[Bank failure discussion mega-thread]

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srt7
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Re: [Bank failure discussion mega-thread]

Post by srt7 »

CuriousTacos wrote: Thu Mar 16, 2023 10:23 pm
srt7 wrote: Thu Mar 16, 2023 8:26 pm
sid hartha wrote: Thu Mar 16, 2023 2:23 pm The additional funding will be made available through the creation of a new Bank Term Funding Program (BTFP), offering loans of up to one year in length to banks, savings associations, credit unions, and other eligible depository institutions pledging U.S. Treasuries, agency debt and mortgage-backed securities, and other qualifying assets as collateral. These assets will be valued at par. The BTFP will be an additional source of liquidity against high-quality securities, eliminating an institution's need to quickly sell those securities in times of stress.
Say one of their investments was bought at $1MM and is now valued at $700K meaning when the Fed bails them out they'd do so at $1MM. Who bears the $300K difference?
It works differently from that. If their treasury and/or mortgage backed securities were bought at $1m and are now valued at $700k, then the Fed will loan them up to $1m for one year. By the end of that year, the bank has to pay back that $1m plus interest, and their investments will still be worth whatever the market says they're worth. The Fed doesn't make up the difference on these investments. It does offer them a favorable loan, so the "cost" to the Fed for this program is the opportunity cost of what the Fed otherwise would have done with this money. In the event that the bank fails before the loan is paid back, the loans are "recourse beyond the pledged collateral," meaning the FDIC can claim the collateral and additional assets to recover its loan. I'm not sure where that puts them in the priority though, so there's still potentially some risk if one of these banks fails really badly- but the FDIC generally tries to step in before it gets to that point anyway, so the loans are probably pretty safe.

The key is that these banks are not insolvent even considering their investment losses (at least now), but merely getting closer than comfort, and many of their assets can't be sold in a hurry (except at fire-sale prices because some of their loans are difficult for buyers to value). If the Fed can convince depositors that there's no reason to panic, then perhaps it buys these banks some time to sell a few things and restore a cushion of liquidity.

I'm not necessarily endorsing this plan, but just trying to correct some misunderstandings that probably make it sound much worse.
Thank you for this clear and concise explanation. Glad to know my understanding was incorrect and a reasonable plan set forward by FDIC.
Taking care of tomorrow while enjoying today.
JackoC
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Re: [Bank failure discussion mega-thread]

Post by JackoC »

CuriousTacos wrote: Wed Mar 15, 2023 5:36 pm
JackoC wrote: Wed Mar 15, 2023 3:36 pm If you run banks risklessly there would be much less capital available for growth in the economy. Economic growth depends on risk taking.
You seem to be implying that money is equivalent to capital, and more money is better. If so, we should print more money so we have more capital available for growth in the economy. I say that jokingly and to make a point, but some people do think that, and I mean no offense if so.

Edit: sorry that was long winded.

1: The system is currently skewed such that depositors don't have sufficient incentive to shift their demand deposits to term deposits, so what I'm describing above doesn't mean business loans would be limited to the current quantity of time deposits, but rather that lots of demand deposits would be appropriately shifted to term deposits. As you pointed out in a subsequent post (in the context of going above FDIC limits), lots of business deposits should be in ultra short term securities rather than demand deposits
Yeah that was long. :happy And, though maybe because you snipped most of my post to make room for it, none of really answered the point of mine that you left in the snip. Which is really basic, I think anyone thinking I'm basically off track here is overcomplicating things then going off on various tangents. Savers have a different preference for liquidity and duration than the demand for investments. Eg. a large proportion of checking and savings account are short term because that's what the depositors prefer. But many uses to invest that capital are by borrowers who require longer term and/or fixed rate. Forcing assets and liabilities to exactly match would have a huge economic opportunity cost. Some kind of risk taking intermediary converting between the preferences, in return for expected profit, but risking a capital base, adds greatly to economic efficiency. This isn't debateable as a general principal, it's an Econ 101 thing. There would be a huge cost to requiring a complete match in duration between bank assets and liabilities (no 30 yr mortgages prepayable at borrower's option for example, funded by banks at least, except to the degree depositors accept 30 yr fixed deposits prepayable at bank's option). But that kind of economic straight jacket is required because banks fail every once in a while? Ridiculous. Any reasonable discussion is on the basis of what degree of risk banks are allowed to take on what base of capital, not eliminating bank risk.

But back to deposit insurance, have to say the thread is itself evidence of general degree of ignorance how banks and the economy work, which makes the moral hazard of small (like $250k, though that number hasn't been adjusted for inflation in a long time it's true) deposit insurance limits probably for the best, net. $100mil deposits being de facto insured though is a mistake IMO because the balance of moral hazard and reasonable expectation of what those depositors should know, is different. Just like there can be reasonable discussion eg. 'is the 30 y prepayable mortgage really necessary?' since it generates a lot of and not so simple to hedge (because of the prepayment option) risk. In some other countries almost all mortgages are floating (rate risk, though not liquidity-wise, matched to their demand deposits). That could be a reasonable debate, like the level of deposit insurance (maybe it's time it be $500k...still not $400mil :shock: ). But riskless banking is a silly discussion, sorry if too blunt.
Last edited by JackoC on Fri Mar 17, 2023 9:27 am, edited 2 times in total.
MarkBarb
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Re: [Bank failure discussion mega-thread]

Post by MarkBarb »

alex_686 wrote: Thu Mar 16, 2023 8:21 am
Chief_Engineer wrote: Thu Mar 16, 2023 8:10 am
nisiprius wrote: Thu Mar 16, 2023 6:33 am Indeed, one of the things I've wondered about is "whatever happened to the distinction between time deposits and demand deposits?" The high inflation and interest rates of circa 1980 led to a lot of changes, of course.

Before then, it was illegal to pay interest on a checking account.

Nowadays most people believe they have an absolute right to make early withdrawals from CDs.
As a millennial I have never heard of time or demand deposits.
Technical term. Demand is anything that can be pulled out at any time. Checking, savings, money markets.

