[Bank failure discussion mega-thread]

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sc9182
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Re: Has 96% of US banks pre-tightening capitalization gone missing?

Post by sc9182 »

Soon after we see more stability in inflation- then possibly comes limited QE, and Interest rate reductions — then Banks be quite solvent/flush-with-cash again :)

If someone says there might still be other possible Bank failures in the mean time (especially, $50B - $250 Billion kind) — won’t be surprised- but, those will be “controlled/managed” well - we suppose.
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Re: Has 96% of US banks pre-tightening capitalization gone missing?

Post by taojaxx »

jebmke wrote: Thu Mar 30, 2023 5:44 am Please provide a link to your reference.
From the Stanford Institute of Economic Policy Research:
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Re: Has 96% of US banks pre-tightening capitalization gone missing?

Post by MarginalUtility »

The Stanford paper cited by the OP does not appear to support the conclusion that recent increases in interest rates have caused banks to lose 96 percent of their capital on a mark-to-market basis.

1. The Stanford paper expressly does not account for banks' use of interest rate hedges (e.g., pay fixed, receive variable derivatives) that can mitigate interest rate increases.

2. The Stanford paper does not account for the effect of interest rate increases on the market value of banks' long-term liabilities (e.g., a five-year CD or long-term unsubordinated debt). Increases in interest rates tend to decrease the value (cost to the bank) of long-term liabilities, just as they decrease the value of long-term assets. The paper seems to assume that all bank deposits are payable on demand.

3. The Stanford paper does not account for the regulatory regime that applies to banks (or should have applied to SVB). Bank examiners rate banks using CAMELS criteria. The "S" in CAMELS addresses a bank's sensitivity to changes in market interest rates. Banks have asset-liability ("ALCO") committees that stress-test the bank's capital and earnings for spikes in interest rates. SVB's ALCO committee should have met monthly, regularly conducted these stress tests, and taken measures to control SVB's interest rate risk. However, SVB apparently did not control its interest rate risk. I suspect that is why Fed Governor Michael Barr recently testified that SVB was a "textbook case of mismanagement."
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Re: Has 96% of US banks pre-tightening capitalization gone missing?

Post by nisiprius »

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Re: Has 96% of US banks pre-tightening capitalization gone missing?

Post by rich126 »

z3r0c00l wrote: Thu Mar 30, 2023 5:58 am If everyone in the country panics and tries to take their money out of all of the banks at once, many of those banks would fail and there wouldn't be enough money to back up the deposits. This is why everyone shouldn't panic and take their money out of banks.
That didn't work so well with toilet paper so will it work here? Although TP might be more important than money :D
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Re: [Bank failure discussion mega-thread]

Post by LadyGeek »

I merged taojaxx's thread into the ongoing discussion. Use this thread to discuss anything related to the bank failures.

Please keep the discussion actionable as a personal investor. General economic comments are off-topic. See the site owner's post here: Re: U.S. stocks in free fall
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Re: Has 96% of US banks pre-tightening capitalization gone missing?

Post by JoMoney »

rich126 wrote: Thu Mar 30, 2023 7:49 am
z3r0c00l wrote: Thu Mar 30, 2023 5:58 am If everyone in the country panics and tries to take their money out of all of the banks at once, many of those banks would fail and there wouldn't be enough money to back up the deposits. This is why everyone shouldn't panic and take their money out of banks.
That didn't work so well with toilet paper so will it work here? Although TP might be more important than money :D
The conclusion doesn't necessarily follow from the facts provided either, if "everyone" didn't want banks to fail that might follow, but it's not a given that there aren't people who actively want banks to fail.
... one might expect the people who actually hold lots of money in bank(s) wouldn't want that, but that didn't stop Peter Thiel from telling people to get out of SVB, and their are plenty of short-selling profiteers out their, as well as people with a variety of anti-fed anti-bank anti-current system ideas floating around.
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Re: Has 96% of US banks pre-tightening capitalization gone missing?

Post by TomatoTomahto »

JoMoney wrote: Thu Mar 30, 2023 8:28 am.
... one might expect the people who actually hold lots of money in bank(s) wouldn't want that, but that didn't stop Peter Thiel from telling people to get out of SVB, and their are plenty of short-selling profiteers out their, as well as people with a variety of anti-fed anti-bank anti-current system ideas floating around.
Yeah, that might be the last hope for crypto :twisted:
I get the FI part but not the RE part of FIRE.
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Re: [Bank failure discussion mega-thread]

Post by nisiprius »

Matt Levine's "Money Stuff" column is very germane today. I get it via a no-cost email subscription.

The URL is Money Stuff: SVB’s Depositors Weren’t Very Loyal

He makes the interesting point that bond investments have a duration, but that deposits can also be said to have a duration. Even if depositors have the right to withdraw at any time, the actual duration depends on the behavior and loyalty of the depositors.
A bank with sleepy depositors would do well, a bank with antsy depositors would go bust, even if their investments were the same.

One way to say this is that a bank with sleepy and undemanding depositors is much more valuable than a bank with nervous and demanding depositors, but it is hard to measure that. In fact bank regulation does try to measure that; it knows that some types of deposits are flightier than others, and liquidity regulations require banks to have more cash to cover flighty deposits than stable ones.... But it is a crude and imprecise approach to a basically social set of questions: What are your depositors like? Do they talk to each other? When they get together, do they tend to calm each other down or work each other up?

Another way to say it is that a bank’s assets have some duration... And the bank’s liabilities have some duration that is driven partly by their legal terms ... but mostly by the behavior of their depositors. In some technical sense a checking account has zero duration — the customer can take her money out at any time — but in a practical sense, if all your customers keep their money in their checking accounts for years without even looking at the interest rate, that is very valuable long-term financing.
He goes on to present evidence that SVB's depositors were urging each other on to make withdrawals, and, he says,
The simple story of SVB’s failure is that it had an asset-liability mismatch.... But the counterargument would be that SVB thought it had long-term liabilities — these locked-in, loyal deposits — and so matched its assets to its liabilities.... SVB hedged the interest-rate risk on its bonds by investing in good relationships with its depositors.

This counterargument is not crazy! It just turned out to be totally wrong.
He then musters some evidence that First Republic's depositors are behaving differently:
This is the same exact story as SVB — a network of investors and founders who bump into each other in California and chat about the craziness at their bank — but with different outcomes. SVB’s customers worked each other up and took their money out; First Republic’s customers — at least some of them — calmed each other down and kept their money in.
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Re: [Bank failure discussion mega-thread]

Post by Valuethinker »

nisiprius wrote: Thu Mar 30, 2023 9:07 am Matt Levine's "Money Stuff" column is very germane today. I get it via a no-cost email subscription.

