserts.
|
| "Just deserts" is a common phrase that uses it in the same way.
| ascotan wrote:
| desert i don't think means deserving. It comes from the latin
| desertus which means to "make barren or empty/forsake". I
| think in this context it means to have something fail or be
| abandoned at a critical moment.
| 542458 wrote:
| The person you're replying to is correct - "desert" is in
| some contexts an old word that's pronounced like "dessert"
| but spelled with one "s" that means "the punishment that
| one deserves".
|
| https://www.merriam-webster.com/words-at-play/just-
| deserts-o...
| lnx01 wrote:
| Also, "desert" as the present tense of "deserted". As in
| "All my friends have deserted me." Or, "The Sgt. Major
| punished the deserter."
| nightpool wrote:
| https://webstersdictionary1828.com/Dictionary/desert
| echion wrote:
| > > > > I am very frustrated by political arguments about
| desert
|
| > > > What does "desert" mean here
|
| > A deserving [...] merit
|
| Thanks. As a native speaker aware of "desert"'s multiple
| meanings and "just deserts", I think "merit", "deservedness",
| "appropriateness" would have been much clearer choices here.
| Perhaps the jarring note alone (of "desert" in this context)
| should have clued me in that an unusual usage was in play.
| Thanks again for the clarification.
| [deleted]
| Semaphor wrote:
| Oh wow. I (non-native) never realized it only had one s, I
| always assumed it was "just desserts", as in, you are getting
| the dessert you deserve, after the food (the evil you did) :D
| antibasilisk wrote:
| I (native) also did not realize this.
| Kye wrote:
| Native English speaker here too.
|
| TWL (Today We Learned)
|
| I always assumed it was one one of those odd manglings
| that gained traction, like irregardless.
| bombcar wrote:
| Apparently it's spelled "deserts" and pronounced
| "desserts"
|
| https://www.merriam-webster.com/words-at-play/just-
| deserts-o...
| Kye wrote:
| Yes. That's why people think it's "desserts."
| johnla wrote:
| If I was on Who Wants to be a Millionaire, I would've
| picked "just desserts" as my final answer without
| hesitation. TIL
| ImprobableTruth wrote:
| "desert" means something one deserves. You probably know it in
| the idiom "just deserts".
| [deleted]
| globalise83 wrote:
| Ha! I just learnt something new. Always thought it was
| desserts with two S's, but seems that my version is a pun
| that is slipping into general usage:
| https://blog.oup.com/2007/07/eggcorn/
| duxup wrote:
| I knew the idiom, I just didn't make the connection for some
| reason. Very interesting, the text is very close, but I
| didn't get it.
| [deleted]
| juefeicheng wrote:
| It should refer to "desert" as in "to deserve". Desert
| arguments typically ascribe a certain sort of moral
| responsibility on certain persons and them being liable to
| negative consequences in light of that ascription.
| brvsft wrote:
| > We recently went through that cycle faster than we thought
| possible with regards to a bank which responsible people
| considered very safe. According to the official record, one of
| the institutions went from being financially healthy one day to
| insolvent the next. I believe that narrative to be face-saving,
| but it is what The System currently is messaging as the truth, so
| let's accept it for now. If this is the truth, what unfortunate
| truths might we learn in the near future?
|
| Yeah, this is a good quote, and I find it unbelievable that a
| bank goes from financially healthy one day to insolvent the next.
| I also find it _far more_ discomforting than the alternative
| (that it was financially unhealthy for a while, and many other
| banks are as well). Is this really the 'official' record?
| Laremere wrote:
| Bank runs killing healthy banks hadn't happened in nearly
| living memory, but it used to be a thing. Before 1933, if you
| heard your bank was unhealthy, you'd run to the bank to take
| out all your money before it vanished. So even a bank with a
| positive net assets and large liquidity could fail. All it took
| was a rumor causing a bank run that exceeded the liquidity.
|
| This is why the FDIC was formed: to stop rumors causing bank
| runs. Since the average person knows their deposits are
| insured, your money isn't going anywhere, so theirs no need to
| do a bank run.
|
| What failed here is that a group of uninsured depositors did an
| old fashion bank run. That's why the FDIC announced early that
| everything was covered: to very clearly telegraph that the bank
| run was unnecessary, and you shouldn't be doing them.
| marcosdumay wrote:
| > What failed here is that a group of uninsured depositors
| did an old fashion bank run.
|
| Oh, there was so much stuff that happened.
|
| You had a bank where the wide majority of the deposits were
| uninsured. That's quite a major problem.
|
| But then, it doubles down in that those deposits were largely
| correlated. They increased all together, and decreased all
| together.
|
| The bank then made sure to double down on that correlation
| and favor lending to people whose income were highly
| correlated with their deposits.
|
| Then, when they got a highly correlated amount of deposits,
| they decided that the risk of a highly correlated change on
| their funds was low, and optimized for long-term profits
| instead of safety. (Why? I still don't fully understand this.
| I was expecting to see one of those "tails we win, heads you
| lose" games banks like to play, but from what people say,
| looks like bare incompetence was a very important factor
| here.)
|
| Then they use corruption... ops, sorry, lobbying to make sure
| the government doesn't stop them from betting against their
| deposits and debit repayment being correlated.
|
| And finally, they got all so surprised by a highly
| correlation stop on deposits (and probably repayments) when
| withdraws kept going.
|
| That one bank failure was quite a feat, and it's completely
| unfair to blame it on a bank run.
| ru552 wrote:
| Not even the Big 4 of banks could handle 20% of their deposits
| leaving in a matter of hours. No bank can survive a run.
|
| Now, in the case of the Big 4 being run on, they are too big to
| fail so the Fed would just extend them unlimited funds
| (probably).
| Kye wrote:
| They would with a 20% reserve requirement. Since that's
| probably not viable, maybe some changes to the interbank loan
| system to make emergency loans for this purpose a thing. The
| FDIC already has wide authority once they're called in, but a
| system like this could have prevented the need for it. Bigger
| banks could provide the money to prevent failure of an
| otherwise solid bank rather than be expected to help clean up
| the mess later.
| jnwatson wrote:
| The FDIC literally just created an emergency loan facility.
|
| I don't see why a 20% reserve requirement isn't viable.
| patio11 wrote:
| The document I am alluding to is here. It says what it says.
|
| https://dfpi.ca.gov/wp-content/uploads/sites/337/2023/03/DFP...
| tln wrote:
| "Over the last week, three U.S. banks have failed."
|
| Wait, 3? I thought it was only 2 (SVB and Signature Bank).
| bo1024 wrote:
| Silvergate, I assume
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