Time has a time element. CDs are the most common retail type.
Savings accounts are a hybrid. Most have limits on the number (but not amount) of withdrawals in a month.
SteadyOne
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Re: [Bank failure discussion mega-thread]

Post by SteadyOne »

srt7 wrote: Thu Mar 16, 2023 8:56 pm
technovelist wrote: Thu Mar 16, 2023 8:45 pm
exodusing wrote: Thu Mar 16, 2023 5:00 pm
Tanelorn wrote: Thu Mar 16, 2023 3:50 pm
exodusing wrote: Thu Mar 16, 2023 3:35 pm Eleven Banks Deposit $30 Billion in First Republic Bank
U.S. regulators say the group’s deposit ‘demonstrates the resilience of the banking system’
Looks like FRC is going to make it

https://www.wsj.com/articles/jpmorgan-m ... c-4f9eeb76
"Four of the country’s biggest banks — JPMorgan Chase, Bank of America, Citigroup and Wells Fargo — agreed to contribute $5 billion each. Goldman Sachs and Morgan Stanley will contribute $2.5 billion each and BNY Mellon, PNC Bank, State Street, Truist and US Bank will each add $1 billion.

"The deposits are uninsured, the banks said"

I wonder what other terms there may be. If I were one of those banks I'd want some form of equity.
What does this even mean? Deposits are liabilities of the bank. How does increasing the amount of their liabilities help them?
And where did the other banks get $30 billion to "contribute"?
Can someone explain how this is reassuring?
LOL! Robbing Peter to pay Paul ...
It might be moneys depositors if those failing banks moved to mega banks for safety.

Actually any bank can fail regardless of management honesty, strong balance sheet, superb risk management. Bank run on that perfect bank will ruin it quickly. Again, if depositors of bank X panic for whatever reason and start taking money out that bank will fail. Think about it - bank has short term deposits from customer and long term loans on the other side of the balance sheet.

Depositors can take their money at any moment. If that happens what’s left? Loans, mortgages - longer term obligations. Banks are required to keep certain amount of liquidity not sure but not more than 10% say. So if 10% of deposits are gone bank will fail. And no amount of risk management will help.
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LadyGeek
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Re: [Bank failure discussion mega-thread]

Post by LadyGeek »

MarkBarb wrote: Fri Mar 17, 2023 8:53 am Savings accounts are a hybrid. Most have limits on the number (but not amount) of withdrawals in a month.
I'm not an expert, but federal regulations limit savings accounts to 6 transactions per month as defined by something called "Requirement D'. From Regulation D - Reserve Requirements (Federal Reserve):
Regulation D requires that an account, to be classified as a ‘‘savings deposit,’’ must not permit more than six convenient transfers or withdrawals per month from the account. Transfers and withdrawals that are considered ‘‘convenient’’ for this purpose are those made by preauthorized, automatic, telephonic agreement, order or instruction, or by check, debit card, or similar order made by the depositor and payable to third arties. 12 CFR 204.2(d)(2).
So, it's stated in the Code of Federal Regulations.

==========
alex_686 - Thank you for providing clear explanations with examples. It's much appreciated.
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JackoC
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Re: [Bank failure discussion mega-thread]

Post by JackoC »

skierincolorado wrote: Wed Mar 15, 2023 4:54 pm
JackoC wrote: Wed Mar 15, 2023 4:20 pm
skierincolorado wrote: Wed Mar 15, 2023 3:53 pm
JackoC wrote: Wed Mar 15, 2023 2:48 pm
skierincolorado wrote: Mon Mar 13, 2023 11:18 am
You'd be surprised re: CFOs. As I said I know two CFOs who knew their deposits were uninsured and yet chose SVB. They did not even consider the risks and even if they had they did not have the skill, information, or resources to properly evaluate or monitor it. The only thing they might have done if they really thought about it would have been to move to a too big too fail bank. But moving to too big to fail is not actually a consideration of actual solvency and only increases the moral hazard. There is more than enough incentive to prevent reckless bank investments if the shareholders, bondholders and managers are held responsible for mismanagement. There is no significant moral hazard created by insuring all bank deposits and if you consider the realities of the situation it greatly reduces moral hazard by preventing over concentration in TBTF. It allows the banking industry to remain competitive and not concentrated.
Obviously that was a difficult explain failure on the part of some of those CFO's, the $400mil+ deposited by Roku stands out in particular. However the big difference is still the reasonable standard to *expect* from highly paid CFO's of big companies vs what it's reasonable to *expect* of sub $250k depositors. I'm a <$250k depositor with good skills in financial risk management, others here probably are too. But you can't expect that in general. When it comes to big company CFO's OTOH, we have a system headed for worse trouble sooner or later if that system doesn't require it. Short circuiting the painful mechanisms of capitalism by rubbing everyone's tummy has real costs, though it's more comfortable in the short run. Companies hiring CFO's who do stupid stuff should lose money, which will make them (as in CEO, and board) pay more attention to who they put in charge of the finance dept and why. And as some people willing to accept this sudden change in deposit insurance rules point out correctly, the actual haircut to Roku et al probably would have been a fairly modest %. They wouldn't have lost anywhere near the whole deposit. But I see that as a reason why this sudden change 'all depositors will be protected...just this once (hah hah)' is such a mistake, not an argument why it's no big deal. It's all about what behavior rules will encourage *in the future*.

And there are myriad ways they could have avoided this and other companies could in the future...if not signaled that it doesn't matter as much because uninsured deposits will probably be protected next time too. There are sweep mechanisms that distribute deposits around to a large number of banks (not under $250k each necessarily but greatly reduces the single point of failure risk). SVB themselves offered that service! Nor are companies in any way limited from buying T-bills. This apparent complete stupidity probably wasn't entirely, it apparently had to do in part with a semi-legitimate idea that SVB could help customers various ways with its contacts in the SV world, so they wanted a 'great relationship' with SVB. Plus in situations like this there's often the less legitimate angle of people in one company doing favors for those in another within the same 'cluster' in view of own personal 'networking'. That's sleazy but almost never provable so forget addressing it with law enforcement or regulation. The best way to limit behavior like that (there is no 'solution' and it's naive to imagine there is) is financial consequences when it goes bad, which are being short circuited in this case. Mistake, IMO.
1. There is no fundamental economic reason why depositors at banks should bear the risk of the bank's investments. There is no moral hazard. The risk is borne by the shareholders and bondholders of the bank - the people who actually decide on the bank's investments,

2. As I said before you are dramatically overestimating the skill, resources, and information available to CFOs of small and mid-size companies. Not to mention small LLCs or elderly retirees who also frequently have over 250k on deposit. All these people are supposed to waste their time and resources evaluating the financial solvency of their bank? Or breaking up their 5M into 20 x 250k deposits at different banks? This accomplishes exactly nothing productive.