The URL is Money Stuff: SVB’s Depositors Weren’t Very Loyal

He makes the interesting point that bond investments have a duration, but that deposits can also be said to have a duration. Even if depositors have the right to withdraw at any time, the actual duration depends on the behavior and loyalty of the depositors.
A bank with sleepy depositors would do well, a bank with antsy depositors would go bust, even if their investments were the same.

One way to say this is that a bank with sleepy and undemanding depositors is much more valuable than a bank with nervous and demanding depositors, but it is hard to measure that. In fact bank regulation does try to measure that; it knows that some types of deposits are flightier than others, and liquidity regulations require banks to have more cash to cover flighty deposits than stable ones.... But it is a crude and imprecise approach to a basically social set of questions: What are your depositors like? Do they talk to each other? When they get together, do they tend to calm each other down or work each other up?

Another way to say it is that a bank’s assets have some duration... And the bank’s liabilities have some duration that is driven partly by their legal terms ... but mostly by the behavior of their depositors. In some technical sense a checking account has zero duration — the customer can take her money out at any time — but in a practical sense, if all your customers keep their money in their checking accounts for years without even looking at the interest rate, that is very valuable long-term financing.
He goes on to present evidence that SVB's depositors were urging each other on to make withdrawals, and, he says,
The simple story of SVB’s failure is that it had an asset-liability mismatch.... But the counterargument would be that SVB thought it had long-term liabilities — these locked-in, loyal deposits — and so matched its assets to its liabilities.... SVB hedged the interest-rate risk on its bonds by investing in good relationships with its depositors.

This counterargument is not crazy! It just turned out to be totally wrong.
He then musters some evidence that First Republic's depositors are behaving differently:
This is the same exact story as SVB — a network of investors and founders who bump into each other in California and chat about the craziness at their bank — but with different outcomes. SVB’s customers worked each other up and took their money out; First Republic’s customers — at least some of them — calmed each other down and kept their money in.
I think this "Social media bank run" is going to turn out to have been one of the most interesting aspects of the SVB saga. Governor of the Bank of England said it was the fastest financial institution collapse in 35 years (since Barings Bank in 1995; interesting that he discounts Lehman in that).

However we also have Credit Suisse. Which has been losing deposits for entirely other reasons associated with bad banking decisions.

The failure of SVB caused:

- a surge in the cost of credit protection (Credit Default Swaps) on CS default (this is being investigated in the case of Deutsche Bank for market manipulation -- apparently a trade of around EUR 5m caused DB CDS prices to soar)

- a steep fall in share price (did this come before, or after, or at the same time?)

- Saudi sovereign wealth fund announced they would not be investing any further money into CS - having bought 9.9% last year. Swiss law prevented them from going over 10% but the executive (who has now "retired" from his role) apparently stressed that this was not the reason for refusal?

- Swiss authorities then decided the bank was in peril. Over the course of a weekend they arranged for a bailout by UBS, at a price which UBS shareholders apparently found attractive (the share price of UBS *rose* after the deal was announced). To effectuate this they brought about several changes in Swiss law

- CS shareholders got some money--heavy dilution but not total wipeout (so different than SVB). However the AT1 tranche holders (bonds that would convert into equity under certain circumstances of financial distress) of $17bn of bonds have been wiped out to zero - apparently the Prospectus did warn of that possibility, so it was not illegal. But an odd situation where the debt holders (bonds in this case) were wiped out but the equity investors did retain some value. Normally in banks the ranking is pretty strict: depositors first, bondholders second, equity holders get any residual (of which there is usually very little or nothing)

So this is an example of how a bank run, which took place for very specific, localised factors, causes the market to call into question the position of all financially weak institutions, even if they have very different locations, businesses & asset portfolios.
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Re: [Bank failure discussion mega-thread]

Post by Valuethinker »

BTW Credit Suisse had become known in banking markets as Debit Suisse.

Which demonstrates that black humour is often the best form of humour.
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Re: [Bank failure discussion mega-thread]

Post by Texanbybirth »

runninginvestor wrote: Wed Mar 29, 2023 7:42 am People really want t+0 settlement and transfers. But this kind of friction definitely helps in cases like this.
US and Canadian Capital Markets are moving to T+1 next year (Memorial Day weekend, 2024), which will have a significant impact on small players in the equity and bond markets. DTCC settles something like $150T worth of trades every year, and almost all of that goes off without a hitch. (I'm gainfully employed partially because of the "hitches". :happy )

I will say that T+0 faces significant headwind. This is a really interesting paper on the large barriers to T+0 (and "real-time") settlement, and some of the proposals to overcome some of them.
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Re: [Bank failure discussion mega-thread]

Post by Dead Man Walking »

:thumbsup
Valuethinker wrote: Thu Mar 30, 2023 11:31 am BTW Credit Suisse had become known in banking markets as Debit Suisse.

Which demonstrates that black humour is often the best form of humour.
LOL. :D
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Re: [Bank failure discussion mega-thread]

Post by moneyflowin »

Valuethinker wrote: Thu Mar 30, 2023 11:30 am
nisiprius wrote: Thu Mar 30, 2023 9:07 am Matt Levine's "Money Stuff" column is very germane today. I get it via a no-cost email subscription.

He makes the interesting point that bond investments have a duration, but that deposits can also be said to have a duration. Even if depositors have the right to withdraw at any time, the actual duration depends on the behavior and loyalty of the depositors.
A bank with sleepy depositors would do well, a bank with antsy depositors would go bust, even if their investments were the same.

One way to say this is that a bank with sleepy and undemanding depositors is much more valuable than a bank with nervous and demanding depositors, but it is hard to measure that. In fact bank regulation does try to measure that; it knows that some types of deposits are flightier than others, and liquidity regulations require banks to have more cash to cover flighty deposits than stable ones.... But it is a crude and imprecise approach to a basically social set of questions: What are your depositors like? Do they talk to each other? When they get together, do they tend to calm each other down or work each other up?

Another way to say it is that a bank’s assets have some duration... And the bank’s liabilities have some duration that is driven partly by their legal terms ... but mostly by the behavior of their depositors. In some technical sense a checking account has zero duration — the customer can take her money out at any time — but in a practical sense, if all your customers keep their money in their checking accounts for years without even looking at the interest rate, that is very valuable long-term financing.
He goes on to present evidence that SVB's depositors were urging each other on to make withdrawals, and, he says,
The simple story of SVB’s failure is that it had an asset-liability mismatch.... But the counterargument would be that SVB thought it had long-term liabilities — these locked-in, loyal deposits — and so matched its assets to its liabilities.... SVB hedged the interest-rate risk on its bonds by investing in good relationships with its depositors.

This counterargument is not crazy! It just turned out to be totally wrong.
He then musters some evidence that First Republic's depositors are behaving differently:
This is the same exact story as SVB — a network of investors and founders who bump into each other in California and chat about the craziness at their bank — but with different outcomes. SVB’s customers worked each other up and took their money out; First Republic’s customers — at least some of them — calmed each other down and kept their money in.
I think this "Social media bank run" is going to turn out to have been one of the most interesting aspects of the SVB saga.
So this is an example of how a bank run, which took place for very specific, localised factors, causes the market to call into question the position of all financially weak institutions, even if they have very different locations, businesses & asset portfolios.
A century ago, depositors had to ride their horses to the bank to withdraw money. Then the automobile came along and made bank runs happen quicker, so I hereby blame previous bank runs on the existence of automobiles.

People are grasping at straws to excuse SVB's dumb management. Smartphones and social media didn't cause SVB's failure anymore than electricity caused IndyMac's failure or automobiles caused the S&L failures of the 1980s. In all cases, crummy management caused the failures.
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Re: [Bank failure discussion mega-thread]

Post by Valuethinker »

moneyflowin wrote: Thu Mar 30, 2023 6:27 pm
A century ago, depositors had to ride their horses to the bank to withdraw money. Then the automobile came along and made bank runs happen quicker, so I hereby blame previous bank runs on the existence of automobiles.

People are grasping at straws to excuse SVB's dumb management. Smartphones and social media didn't cause SVB's failure anymore than electricity caused IndyMac's failure or automobiles caused the S&L failures of the 1980s. In all cases, crummy management caused the failures.
First part is reasoning by false analogy (you are trying to set up a Straw Man argument). (Your correct analogy would be the telegraph, most likely. Or the railway. An ancestor of mine stopped a bank run by shipping actual money (cash) from London by railway to a small English country town).

Yes SVB made bad decisions. Just like Credit Suisse. But the actual failure was a conflation of circumstances.

Losing $45bn of deposits in 24 hours, is a liquidity shock even a well managed bank of that size could not have handled. The impact of social media on speeding things up, and scaling things up, is something we have not yet fully got a handle on. Remember the "WhatsApp lynchings" in India?

SVB was actually reasonably capitalised (a marked distinction from the 2008 Crisis) but unhedged. The deposit run forced it to sell securities at a loss.

EDIT The key point is they lost 25% of their deposit base in 24 hours.

Banks by their nature borrow short & grant liquidity to their creditors (depositors, primarily - bonds and shareholders are a much smaller proportion of their total funding base), and lend long & illiquid via loans to corporates and individual households.

No bank has 25% of its total deposit base in assets which can be liquidated in 24 hours.

The existence of the Federal Reserve window and the FHB (?) window provides a "liquidity lender of last resort". But the limits of tapping that were reached or exceeded.

The liquidation forced SVB to realise losses on securities which, if held to maturity, would not have been sold at a loss. Now their treasury policy - to buy long term government bonds & not to hedge against interest rate moves sufficiently - was badly flawed.

But... 25% ... (almost) no bank could have survived that.
Last edited by Valuethinker on Fri Mar 31, 2023 12:11 pm, edited 1 time in total.
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Re: [Bank failure discussion mega-thread]

Post by Valuethinker »

[edit].
Last edited by Valuethinker on Fri Mar 31, 2023 12:11 pm, edited 1 time in total.
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Re: [Bank failure discussion mega-thread]

Post by Tanelorn »

Coverage disagreeing on social media aspect of SIVB’s bank run. Just old fashion people telling each other to get out and they had problems.

https://www.bloomberg.com/news/articles ... ng-twitter
https://www.zerohedge.com/political/no- ... -bloomberg
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Re: [Bank failure discussion mega-thread]

Post by nisiprius »

Warning, conspiracy theory... I think it's possible that extra enthusiasm behind this particular bank run was stoked by crypto interests, whose enterprises would benefit from public distrust of the fiat-currency-based financial system.
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Re: [Bank failure discussion mega-thread]

Post by PersonalFinanceJam »

Tanelorn wrote: Fri Mar 31, 2023 6:17 am Coverage disagreeing on social media aspect of SIVB’s bank run. Just old fashion people telling each other to get out and they had problems.

https://www.bloomberg.com/news/articles ... ng-twitter
https://www.zerohedge.com/political/no- ... -bloomberg
In my opinion this is missing the forrest for the trees. Ok, so it wasn't Twitter, Facebook, Instagram which caused the initial run. However it was, based on reports, Slack, WhatsApp, text and email which eventually got amplified on social media once the run and failure was well on the way. The fact still remains there were a large portion of SVB customers who by virtue of being venture backed startups all belong to some of the same inner circles and all have their own private instant communication and collaboration tools. To me the fact this wasn't happening initially on public social media doesn't negate the fact that social media like tools these people were using and the speed at which they can communicate were a major contributor to the panic.
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Re: [Bank failure discussion mega-thread]

Post by Valuethinker »

nisiprius wrote: Fri Mar 31, 2023 6:34 am Warning, conspiracy theory... I think it's possible that extra enthusiasm behind this particular bank run was stoked by crypto interests, whose enterprises would benefit from public distrust of the fiat-currency-based financial system.
It's not one I instantly associate in my mind with crypto anything. But perhaps I am too far away from it. (Weren't there a couple of other banks that went down about the same time? With more exposure to crypto?).

I have this mental image that no "serious" VC (of the type that SVB specialised in providing banking services to the VC firm & its portfolio companies) was invested in anything to do with crypto.

But, of course, someone will come up with 10 good counterexamples.

The VC hype bubble has moved on to "Artificial Intelligence" (we were taught not to use that term, as I recall) problems. A lot of bonfires of investor cash will be made in that space. No doubt 1 or 2 sets of Founders will get seriously rich.

We are also in a world where "Resilience" and "Security" are going to be huge. Broadly, in the past this has favoured the nation state. The modern constitutional nation state emerged in the 18th century (contrast to say the Hapsburgs, where the common feature of the Empire was simply that one family ruled over it)*-- I believe. It has proven to be a quite durable feature of the modern world.

Hard to see the end of "fiat currency" in such an environment.