3. The only thing that will accomplish is a blind move to 2 or 3 banks perceived as Too Big To Fail. There will be no actual evaluation of financial solvency. And by concentrating the entire industry into 2 or 3 TBTF banks you will have created the exact problem you were trying to avoid: systemic risk and moral hazard.
1. How do bank bondholders determine the investments of the bank? Their position is actually exactly the same in substance as uninsured depositors. They exert their influence by looking into the bank and setting a rate at which they'll lend depending on the bank's level of risk, or refusing to lend. Stockholders have mixed motives (they lose if there's high risk that blows up, but win if high risk pans out). There's no denying that moving all depositors to the category of people who no reason to care about bank risk means less restraint. And that's what 'moral hazard' actually means. One might argue that that increase in moral hazard is worth it for some other reason, but it can't be argued that's not an increase in moral hazard, which it is.

2. And they will never improve if not accountable for their decisions, about bank deposits or anything else. Hard to believe you are seriously making this argument, for actual professional CFO's: 'they get paid to do this job, but can't, so the system has to be arranged to protect them from the consequences of their mistakes'. Individual depositors who combine large wealth with the ignorance not to know about spreading deposits around (even 5*$1mil is a heck of lot better than $5mil in one bank, though not under the $250k limit) or haven't heard of this thing called 'T-bills': I don't think the whole system should be designed around that relatively unusual combination.

3. So you keep saying, but haven't in any way established. Again, sweep mechanisms by banks where they distribute the actual deposits to a bunch of other banks: common. Again SVB themselves offered that, look it up if you doubt it, only around $.5bil in customers used it though. And again that thing called the 'T-bill'. Concentrating deposits at 2 or 3 very large banks is simply not necessary to achieve a reasonable degree of credit risk management on large amounts of cash. You keep repeating that, but it's clearly not so. :happy
1. The bondholders aren't in the same position as depositors. For one, depositors are ahead of bondholders in case of default. The bondholder is much more at risk. Secondly, it's the bondholders actual primary goal/objective/job to figure out the financial solvency of the bank whereas it's not the primary (or secondary) job of a CFO, LLC owner, or gandma with 500k in the bank. And as you said the bondholders do indirectly have a say in the risk management of the bank by dictating finance rates for the bank. You can't run a bank when you can't raise capital at reasonable rates.

2. Blindly spreading deposits around does not avoid moral hazard. The banks with poor financial stability will receive just as much in these blind deposits as the good banks. For your theory to work you need CFOs of small companies, LLCs, and grandma with 750k in the bank to actually have the skill, resources, and information to evaluate the financial stability of their bank. They don't. In my experience, it's not even considered at all by CFOs or CEOs. I have heard a CFO choose one bank over another because of its size (bigger = perceived less risky) but it had nothing to do with the balance sheet.

3. Again blindly spreading risk around without any consideration of creditworthiness only increases the systemic risk and moral hazard. Blindly investing in TBills eliminates the function of banks entirely to promote an efficient allocation of capital.

We don't need to speculate on what CFOs would do if mid-size banks are perceived as risky. BOA received over 10B in new deposits in 1 day. They will blindly move to TBTF. The reality is that your proposed "solution" will only create the exact problem you are trying to avoid. And for what? Bank owners and managers don't have enough incentive to invest wisely already? They've lost everything. The bondholders who helped finance them have lost everything (or possibly only nearly everything if they're lucky).

Insurance is used in many industries. Customers in many industries purchase insurance and many products come with insurance by default. There is absolutely no reason that bank deposits should not be insured, just like houses, cars and oil tankers.
1. The supposed difference you pointed out between bondholders and depositors doesn't exist. You said bondholders determine bank investments. Not in any direct way (such as shareholders do, via board of directors). And various bondholders have different levels of seniority in bankruptcy so that difference is of degree. Both bondholders and uninsured depositors have the common interest of wanting as high a rate as possible consistent with a very small risk of losing money. Which restrains banks indirectly as that funding cost rises. Univeral deposit insurance shifts a huge quantity of money to the 'don't really care, as long as the govt is solvent' category. That's moral hazard. The question is what benefit it's gaining. Also there's a difference between a well considered decision to make an inflation/national wealth adjustment to the $250k vs having deposit insurance de facto cover $10mil or $100mil. Ignorant grandma's $500k aren't a reason to insure Roku's CFO at $400mil.

2. You're getting confused here on a basic point I tried to clarity last time around. Spreading very large deposits thinly enough for each piece to be less than $250k is often not practical. However, a CFO who knows *anything* about finance, not talking about each one being able to write exotic options models, knows that $1mil deposits at 5 different banks are safer than one $5mil deposit in almost any scenario. The level of ignorance you're saying needs to be supported by the deposit insurance system is a pretty extreme one.

3. 'Blindly investing in T-bills'. That's a good one I'll remember that. :happy And my 'proposed solution' is what was the supposed policy since forever basically up to last weekend. That there's a deposit insurance limit, and over that the depositor must make their own risk evaluation, which banks need to consider in forming their investment and risk policies. Again if that was such a crazy idea, why wasn't there a previous groundswell of well reasoned argument to make deposit insurance universal? And why are Treasury officials even now claiming that the recent action won't generally be repeated? Even they seem to recognize there's a downside (though few if anyone really believes future large depositors with any political connections will now be denied unlimited coverage).
alluringreality
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Re: [Bank failure discussion mega-thread]

Post by alluringreality »

LadyGeek wrote: Fri Mar 17, 2023 9:08 am I'm not an expert, but federal regulations limit savings accounts to 6 transactions per month as defined by something called "Requirement D'.
I'm under the impression that what you're referring to was suspended. Those terms appear to have been removed from my account, although there is a mention here that some banks still have withdrawal limits.
https://www.forbes.com/advisor/banking/ ... ulation-d/
https://www.federalreserve.gov/supervis ... tr2106.htm
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YoungSisyphus
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Re: [Bank failure discussion mega-thread]

Post by YoungSisyphus »

This scary looking chart was the subject of some angst at a different forum. I'd be interested what the more advanced users think:
Assets: Liquidity and Credit Facilities: Loans: Primary Credit: Wednesday Level - https://fred.stlouisfed.org/series/WLCFLPCL

Some were saying the available credit creates an easy arbitrage opportunity for even banks that are not threatened and will be abused. Part of me was wondering if that is why the other big banks are now so willing to "help" First Republic.