* But the rulers of Prussia were still hereditary monarchs, and Prussia was one of the first modern states. So... the USA, France after the Revolution, the British constitutional monarchy (and later their Scandinavian equivalents). Eventually China and the Soviet Union (in the 20th century).
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Re: [Bank failure discussion mega-thread]

Post by JoMoney »

I do wonder what rates these banks were paying on money on deposit with them, and if they had been offering competitive interest rates as an incentive for depositors to keep money with them, maybe that wouldn't have lead to their failure as a bank.
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Re: [Bank failure discussion mega-thread]

Post by Valuethinker »

PersonalFinanceJam wrote: Fri Mar 31, 2023 6:50 am
Tanelorn wrote: Fri Mar 31, 2023 6:17 am Coverage disagreeing on social media aspect of SIVB’s bank run. Just old fashion people telling each other to get out and they had problems.

https://www.bloomberg.com/news/articles ... ng-twitter
https://www.zerohedge.com/political/no- ... -bloomberg
In my opinion this is missing the forrest for the trees. Ok, so it wasn't Twitter, Facebook, Instagram which caused the initial run. However it was, based on reports, Slack, WhatsApp, text and email which eventually got amplified on social media once the run and failure was well on the way. The fact still remains there were a large portion of SVB customers who by virtue of being venture backed startups all belong to some of the same inner circles and all have their own private instant communication and collaboration tools. To me the fact this wasn't happening initially on public social media doesn't negate the fact that social media like tools these people were using and the speed at which they can communicate were a major contributor to the panic.
Exactly. "Social Media Risk" is the term which has been coined.

In one sense this is no different than a bunch of Victorians at a gentlemen's club in Pall Mall sharing rumours about a West End bank. See the movie "Howard's End" w Anthony Hopkins and Emma Thompson.

But that club can now have thousands of connected members. VC is all about networking. So thousands of contacts of that VC- other VCs, portfolio companies etc. All in touch with each other instantaneously. That WhatsApp from the ski lift at Aspen CO "I've told my portfolio companies to get their money out of SVB".

It makes the speed of the bank run potentially much faster. And the scale. $45bn in 24 hours.

It looked for a moment there like First Republic was wobbling. That bleeding seems to have been staunched? But concerns over Commercial RE exposure by small and medium sized US banks remain.

We've seen from Credit Suisse ("Debit Suisse") that these things can leap oceans & time zones.
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Re: [Bank failure discussion mega-thread]

Post by Valuethinker »

JoMoney wrote: Fri Mar 31, 2023 7:57 am I do wonder what rates these banks were paying on money on deposit with them, and if they had been offering competitive interest rates as an incentive for depositors to keep money with them, maybe that wouldn't have lead to their failure as a bank.
High deposit rates are often seen as a sign of financial vulnerability.

Since the upside of 1-2% more interest, v the downside of losing everything above $250k, is quite small, I imagine that it wouldn't make a big difference.

There are corporate treasuries that do "hot money". And someone here (or elsewhere that I read) posted that some banks refuse wholesale deposit money that they think is going to be a fair weather friend and move as soon as someone offers a better rate.
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Re: [Bank failure discussion mega-thread]

Post by JoMoney »

Valuethinker wrote: Fri Mar 31, 2023 7:59 am
JoMoney wrote: Fri Mar 31, 2023 7:57 am I do wonder what rates these banks were paying on money on deposit with them, and if they had been offering competitive interest rates as an incentive for depositors to keep money with them, maybe that wouldn't have lead to their failure as a bank.
High deposit rates are often seen as a sign of financial vulnerability.

Since the upside of 1-2% more interest, v the downside of losing everything above $250k, is quite small, I imagine that it wouldn't make a big difference.

There are corporate treasuries that do "hot money". And someone here (or elsewhere that I read) posted that some banks refuse wholesale deposit money that they think is going to be a fair weather friend and move as soon as someone offers a better rate.
I suppose that would go a ways to trying to cultivate the type of customer base they want as depositors, if you're "competing on price" (or yield) it's a race to poor profits for a business if you have to constantly reduce your margins to best the competition. But if whatever their business model for attracting customers was is falling apart, and they're not willing to compete on price(/yield) perhaps they deserve to fail.
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Re: [Bank failure discussion mega-thread]

Post by Valuethinker »

JoMoney wrote: Fri Mar 31, 2023 8:12 am
Valuethinker wrote: Fri Mar 31, 2023 7:59 am
JoMoney wrote: Fri Mar 31, 2023 7:57 am I do wonder what rates these banks were paying on money on deposit with them, and if they had been offering competitive interest rates as an incentive for depositors to keep money with them, maybe that wouldn't have lead to their failure as a bank.
High deposit rates are often seen as a sign of financial vulnerability.

Since the upside of 1-2% more interest, v the downside of losing everything above $250k, is quite small, I imagine that it wouldn't make a big difference.

There are corporate treasuries that do "hot money". And someone here (or elsewhere that I read) posted that some banks refuse wholesale deposit money that they think is going to be a fair weather friend and move as soon as someone offers a better rate.
I suppose that would go a ways to trying to cultivate the type of customer base they want as depositors, if you're "competing on price" (or yield) it's a race to poor profits for a business if you have to constantly reduce your margins to best the competition. But if whatever their business model for attracting customers was is falling apart, and they're not willing to compete on price(/yield) perhaps they deserve to fail.
Bank current accounts are historically something different.

They are a utility. The ability to not have to hold cash, but to pay bills, receive money eg from your employer. Issue a cheque book and pass card, etc.

The interest return was incidental. For reasons to do with the financial crises of the 1929-39 era, deposit rates were limited to 5%.

Inflation hit in the 70s, and higher interest rates. The world changed when Donald Regan at Merrill Lynch introduced the Cash Management Account. Direct consumer access (for those wealthy enough to have an account at Merrill Lynch) to wholesale financial markets.

Eventually this led to deregulation of banking, the S&L Crisis, etc.

We are now again in an era where there is competition for retail money. And because of technological and regulatory innovations over the last 40 years or so, it's much easier for the consumer to move their money. On the other hand, banks that pay high deposit rates tend to attract "hot" money that is not particularly sticky-- it is much more rate sensitive than depositors as a whole.

Over to small and regional banks. In other countries, there are a handful of retail banks. For example in Canada 6 banks hold 90%+ of current accounts. Britain post Crisis we are down to 4. In the US you still have over 4,000 banks and they are dependent upon either wholesale or retail depositors to lend them money.

Retail money has tended to be stickier than wholesale money. SVB was an odd situation, because many of its lending agreements required the companies to keep their funds on deposit with the bank.

Probably what happens is deposits keep draining out of the system, and US banks keep merging down towards the mature oligopoly of large banks other countries have.

If a bank now jacks up its offered rates on deposit accounts, that's a red flag. Probably cause large depositors to move money *out* of the bank, not into it.
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Re: [Bank failure discussion mega-thread]

Post by Tanelorn »

Valuethinker wrote: Fri Mar 31, 2023 7:58 am It looked for a moment there like First Republic was wobbling. That bleeding seems to have been staunched? But concerns over Commercial RE exposure by small and medium sized US banks remain.
The TBFT deposits meant FRC doesn’t presently have a liquidity problem, but they still have a solvency one. It’s hard to engineer a takeover, or even a takeunder (CS-style), with a $10B hole in their equity. But the Fed and the FDIC don’t want another failure, so it will be interesting to see what they come up with. I’m betting it ends badly for the shareholders either way.
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Re: [Bank failure discussion mega-thread]

Post by Valuethinker »

Tanelorn wrote: Fri Mar 31, 2023 12:07 pm
Valuethinker wrote: Fri Mar 31, 2023 7:58 am It looked for a moment there like First Republic was wobbling. That bleeding seems to have been staunched? But concerns over Commercial RE exposure by small and medium sized US banks remain.
The TBFT deposits meant FRC doesn’t presently have a liquidity problem, but they still have a solvency one. It’s hard to engineer a takeover, or even a takeunder (CS-style), with a $10B hole in their equity. But the Fed and the FDIC don’t want another failure, so it will be interesting to see what they come up with. I’m betting it ends badly for the shareholders either way.
"takeunder" -- brilliant!

Apparently with Dodd-Frank the situation is much more constrained than it was in 2008. I can't see the US Congress springing for anything that looks like a bailout.

I agree the shareholders are likely to lose their shirts. And the bondholders will take a very painful haircut. Of course, with short sellers operating, this becomes a self-fulfilling prophecy quite quickly.
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Re: [Bank failure discussion mega-thread]

Post by ScubaHogg »

nisiprius wrote: Fri Mar 31, 2023 6:34 am Warning, conspiracy theory... I think it's possible that extra enthusiasm behind this particular bank run was stoked by crypto interests, whose enterprises would benefit from public distrust of the fiat-currency-based financial system.
Or that the creditors getting bailed out also happen to be major political donors who can also command a lot of attention in the zeitgeist?
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Re: [Bank failure discussion mega-thread]

Post by nisiprius »

Disclosure, I've only listened to a bit of it, but it seemed too relevant not to post about...

A Great Recession bank takeover

Minute-by-minute detailed account of exactly what the FDIC actually did during its arrangement for the insolvent Bank of Clark County to be taken over.
Long before most of the Bank of Clark County employees knew their bank was dead, the FDIC was planning its demise. They'd been having meetings, contacting other banks in the region, trying to find one that would take over the Bank of Clark County's assets after it failed. All of these negotiations were top secret. And then the time came - Thursday, January 15, 2009, the operation begins. Eighty FDIC agents pull into Vancouver, Wash. Their rental cars are generic. Their arrival times staggered. One by one, the agents check into the hotel, each quietly offering a fake name to the guy at the desk. 9 p.m. - the FDIC calls the CEO of another bank nearby, Umpqua Bank. Your bank, they tell him, has been selected to take over the Bank of Clark County. You can't tell anyone. Come to a meeting tomorrow at noon. The FDIC will tell you everything you need to know....
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Re: [Bank failure discussion mega-thread]

Post by billaster »

I swear, "financial innovators" and the tech bros will be the death of us all.

SVB specifically marketed itself as the the place to be for the cool Silicon valley types. And so the VC folks poured tens of billions into the bank, doubling their deposits in just 12 months. SVB was way out of wack, having 90% of their deposits above the $250,000 FDIC threshold, far above the more typical 30%.

What this meant is that instead of having lots of small FDIC insured depositors who wouldn't be worried, they had a few really big uninsured depositors who got spooked. Since those handful of big depositors were uninsured, they started a bank run, instigated by venture capitalist Peter Thiel and the Founders Fund yanking out billions in one day.

Regulators failed to heed the warning signs of a rapid expansion of hot corporate money dumped into a regional bank.
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Re: [Bank failure discussion mega-thread]

Post by nisiprius »

billaster wrote: Fri Mar 31, 2023 6:55 pm...Regulators failed to heed the warning signs of a rapid expansion of hot corporate money dumped into a regional bank...
My understanding is that they saw the warning signs clearly, and informed SVB of them in a series of communications of "matters requiring attention" (which are supposed to be big red warnings), starting as early as 2019. The Wall Street Journal reported...
...that the Federal Reserve had raised concerns about risk management at Silicon Valley Bank starting at least four years before its failure earlier this month, documents show.... In January 2019, the Fed issued a warning to SVB over its risk-management systems, according to a presentation circulated last year to employees of SVB’s venture-capital arm.
But SVB apparently ignored the warnings, and the Federal Reserve contented itself with just issuing more warnings.

I wonder if it was coincidence that that first warning was issued in 2019, i.e. just after Congress rolled back Dodd-Frank and excused SVB from a layer of oversight it had previously been subject to.
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Re: [Bank failure discussion mega-thread]

Post by billaster »

nisiprius wrote: Fri Mar 31, 2023 7:04 pm But SVB apparently ignored the warnings, and the Federal Reserve contented itself with just issuing more warnings.
I think that is a fair appraisal and a damning condemnation of the feckless Federal Reserve. The same thing happened in the lead up to the Great Recession. The Fed seems to consider their only real job to be management of monetary policy and give short shrift to their bank regulatory obligations.
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Re: Has 96% of US banks pre-tightening capitalization gone missing?

Post by VictoriaF »

rich126 wrote: Thu Mar 30, 2023 7:49 am
z3r0c00l wrote: Thu Mar 30, 2023 5:58 am If everyone in the country panics and tries to take their money out of all of the banks at once, many of those banks would fail and there wouldn't be enough money to back up the deposits. This is why everyone shouldn't panic and take their money out of banks.
That didn't work so well with toilet paper so will it work here? Although TP might be more important than money :D
Money can be used as TP, but TP can't be used as money.

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Re: [Bank failure discussion mega-thread]

Post by retireIn2020 »

nisiprius wrote: Fri Mar 31, 2023 7:04 pm
billaster wrote: Fri Mar 31, 2023 6:55 pm...Regulators failed to heed the warning signs of a rapid expansion of hot corporate money dumped into a regional bank...
My understanding is that they saw the warning signs clearly, and informed SVB of them in a series of communications of "matters requiring attention" (which are supposed to be big red warnings), starting as early as 2019. The Wall Street Journal reported...
...that the Federal Reserve had raised concerns about risk management at Silicon Valley Bank starting at least four years before its failure earlier this month, documents show.... In January 2019, the Fed issued a warning to SVB over its risk-management systems, according to a presentation circulated last year to employees of SVB’s venture-capital arm.
But SVB apparently ignored the warnings, and the Federal Reserve contented itself with just issuing more warnings.

I wonder if it was coincidence that that first warning was issued in 2019, i.e. just after Congress rolled back Dodd-Frank and excused SVB from a layer of oversight it had previously been subject to.
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Re: Has 96% of US banks pre-tightening capitalization gone missing?