Perhaps a more direct question: is this injecting $ that could run contrary to the Fed's goal of reducing inflation?
skierincolorado
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Re: [Bank failure discussion mega-thread]

Post by skierincolorado »

JackoC wrote: Fri Mar 17, 2023 9:10 am
skierincolorado wrote: Wed Mar 15, 2023 4:54 pm
JackoC wrote: Wed Mar 15, 2023 4:20 pm
skierincolorado wrote: Wed Mar 15, 2023 3:53 pm
JackoC wrote: Wed Mar 15, 2023 2:48 pm
Obviously that was a difficult explain failure on the part of some of those CFO's, the $400mil+ deposited by Roku stands out in particular. However the big difference is still the reasonable standard to *expect* from highly paid CFO's of big companies vs what it's reasonable to *expect* of sub $250k depositors. I'm a <$250k depositor with good skills in financial risk management, others here probably are too. But you can't expect that in general. When it comes to big company CFO's OTOH, we have a system headed for worse trouble sooner or later if that system doesn't require it. Short circuiting the painful mechanisms of capitalism by rubbing everyone's tummy has real costs, though it's more comfortable in the short run. Companies hiring CFO's who do stupid stuff should lose money, which will make them (as in CEO, and board) pay more attention to who they put in charge of the finance dept and why. And as some people willing to accept this sudden change in deposit insurance rules point out correctly, the actual haircut to Roku et al probably would have been a fairly modest %. They wouldn't have lost anywhere near the whole deposit. But I see that as a reason why this sudden change 'all depositors will be protected...just this once (hah hah)' is such a mistake, not an argument why it's no big deal. It's all about what behavior rules will encourage *in the future*.

And there are myriad ways they could have avoided this and other companies could in the future...if not signaled that it doesn't matter as much because uninsured deposits will probably be protected next time too. There are sweep mechanisms that distribute deposits around to a large number of banks (not under $250k each necessarily but greatly reduces the single point of failure risk). SVB themselves offered that service! Nor are companies in any way limited from buying T-bills. This apparent complete stupidity probably wasn't entirely, it apparently had to do in part with a semi-legitimate idea that SVB could help customers various ways with its contacts in the SV world, so they wanted a 'great relationship' with SVB. Plus in situations like this there's often the less legitimate angle of people in one company doing favors for those in another within the same 'cluster' in view of own personal 'networking'. That's sleazy but almost never provable so forget addressing it with law enforcement or regulation. The best way to limit behavior like that (there is no 'solution' and it's naive to imagine there is) is financial consequences when it goes bad, which are being short circuited in this case. Mistake, IMO.
1. There is no fundamental economic reason why depositors at banks should bear the risk of the bank's investments. There is no moral hazard. The risk is borne by the shareholders and bondholders of the bank - the people who actually decide on the bank's investments,

2. As I said before you are dramatically overestimating the skill, resources, and information available to CFOs of small and mid-size companies. Not to mention small LLCs or elderly retirees who also frequently have over 250k on deposit. All these people are supposed to waste their time and resources evaluating the financial solvency of their bank? Or breaking up their 5M into 20 x 250k deposits at different banks? This accomplishes exactly nothing productive.

3. The only thing that will accomplish is a blind move to 2 or 3 banks perceived as Too Big To Fail. There will be no actual evaluation of financial solvency. And by concentrating the entire industry into 2 or 3 TBTF banks you will have created the exact problem you were trying to avoid: systemic risk and moral hazard.
1. How do bank bondholders determine the investments of the bank? Their position is actually exactly the same in substance as uninsured depositors. They exert their influence by looking into the bank and setting a rate at which they'll lend depending on the bank's level of risk, or refusing to lend. Stockholders have mixed motives (they lose if there's high risk that blows up, but win if high risk pans out). There's no denying that moving all depositors to the category of people who no reason to care about bank risk means less restraint. And that's what 'moral hazard' actually means. One might argue that that increase in moral hazard is worth it for some other reason, but it can't be argued that's not an increase in moral hazard, which it is.

2. And they will never improve if not accountable for their decisions, about bank deposits or anything else. Hard to believe you are seriously making this argument, for actual professional CFO's: 'they get paid to do this job, but can't, so the system has to be arranged to protect them from the consequences of their mistakes'. Individual depositors who combine large wealth with the ignorance not to know about spreading deposits around (even 5*$1mil is a heck of lot better than $5mil in one bank, though not under the $250k limit) or haven't heard of this thing called 'T-bills': I don't think the whole system should be designed around that relatively unusual combination.

3. So you keep saying, but haven't in any way established. Again, sweep mechanisms by banks where they distribute the actual deposits to a bunch of other banks: common. Again SVB themselves offered that, look it up if you doubt it, only around $.5bil in customers used it though. And again that thing called the 'T-bill'. Concentrating deposits at 2 or 3 very large banks is simply not necessary to achieve a reasonable degree of credit risk management on large amounts of cash. You keep repeating that, but it's clearly not so. :happy
1. The bondholders aren't in the same position as depositors. For one, depositors are ahead of bondholders in case of default. The bondholder is much more at risk. Secondly, it's the bondholders actual primary goal/objective/job to figure out the financial solvency of the bank whereas it's not the primary (or secondary) job of a CFO, LLC owner, or gandma with 500k in the bank. And as you said the bondholders do indirectly have a say in the risk management of the bank by dictating finance rates for the bank. You can't run a bank when you can't raise capital at reasonable rates.

2. Blindly spreading deposits around does not avoid moral hazard. The banks with poor financial stability will receive just as much in these blind deposits as the good banks. For your theory to work you need CFOs of small companies, LLCs, and grandma with 750k in the bank to actually have the skill, resources, and information to evaluate the financial stability of their bank. They don't. In my experience, it's not even considered at all by CFOs or CEOs. I have heard a CFO choose one bank over another because of its size (bigger = perceived less risky) but it had nothing to do with the balance sheet.