Post by Tanelorn »

VictoriaF wrote: Fri Mar 31, 2023 8:09 pm Money can be used as TP, but TP can't be used as money.
Two rolls for a pound of steak please
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Re: Has 96% of US banks pre-tightening capitalization gone missing?

Post by JoMoney »

Tanelorn wrote: Sat Apr 01, 2023 8:52 am
VictoriaF wrote: Fri Mar 31, 2023 8:09 pm Money can be used as TP, but TP can't be used as money.
Two rolls for a pound of steak please
:thumbsup
U.S. dollars are the money du jour, and I don't expect that to change as long as trillions of them are needed for people to repay their, homes, student loans, cars, taxes, and other debts... but there's nothing stopping anything people recognize as having value from being used as money.

But it does make me chuckle at the idea of issuing paper bank-notes as a currency backed by an equivalent amount of paper TP that can be used interchangeably :D
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Re: Has 96% of US banks pre-tightening capitalization gone missing?

Post by Tanelorn »

JoMoney wrote: Sat Apr 01, 2023 9:03 am But it does make me chuckle at the idea of issuing paper bank-notes as a currency backed by an equivalent amount of paper TP that can be used interchangeably :D
You may know about these giant stones that were used in Pacific Islands as money.

https://en.wikipedia.org/wiki/Rai_stones

The ownership rights were what was traded, not the actual ridiculously large stones. A great example of this was how one of the stones was being transported between islands and sunk, left unretrievable at the bottom of the ocean. They continue to trade ownership rights on this sunken stone as money just like all the rest even though it was inaccessible. Money is a weird concept.
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Re: Has 96% of US banks pre-tightening capitalization gone missing?

Post by Valuethinker »

Tanelorn wrote: Sat Apr 01, 2023 10:02 am
JoMoney wrote: Sat Apr 01, 2023 9:03 am But it does make me chuckle at the idea of issuing paper bank-notes as a currency backed by an equivalent amount of paper TP that can be used interchangeably :D
You may know about these giant stones that were used in Pacific Islands as money.

https://en.wikipedia.org/wiki/Rai_stones

The ownership rights were what was traded, not the actual ridiculously large stones. A great example of this was how one of the stones was being transported between islands and sunk, left unretrievable at the bottom of the ocean. They continue to trade ownership rights on this sunken stone as money just like all the rest even though it was inaccessible. Money is a weird concept.
But it generates absolutely vast social utility v bartering. Which is I think the point of the anthropology of those stones?

We attribute huge value to "land" and "shares" even though, in the end, they have no value if there's a change in institutional arrangements (or the land becomes unusable). Our whole civilisation is based on a series of fictions, piled on top of each other.

This causes most of us uneasy feelings so we shun looking at it. Anthropologists find it very interesting (including the chief columnist of the Financial Times for the USA, Gillian Tett, who has a Phd entitled thesis "Ambiguous alliances: marriage and identity in a Muslim village in Soviet Tajikstan"; she has since written a book on the use of anthropology to understand business https://www.amazon.com/Anthro-Vision-An ... oks&sr=1-1 )

The human desire for culture seems to be innate. We used to think that this was unique to humans, and that Neanderthals lacked it, but there is increasing evidence that other advanced animals have it: primates, parrots etc.

Money seems to be one of those inventions that just keeps getting made, again and again.
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Re: Has 96% of US banks pre-tightening capitalization gone missing?

Post by JoMoney »

Tanelorn wrote: Sat Apr 01, 2023 10:02 am... Money is a weird concept.
It has very 'weirdly' metaphysical properties that impact people's life in very tangible ways. The numbers people decide have "value" as a unit of account and trade has haunting effects on people and the way they behave... which also makes all the weird symbols and talisman we seem to put on the notes and coins odd as well.
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Re: [Bank failure discussion mega-thread]

Post by ehh »

Valuethinker wrote: Sat Apr 01, 2023 10:44 am Money seems to be one of those inventions that just keeps getting made, again and again.
Money facilitates cooperation and specialization.

The ability to cooperate is why Homo Sapiens are the dominate species on the planet. At least for now.

Specialization is why we enjoy such an easy and abundant life.

Probably not all dumb luck that Homo Sapiens are literally "The Last Ape Standing". https://www.amazon.com/Last-Ape-Standin ... 1620405210
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Re: [Bank failure discussion mega-thread]

Post by nisiprius »

It is the height of civilization that it is possible for a person to make a promise today that must be kept by a different person thirty years in the future.
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Re: [Bank failure discussion mega-thread]

Post by nisiprius »

Washington Post: Silicon Valley Bank's risk model flashed red. So its executives changed it. Hard to condense. They apparently overrode internal risk models several times, and they overrode models both on interest rates and on depositor behavior.
... a former bank official...[recalled] an internal stress test in late 2018 or 2019 that showed SVB could lose at least a third of its deposits over two years. Executives directed that that model also be reworked....

The behavior of customers depositing money is a key variable that banks use in developing risk models. One metric, closely tracked by banks and their examiners, estimates future cash flows and how sensitive they are to changes in interest rates. It was this metric, called the economic value of equity, that triggered a warning in mid-2020, according to the former employees....

SVB’s new projections took effect last year and assumed that cash flow from deposits would stay consistent for longer, softening the projected bite of higher interest rates. Before changing the model, a 2 percent interest-rate hike would drop a measure of future cash flows by more than 27 percent; afterward, the hit was less than five percent, according to the bank’s securities filings....

In an apparent bet that interest rates would go down last fall, SVB sold for a profit the financial instruments it used to hedge against the risk of higher rates, according to a company presentation.
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Re: [Bank failure discussion mega-thread]

Post by CuriousTacos »

nisiprius wrote: Sun Apr 02, 2023 10:21 am Washington Post: Silicon Valley Bank's risk model flashed red. So its executives changed it. Hard to condense. They apparently overrode internal risk models several times, and they overrode models both on interest rates and on depositor behavior.
... a former bank official...[recalled] an internal stress test in late 2018 or 2019 that showed SVB could lose at least a third of its deposits over two years. Executives directed that that model also be reworked....

The behavior of customers depositing money is a key variable that banks use in developing risk models. One metric, closely tracked by banks and their examiners, estimates future cash flows and how sensitive they are to changes in interest rates. It was this metric, called the economic value of equity, that triggered a warning in mid-2020, according to the former employees....

SVB’s new projections took effect last year and assumed that cash flow from deposits would stay consistent for longer, softening the projected bite of higher interest rates. Before changing the model, a 2 percent interest-rate hike would drop a measure of future cash flows by more than 27 percent; afterward, the hit was less than five percent, according to the bank’s securities filings....