3. Again blindly spreading risk around without any consideration of creditworthiness only increases the systemic risk and moral hazard. Blindly investing in TBills eliminates the function of banks entirely to promote an efficient allocation of capital.

We don't need to speculate on what CFOs would do if mid-size banks are perceived as risky. BOA received over 10B in new deposits in 1 day. They will blindly move to TBTF. The reality is that your proposed "solution" will only create the exact problem you are trying to avoid. And for what? Bank owners and managers don't have enough incentive to invest wisely already? They've lost everything. The bondholders who helped finance them have lost everything (or possibly only nearly everything if they're lucky).

Insurance is used in many industries. Customers in many industries purchase insurance and many products come with insurance by default. There is absolutely no reason that bank deposits should not be insured, just like houses, cars and oil tankers.
1. The supposed difference you pointed out between bondholders and depositors doesn't exist. You said bondholders determine bank investments. Not in any direct way (such as shareholders do, via board of directors). And various bondholders have different levels of seniority in bankruptcy so that difference is of degree. Both bondholders and uninsured depositors have the common interest of wanting as high a rate as possible consistent with a very small risk of losing money. Which restrains banks indirectly as that funding cost rises. Univeral deposit insurance shifts a huge quantity of money to the 'don't really care, as long as the govt is solvent' category. That's moral hazard. The question is what benefit it's gaining. Also there's a difference between a well considered decision to make an inflation/national wealth adjustment to the $250k vs having deposit insurance de facto cover $10mil or $100mil. Ignorant grandma's $500k aren't a reason to insure Roku's CFO at $400mil.

2. You're getting confused here on a basic point I tried to clarity last time around. Spreading very large deposits thinly enough for each piece to be less than $250k is often not practical. However, a CFO who knows *anything* about finance, not talking about each one being able to write exotic options models, knows that $1mil deposits at 5 different banks are safer than one $5mil deposit in almost any scenario. The level of ignorance you're saying needs to be supported by the deposit insurance system is a pretty extreme one.

3. 'Blindly investing in T-bills'. That's a good one I'll remember that. :happy And my 'proposed solution' is what was the supposed policy since forever basically up to last weekend. That there's a deposit insurance limit, and over that the depositor must make their own risk evaluation, which banks need to consider in forming their investment and risk policies. Again if that was such a crazy idea, why wasn't there a previous groundswell of well reasoned argument to make deposit insurance universal? And why are Treasury officials even now claiming that the recent action won't generally be repeated? Even they seem to recognize there's a downside (though few if anyone really believes future large depositors with any political connections will now be denied unlimited coverage).
1. Yes it's a difference of degree I'll grant you that, but it's a lot of degrees. Bondholders will be wiped out at SVB, depositors won't, even without fdic help. The bondholders don't directly influence the risk management of the bank, but they do indirectly because management must have demonstrated risk management in order to secure necessary financing at reasonable rates. At least in theory. In this case it seems shareholders, bondholders and depositors were all oblivious. If bondholders in reality did not properly evaluate the solvency of the bank, it's even more absurd to expect that the CFO of a small company with 30 employees and 5M on deposit will have the skill or knowledge or resources to do so.

2. Obviously spreading deposits around is safer for the depositor. But it accomplished nothing to reduce systemic risk or moral hazard. The 'bad' banks will receive just as much if not more money by people blindly spreading their money around. When the bad bank goes under there will still be 200b in deposits at risk, affecting more people but to a lesser extent each. The aggregate risk is the same. The goal is to accomplish an efficient and conservative allocation of capital. Blindly spreading money around does not accomplish this. To accomplish this people have to actually consider the balance sheet and risk management of the bank. How can that actually be accomplished in reality? By holding shareholders and bondholders and bank managers responsible for failure. We already are holding shareholders and bondholders responsible. But corporate governance structures in this country are so bad that SVB execs were able to reward themselves massively for their mismanagement. You want to prevent the kind of reckless mismanagement like this from happening again? Actually hold management responsible instead of employees of small companies who just happened to bank there. Another alternative would be to bring back the stress tests on mid size banks that were repealed in 2018.

3. By blind I mean that while it should be safe for the depositor it does nothing to promote an efficient allocation of capital. For example, if all savers bought TBILLS there would be nobody to lend long for example for mortgages, even though when properly managed MBS are a perfectly reasonable part of a banks portfolio.

In terms of why this isn't policy... well it kind of is. What's happening this time is actually much less than last time where bondholders and shareholders were bailed out with taxpayer money. And it's happened lots of other times too. Because it just doesn't make sense to punish small time depositors for the mistakes of the bank management. You also haven't acknowledged the reality that all your proposal would accomplish is cause everyone to blindly move to TBTF, which is literally what was already happening, thereby increasing the systemic risk and moral hazard (except for the fact that the big banks are actually stress tested as Alex pointed out - which is a possible solution to stress test all banks again). Again, insurance is commonly used in many industries and there is no macroeconomic reason depositors shouldn't have their deposits insured. There are a myriad of other more realistic ways to prevent moral hazard and systemic risk.
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Re: [Bank failure discussion mega-thread]

Post by alex_686 »

alluringreality wrote: Fri Mar 17, 2023 9:21 am
LadyGeek wrote: Fri Mar 17, 2023 9:08 am I'm not an expert, but federal regulations limit savings accounts to 6 transactions per month as defined by something called "Requirement D'.
I'm under the impression that what you're referring to was suspended. Those terms appear to have been removed from my account, although there is a mention here that some banks still have withdrawal limits.
https://www.forbes.com/advisor/banking/ ... ulation-d/
https://www.federalreserve.gov/supervis ... tr2106.htm
I think the magic number is 6 days.

Many money market have a requirement of 7 days buried in the fine print. While regularly waived it technically puts it in a grey area.

On that, are we talking about pragmatic usage or technical banking regulation? I mean, I could look up the regs for “Christmas Clubs”, saving account that only allow a song penalty free withdrawal in December. But I don’t think that is where this conversation is heading.