In an apparent bet that interest rates would go down last fall, SVB sold for a profit the financial instruments it used to hedge against the risk of higher rates, according to a company presentation.
Very interesting. They clearly made incorrect assumptions about interest rate changes and depositor behavior. I'd really like to see exactly what those assumptions were before and after the changes, especially since the Basel III "recommended" interest rate stress test itself only calls for testing a 2% change in rates.

The part about selling hedges doesn't seem quite as bad as it sounds. The SVB presentation says "$49M net pre-tax realized gains in Q1’22 noninterest income from unwind of $5B AFS hedges (at a $204M gain) and sale of related securities". I think that means they sold those securities along with the hedges. It also says "$313M pre-tax locked-in gains from unwind of remaining $6B AFS hedges in July 2022 (to be amortized into interest income over the life of the related securities, ~7 years)." So presumably those securities were not sold and no longer hedged. But intermediate bonds have been close to flat since July 2022, so that doesn't seem like a smoking gun to me. It also says nothing about their HTM securities, which I think triggered the final bank run.

The article does shed some light on depositor flight, and that they had to pay higher rates on deposits to stem that. I thought more of their depositors were essentially "locked in" in order to maintain other services, in which case they should have been able to pay below market rates on deposits. Apparently not.
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Re: [Bank failure discussion mega-thread]

Post by nisiprius »

(Once again) the Rational Reminder podcast has come through with a darned good presentation: Episode 247: Bank Runs

Some of the take-homes:

I already knew this, but they make the point that
...the thing that makes banking useful, also exposes it to the risk of bank runs. It's like fundamental to the existence of banking.
They said:
Banks provide depositors with insurance against their unknown future liquidity needs.
I thought that was a very helpful and interesting way to phrase things. Regular insurance pools risk and only needs to pay the few people whose houses burn down. Banks provide an insurance-like function, by pooling diverse depositors, and (on any given day) only needing to pay the few who need to withdraw money right now.

They made frequent reference to papers and work by "Douglas Diamond and Philip Dybvig." According to them, they worked out a lot of things about banks years ago, proving that banks are economically superior to individuals just lending money directly. And according to them, Diamond and Dybvig addressed the three risks that are fundamental to banking:
They've got to manage credit risk. That's the risk that they make loans that can't be repaid. They've got to manage liquidity risk. That's the risk that their asset portfolio can't be liquidated at a good price when it's needed, when liquidity is needed, and it's got to manage duration risk. That's the risk. There's a mismatch in interest rate sensitivity between the bank's assets and liabilities. For managing those risks, a bank is going to earn a return. That's the business. But the risks have to be properly managed.
They mention a few times how surprised they were, rereading Diamond and Dybvig's papers, to see how neatly Silicon Valley Bank's problems fit in with what Diamond and Dybvig found. Yes, there are risks that all banks intrinsically have, and SVB mismanaged them.
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Re: [Bank failure discussion mega-thread]

Post by CuriousTacos »

nisiprius wrote: Mon Apr 10, 2023 4:59 pm They said:
Banks provide depositors with insurance against their unknown future liquidity needs.
I thought that was a very helpful and interesting way to phrase things. Regular insurance pools risk and only needs to pay the few people whose houses burn down. Banks provide an insurance-like function, by pooling diverse depositors, and (on any given day) only needing to pay the few who need to withdraw money right now.
In a world with plenty of good money market and fixed income funds, ever-decreasing transaction times, and especially with brokerages that offer most of the conviences of banks, the uniqueness of this "feature" of our banking system (from the perspective of depositors) seems declining to me.

I also find it odd that most developed societies have decided that depositors are a special class of lenders who should be insured by the government at a flat rate regardless of risk. I understand the desire to prevent contagion and economic collapse; I just think it's head-scratching that we try to solve the problem this way rather than disincentivizing (or at least charging appropriate premiums for) the risk taking that puts the system at risk to begin with. Especially when recent history has shown that modest deposit insurance doesn't come close to preventing contagion. I've heard arguments that central banks view commercial banks as key levers in the control of the monetary system, but it's pretty ironic that the banking system itself is often the reason the central bank has to intervene.
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Re: [Bank failure discussion mega-thread]

Post by nisiprius »

Copied from another thread because I think it's relevant here: the Treasury temporarily insured money market mutual funds for a year following the collapse of the Reserve Primary fund in 2008, in order to stabilize the money market mutual fund industry. The program then ended and money market mutual funds again were uninsured. So there's a history of temporary insurance when needed to prevent runs, and I imagine the FDIC's unlimited insurance will be temporary, too; if not, there are eventually sure to be gross abuses.

I incorrectly remembered that it was the FDIC that insured money market mutual funds, but it wasn't. Crisis and Response: An FDIC History, 2008–2013 led me to United States: Temporary Guarantee Program for Money Market Funds which gives details. The abstract is:
On September 16, 2008, following the collapse of Lehman Brothers, the Reserve Primary Fund “broke the buck,” meaning that its net asset value (NAV) fell more than 0.5% below the $1 per share target value maintained by money-market funds (MMFs). When the Reserve Primary Fund could not restore the NAV, investors began withdrawing funds from MMFs, leading to a $439 billion run on the MMF market. To stop this run, the US Department of the Treasury established the Temporary Guarantee Program for Money Market Funds (the Guarantee Program), which insured investors’ holdings in participating MMFs. The Guarantee Program was designed to protect assets held as of the announcement of the program on September 19, 2008. MMFs participating in the Guarantee Program paid a quarterly fee ranging from 1 to 1.5 basis points, depending on their NAV. The Guarantee Program, originally scheduled to last three months, was ultimately extended until September 18, 2009. During its year of operation, the Guarantee Program covered 93% of assets in the MMF market, equivalent to more than $3.2 trillion. There were no losses, and the Department of the Treasury did not make any payments through the Guarantee Program, generating a surplus of $1.2 billion in fees.
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Re: [Bank failure discussion mega-thread]

Post by nisiprius »

CuriousTacos wrote: Mon Apr 10, 2023 10:59 pm...In a world with plenty of good money market and fixed income funds, ever-decreasing transaction times, and especially with brokerages that offer most of the conviences of banks, the uniqueness of this "feature" of our banking system (from the perspective of depositors) seems declining to me...
Well, the Rational Reminder people said there was Nobel-winning research by Douglas Diamond and Philip Dybvig showing that the system of "borrowing short and lending long" (supporting demand deposits with long-term loans) did produce economic benefit.

If you don't have that, how else are you going to fund 30-year mortgages?

It's true that there is a "narrow banking" concept, a bank which invests only in safe short-term loans. It seems to me that money market mutual funds have always been close to that. In fact, in a collection of interviews in book entitled IIRC What Goes Up?, the founders of the first MMF acknowledged pulling the wool over regulators' eyes. The original proposal simply said that the funds could include short-term investments within a long list, and never disclosed that the intent was to invest only in these short-term instruments and none in the longer. Ever since reading the book I've believed MMFs were a (successful!) attempt to circumvent banking regulations.