Pragmatically “demand deposits” can be yanked from the bank very quickly with little to no notice or penalty. It is really a measure of how stick - or in this case unstick - the bank’s funding base is.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
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Re: [Bank failure discussion mega-thread]

Post by CuriousTacos »

simplesimon wrote: Fri Mar 17, 2023 8:33 am
novolog wrote: Fri Mar 17, 2023 8:25 am if BTFP is a 1 year loan, what are we doing 1 year from now?

presumably the only way banks can pay off the BTFP loan is if the bonds return to their original value, and it seems like the only way that occurs is if rates go back down significantly?

am i missing something?
They will likely do all of these things: repay the loan with earnings, push to raise more deposits, repay the loan with bonds that mature. They can try to sell equity. Assuming no reinvestment the duration of the portfolio will fall and improve the FMV. And obviously interest rate changes can help or hurt.
If things don't get worse, they can also sell off some less liquid loans at reasonable prices rather than fire-sale prices.

While the main decline was in longer dated treasuries and mortgage backed securities, the liquidity of their other loans becomes a problem in a bank run.

A lot of "ifs", but that's the hope
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Re: [Bank failure discussion mega-thread]

Post by simplesimon »

YoungSisyphus wrote: Fri Mar 17, 2023 9:43 am Perhaps a more direct question: is this injecting $ that could run contrary to the Fed's goal of reducing inflation?
I don't believe so. Lending out all those borrowings is not the solution to the problem.
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Re: [Bank failure discussion mega-thread]

Post by Valuethinker »

YoungSisyphus wrote: Fri Mar 17, 2023 9:43 am This scary looking chart was the subject of some angst at a different forum. I'd be interested what the more advanced users think:
Assets: Liquidity and Credit Facilities: Loans: Primary Credit: Wednesday Level - https://fred.stlouisfed.org/series/WLCFLPCL

Some were saying the available credit creates an easy arbitrage opportunity for even banks that are not threatened and will be abused. Part of me was wondering if that is why the other big banks are now so willing to "help" First Republic.
The CEOs of the big banks lived through 2008: the moment when the entire financial system could have failed (and wound up nationalised). They don't want to live through that again. Nor do they want more heavy handed government prudential regulation than they already have.
Perhaps a more direct question: is this injecting $ that could run contrary to the Fed's goal of reducing inflation?
In macroeconomic theory terms. If the increase in the money supply is felt to be temporary, then no. Economic agents will not assume a permanent increase in the price level, because they believe that the monetary stimulus will be withdrawn. So if there is a belief the Fed will eventually recommence its process of Quantitative Tightening, then no.

It's only if the increase in the money supply is permanent, that measures like this will have a permanent impact on the price level.

That's a fairly standard statement of macroeconomic thinking: that in aggregate economic agents are rational, far sighted, and take into account all publicly available information. I think it was Stigler (Nobel Prize winning professor at Chicago) who said (paraphrasing) "To drive your car home from work, you engage in a real time solution of changing sets of differential equations. But you don't need to pass a math test to drive a car".

I wouldn't jump to the conclusion that this measure is "obviously" inflationary (straw man). There will be many who will, but I believe they will do so because they have an ideological bias against government intervention. Rather than thinking through the macroeconomic implications of holding that belief.
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Re: [Bank failure discussion mega-thread]

Post by rkhusky »

alluringreality wrote: Fri Mar 17, 2023 9:21 am
LadyGeek wrote: Fri Mar 17, 2023 9:08 am I'm not an expert, but federal regulations limit savings accounts to 6 transactions per month as defined by something called "Requirement D'.
I'm under the impression that what you're referring to was suspended. Those terms appear to have been removed from my account, although there is a mention here that some banks still have withdrawal limits.
https://www.forbes.com/advisor/banking/ ... ulation-d/
https://www.federalreserve.gov/supervis ... tr2106.htm
+1
My bank eliminated the 6 withdrawal/transfer limit a while back.
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Re: [Bank failure discussion mega-thread]

Post by exodusing »

YoungSisyphus wrote: Fri Mar 17, 2023 9:43 amPerhaps a more direct question: is this injecting $ that could run contrary to the Fed's goal of reducing inflation?
There is no direct relation between the money supply and inflation. The relation is mediated by velocity, how quickly the money is spent or turns over. There can be a massive increase in the money supply and if the money is not spent quickly, you won't see much inflation. See for example https://fred.stlouisfed.org/series/M2V or https://en.wikipedia.org/wiki/Velocity_of_money

If it does increase inflation, the Fed can use other means to lower inflation, such as increasing interest rates.
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Re: [Bank failure discussion mega-thread]

Post by CuriousTacos »

JackoC wrote: Fri Mar 17, 2023 8:40 am
CuriousTacos wrote: Wed Mar 15, 2023 5:36 pm
JackoC wrote: Wed Mar 15, 2023 3:36 pm If you run banks risklessly there would be much less capital available for growth in the economy. Economic growth depends on risk taking.
You seem to be implying that money is equivalent to capital, and more money is better. If so, we should print more money so we have more capital available for growth in the economy. I say that jokingly and to make a point, but some people do think that, and I mean no offense if so.

Edit: sorry that was long winded.

1: The system is currently skewed such that depositors don't have sufficient incentive to shift their demand deposits to term deposits, so what I'm describing above doesn't mean business loans would be limited to the current quantity of time deposits, but rather that lots of demand deposits would be appropriately shifted to term deposits. As you pointed out in a subsequent post (in the context of going above FDIC limits), lots of business deposits should be in ultra short term securities rather than demand deposits
Yeah that was long. :happy And, though maybe because you snipped most of my post to make room for it, none of really answered the point of mine that you left in the snip. Which is really basic, I think anyone thinking I'm basically off track here is overcomplicating things then going off on various tangents. Savers have a different preference for liquidity and duration than the demand for investments. Eg. a large proportion of checking and savings account are short term because that's what the depositors prefer. But many uses to invest that capital are by borrowers who require longer term and/or fixed rate. Forcing assets and liabilities to exactly match would have a huge economic opportunity cost. Some kind of risk taking intermediary converting between the preferences, in return for expected profit, but risking a capital base, adds greatly to economic efficiency. This isn't debateable as a general principal, it's an Econ 101 thing. There would be a huge cost to requiring a complete match in duration between bank assets and liabilities (no 30 yr mortgages prepayable at borrower's option for example, funded by banks at least, except to the degree depositors accept 30 yr fixed deposits prepayable at bank's option). But that kind of economic straight jacket is required because banks fail every once in a while? Ridiculous. Any reasonable discussion is on the basis of what degree of risk banks are allowed to take on what base of capital, not eliminating bank risk.