According to Matt Levine, in 2019 there was an attempt to establish just such a bank, called TNB USA Inc, but the Fed so far has killed it, without explanation, by refusing to give it an account at the Fed. The guess is that the Fed believes narrow banks are not in the public interest.
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Re: [Bank failure discussion mega-thread]

Post by exodusing »

nisiprius wrote: Tue Apr 11, 2023 6:54 am
CuriousTacos wrote: Mon Apr 10, 2023 10:59 pm...In a world with plenty of good money market and fixed income funds, ever-decreasing transaction times, and especially with brokerages that offer most of the conviences of banks, the uniqueness of this "feature" of our banking system (from the perspective of depositors) seems declining to me...
Well, the Rational Reminder people said there was Nobel-winning research by Douglas Diamond and Philip Dybvig showing that the system of "borrowing short and lending long" (supporting demand deposits with long-term loans) did produce economic benefit.

If you don't have that, how else are you going to fund 30-year mortgages?

It's true that there is a "narrow banking" concept, a bank which invests only in safe short-term loans. It seems to me that money market mutual funds have always been close to that. In fact, in a collection of interviews in book entitled IIRC What Goes Up?, the founders of the first MMF acknowledged pulling the wool over regulators' eyes. The original proposal simply said that the funds could include short-term investments within a long list, and never disclosed that the intent was to invest only in these short-term instruments and none in the longer. Ever since reading the book I've believed MMFs were a (successful!) attempt to circumvent banking regulations.

According to Matt Levine, in 2019 there was an attempt to establish just such a bank, called TNB USA Inc, but the Fed so far has killed it, without explanation, by refusing to give it an account at the Fed. The guess is that the Fed believes narrow banks are not in the public interest.
The longer version of the guess is that they are not in the public interest because depositors would prefer them to traditional banks (due to increased safety), depriving traditional banks of the deposits they need to fund loans (including 30-year mortgages) and bank loans are necessary for our economy. There are occasional objections to MMFs on the similar grounds.
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Re: [Bank failure discussion mega-thread]

Post by Valuethinker »

nisiprius wrote: Tue Apr 11, 2023 6:39 am Copied from another thread because I think it's relevant here: the Treasury temporarily insured money market mutual funds for a year following the collapse of the Reserve Primary fund in 2008, in order to stabilize the money market mutual fund industry. The program then ended and money market mutual funds again were uninsured. So there's a history of temporary insurance when needed to prevent runs, and I imagine the FDIC's unlimited insurance will be temporary, too; if not, there are eventually sure to be gross abuses.

I incorrectly remembered that it was the FDIC that insured money market mutual funds, but it wasn't. Crisis and Response: An FDIC History, 2008–2013 led me to United States: Temporary Guarantee Program for Money Market Funds which gives details. The abstract is:
On September 16, 2008, following the collapse of Lehman Brothers, the Reserve Primary Fund “broke the buck,” meaning that its net asset value (NAV) fell more than 0.5% below the $1 per share target value maintained by money-market funds (MMFs). When the Reserve Primary Fund could not restore the NAV, investors began withdrawing funds from MMFs, leading to a $439 billion run on the MMF market. To stop this run, the US Department of the Treasury established the Temporary Guarantee Program for Money Market Funds (the Guarantee Program), which insured investors’ holdings in participating MMFs. The Guarantee Program was designed to protect assets held as of the announcement of the program on September 19, 2008. MMFs participating in the Guarantee Program paid a quarterly fee ranging from 1 to 1.5 basis points, depending on their NAV. The Guarantee Program, originally scheduled to last three months, was ultimately extended until September 18, 2009. During its year of operation, the Guarantee Program covered 93% of assets in the MMF market, equivalent to more than $3.2 trillion. There were no losses, and the Department of the Treasury did not make any payments through the Guarantee Program, generating a surplus of $1.2 billion in fees.
I understand that post the passage of the Dodd-Frank Act (or a court decision?) the US Treasury would be unable to do this again (presumably Congress would have to pass a specific piece of legislation to allow it to take place). Given how many voices call for "liquidate, only liquidate" (the US Treasury Secretary in the 1929-1932 period) I doubt that would be forthcoming.

MMFs are not "run proof". They are not, intrinsically, superior to the supply of short term credit to the economy via banks and banking facilities. They can freeze, just like anything else.

I had a relation who was in Corporate Treasury during Sept-Oct 2008. They said that, literally, there was zero liquidity. If you did not have cash on account, you could not borrow from *anyone* at any price. Money Markets were totally shut to them because the investors in MM vehicles were withdrawing their funds. Which meant a very large percentage of private sector employers would have been unable to pay their creditors as they fell due, or their employees and their suppliers. In effect we were Wil-E-Coyote after he has chased Road Runner off the cliff, and is waiting for gravity to take hold.

Canada's particular, and early, contribution was the Asset Backed Commercial Paper debacle. I had a friend who had a hand in sorting that out-- some tough negotiating.
CuriousTacos
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Re: [Bank failure discussion mega-thread]

Post by CuriousTacos »

nisiprius wrote: Tue Apr 11, 2023 6:54 am
CuriousTacos wrote: Mon Apr 10, 2023 10:59 pm...In a world with plenty of good money market and fixed income funds, ever-decreasing transaction times, and especially with brokerages that offer most of the conviences of banks, the uniqueness of this "feature" of our banking system (from the perspective of depositors) seems declining to me...
Well, the Rational Reminder people said there was Nobel-winning research by Douglas Diamond and Philip Dybvig showing that the system of "borrowing short and lending long" (supporting demand deposits with long-term loans) did produce economic benefit.

If you don't have that, how else are you going to fund 30-year mortgages?
Indeed, I said "from the perspective of depositors" to avoid this larger discussion.

But if the 30yr fixed mortgage (which doesn't seem common outside the US anyway) only exists because the government entices depositors (and also buys many of the loans), and just pulls more money into an unstable system, then maybe it's more trouble than it's worth. It's debatable whether housing is more affordable because of it, or if house prices are just higher (which is especially bad for people with poor credit).

Regarding other business loans, I'm not convinced that other solutions couldn't fill the gap (i.e. a company that borrows from the fixed income market and lends to local businesses). There's also some unknowable sweet spot here, and it's a reasonable hypothesis that the government backing of banks has pushed it beyond what is sustainable and leads to bubbles and busts.

And I realize my mention of money market funds may have been perceived as an endorsement that they are superior and /or run-proof, and they surely aren't the latter as you pointed out. They at least involve some decisions from the investor on how much risk they want to take. I think funds with a truly floating NAV are better at that, and are also more run-proof.
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