But back to deposit insurance, have to say the thread is itself evidence of general degree of ignorance how banks and the economy work, which makes the moral hazard of small (like $250k, though that number hasn't been adjusted for inflation in a long time it's true) deposit insurance limits probably for the best, net. $100mil deposits being de facto insured though is a mistake IMO because the balance of moral hazard and reasonable expectation of what those depositors should know, is different. Just like there can be reasonable discussion eg. 'is the 30 y prepayable mortgage really necessary?' since it generates a lot of and not so simple to hedge (because of the prepayment option) risk. In some other countries almost all mortgages are floating (rate risk, though not liquidity-wise, matched to their demand deposits). That could be a reasonable debate, like the level of deposit insurance (maybe it's time it be $500k...still not $400mil :shock: ). But riskless banking is a silly discussion, sorry if too blunt.
Deleted. I'd like to take another stab with a better response
Last edited by CuriousTacos on Fri Mar 17, 2023 1:03 pm, edited 1 time in total.
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Re: [Bank failure discussion mega-thread]

Post by rockstar »

exodusing wrote: Fri Mar 17, 2023 10:23 am
YoungSisyphus wrote: Fri Mar 17, 2023 9:43 amPerhaps a more direct question: is this injecting $ that could run contrary to the Fed's goal of reducing inflation?
There is no direct relation between the money supply and inflation. The relation is mediated by velocity, how quickly the money is spent or turns over. There can be a massive increase in the money supply and if the money is not spent quickly, you won't see much inflation. See for example https://fred.stlouisfed.org/series/M2V or https://en.wikipedia.org/wiki/Velocity_of_money

If it does increase inflation, the Fed can use other means to lower inflation, such as increasing interest rates.
Giving people stimulus checks is a lot different from the Fed printing money to buy treasuries.
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Re: [Bank failure discussion mega-thread]

Post by exodusing »

SteadyOne wrote: Fri Mar 17, 2023 9:07 am
srt7 wrote: Thu Mar 16, 2023 8:56 pm
technovelist wrote: Thu Mar 16, 2023 8:45 pm
exodusing wrote: Thu Mar 16, 2023 5:00 pm
Tanelorn wrote: Thu Mar 16, 2023 3:50 pm
Looks like FRC is going to make it

https://www.wsj.com/articles/jpmorgan-m ... c-4f9eeb76
"Four of the country’s biggest banks — JPMorgan Chase, Bank of America, Citigroup and Wells Fargo — agreed to contribute $5 billion each. Goldman Sachs and Morgan Stanley will contribute $2.5 billion each and BNY Mellon, PNC Bank, State Street, Truist and US Bank will each add $1 billion.

"The deposits are uninsured, the banks said"

I wonder what other terms there may be. If I were one of those banks I'd want some form of equity.
What does this even mean? Deposits are liabilities of the bank. How does increasing the amount of their liabilities help them?
And where did the other banks get $30 billion to "contribute"?
Can someone explain how this is reassuring?
LOL! Robbing Peter to pay Paul ...
It might be moneys depositors if those failing banks moved to mega banks for safety.

Actually any bank can fail regardless of management honesty, strong balance sheet, superb risk management. Bank run on that perfect bank will ruin it quickly. Again, if depositors of bank X panic for whatever reason and start taking money out that bank will fail. Think about it - bank has short term deposits from customer and long term loans on the other side of the balance sheet.

Depositors can take their money at any moment. If that happens what’s left? Loans, mortgages - longer term obligations. Banks are required to keep certain amount of liquidity not sure but not more than 10% say. So if 10% of deposits are gone bank will fail. And no amount of risk management will help.
There are capital and other requirements for banks, the goal of which is to make sure the banks are healthy. The details are somewhat complex. https://en.wikipedia.org/wiki/Capital_requirement https://en.wikipedia.org/wiki/Basel_Accords
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Re: [Bank failure discussion mega-thread]

Post by exodusing »

rockstar wrote: Fri Mar 17, 2023 10:26 am
exodusing wrote: Fri Mar 17, 2023 10:23 am
YoungSisyphus wrote: Fri Mar 17, 2023 9:43 amPerhaps a more direct question: is this injecting $ that could run contrary to the Fed's goal of reducing inflation?
There is no direct relation between the money supply and inflation. The relation is mediated by velocity, how quickly the money is spent or turns over. There can be a massive increase in the money supply and if the money is not spent quickly, you won't see much inflation. See for example https://fred.stlouisfed.org/series/M2V or https://en.wikipedia.org/wiki/Velocity_of_money

If it does increase inflation, the Fed can use other means to lower inflation, such as increasing interest rates.
Giving people stimulus checks is a lot different from the Fed printing money to buy treasuries.
That may be true, but it doesn't contradict the basic point. Also, the Bank Term Funding Program, the Fed facility under discussion, is not "printing money to buy Treasuries". That was QE, a program the Fed ended and is reversing (QT). For example, https://www.troweprice.com/personal-inv ... tions.html
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Re: [Bank failure discussion mega-thread]

Post by rockstar »

exodusing wrote: Fri Mar 17, 2023 10:34 am
rockstar wrote: Fri Mar 17, 2023 10:26 am
exodusing wrote: Fri Mar 17, 2023 10:23 am
YoungSisyphus wrote: Fri Mar 17, 2023 9:43 amPerhaps a more direct question: is this injecting $ that could run contrary to the Fed's goal of reducing inflation?
There is no direct relation between the money supply and inflation. The relation is mediated by velocity, how quickly the money is spent or turns over. There can be a massive increase in the money supply and if the money is not spent quickly, you won't see much inflation. See for example https://fred.stlouisfed.org/series/M2V or https://en.wikipedia.org/wiki/Velocity_of_money

If it does increase inflation, the Fed can use other means to lower inflation, such as increasing interest rates.
Giving people stimulus checks is a lot different from the Fed printing money to buy treasuries.
That may be true, but it doesn't contradict the basic point. Also, the Bank Term Funding Program, the Fed facility under discussion, is not "printing money to buy Treasuries". That was QE, a program the Fed ended and is reversing (QT). For example, https://www.troweprice.com/personal-inv ... tions.html
What I’m saying is that printing money isn’t necessarily a bad thing. But how that money is distributed is what could or could not cause inflation. You also have the impact of low rates as well.

The impact of running off the balance sheet is the bit that looks ignored.
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Re: [Bank failure discussion mega-thread]

Post by rockstar »

This isn’t money that people will use to buy groceries. This is available cash to convince people not to do bank runs. It’s like Monopoly money that will never get used.
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Re: [Bank failure discussion mega-thread]

Post by rkhusky »

exodusing wrote: Fri Mar 17, 2023 10:23 am If it does increase inflation, the Fed can use other means to lower inflation, such as increasing interest rates.
Which causes problems for banks with liquidity issues and who have to sell bonds at a loss.
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Re: [Bank failure discussion mega-thread]

Post by exodusing »

rkhusky wrote: Fri Mar 17, 2023 11:15 am
exodusing wrote: Fri Mar 17, 2023 10:23 am If it does increase inflation, the Fed can use other means to lower inflation, such as increasing interest rates.
Which causes problems for banks with liquidity issues and who have to sell bonds at a loss.
Among many other issues. One example is it slows the economy, which causes problems for a lot of people. For bank, reducing the level of economic activity is not a positive.
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Re: [Bank failure discussion mega-thread]

Post by exodusing »

Another take:
At a high level and in very brief summary: there have been regulations since the 2010s which are meant to set limits on the ability of banks to “borrow short / lend long”. They’re not meant to prevent it – how could you prevent a bank from doing liquidity transformation, that’s what it’s for! But they put limits on it. In an important sense, most bank regulations are really just codifications of best practice (in this case, sensible management of a bank’s treasury). Their purpose is really to draw a line under best practice, in an industry where people who don’t follow good practices can gain a lot of market share really quickly.

The USA didn’t do a good job of implementing these regulations – it only applied them properly to a category of banks which didn’t include SVB. You don’t really need to know much more than that about the global regulatory politics.
https://backofmind.substack.com/
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Re: [Bank failure discussion mega-thread]

Post by CuriousTacos »

exodusing wrote: Fri Mar 17, 2023 11:35 am Another take:
At a high level and in very brief summary: there have been regulations since the 2010s which are meant to set limits on the ability of banks to “borrow short / lend long”. They’re not meant to prevent it – how could you prevent a bank from doing liquidity transformation, that’s what it’s for! But they put limits on it. In an important sense, most bank regulations are really just codifications of best practice (in this case, sensible management of a bank’s treasury). Their purpose is really to draw a line under best practice, in an industry where people who don’t follow good practices can gain a lot of market share really quickly.

The USA didn’t do a good job of implementing these regulations – it only applied them properly to a category of banks which didn’t include SVB. You don’t really need to know much more than that about the global regulatory politics.
https://backofmind.substack.com/
Are you referring to the 2018 rollback, or the regulations even before that?
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Re: [Bank failure discussion mega-thread]

Post by exodusing »

CuriousTacos wrote: Fri Mar 17, 2023 12:09 pm
exodusing wrote: Fri Mar 17, 2023 11:35 am Another take:
At a high level and in very brief summary: there have been regulations since the 2010s which are meant to set limits on the ability of banks to “borrow short / lend long”. They’re not meant to prevent it – how could you prevent a bank from doing liquidity transformation, that’s what it’s for! But they put limits on it. In an important sense, most bank regulations are really just codifications of best practice (in this case, sensible management of a bank’s treasury). Their purpose is really to draw a line under best practice, in an industry where people who don’t follow good practices can gain a lot of market share really quickly.

The USA didn’t do a good job of implementing these regulations – it only applied them properly to a category of banks which didn’t include SVB. You don’t really need to know much more than that about the global regulatory politics.
https://backofmind.substack.com/
Are you referring to the 2018 rollback, or the regulations even before that?
Dan Davies is referring to the 2018 rollbacks. Before then, more regs applied to SVB.
Last edited by exodusing on Fri Mar 17, 2023 12:24 pm, edited 1 time in total.
rockstar
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Re: [Bank failure discussion mega-thread]

Post by rockstar »

CuriousTacos wrote: Fri Mar 17, 2023 12:09 pm
exodusing wrote: Fri Mar 17, 2023 11:35 am Another take:
At a high level and in very brief summary: there have been regulations since the 2010s which are meant to set limits on the ability of banks to “borrow short / lend long”. They’re not meant to prevent it – how could you prevent a bank from doing liquidity transformation, that’s what it’s for! But they put limits on it. In an important sense, most bank regulations are really just codifications of best practice (in this case, sensible management of a bank’s treasury). Their purpose is really to draw a line under best practice, in an industry where people who don’t follow good practices can gain a lot of market share really quickly.

The USA didn’t do a good job of implementing these regulations – it only applied them properly to a category of banks which didn’t include SVB. You don’t really need to know much more than that about the global regulatory politics.
https://backofmind.substack.com/
Are you referring to the 2018 rollback, or the regulations even before that?
What’s more concerning is all the questions that Powell received about loosening reserves before SVB failed. This shows how powerful the banks lobbying is in Washington. So it’s not surprising that banks are being asked to bail out banks. It’s really a mess. As an individual investor QQQ is outperforming SPY in my port. That’s a bit surprising given all of the tech layoffs. But the bank bit seems much worse.
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Re: [Bank failure discussion mega-thread]

Post by stocknoob4111 »

Small caps are getting decimated... I'm guessing exposure to regionals, disappointing as they've underperformed last decade and they were just beginning to get ahead
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Re: [Bank failure discussion mega-thread]

Post by exodusNH »

novolog wrote: Fri Mar 17, 2023 8:25 am if BTFP is a 1 year loan, what are we doing 1 year from now?

presumably the only way banks can pay off the BTFP loan is if the bonds return to their original value, and it seems like the only way that occurs is if rates go back down significantly?

am i missing something?
As noted, these banks have other sources of income to pay back the loans. CME FedWatch shows that people believe interest rates will drop Q3/4.

In the meantime, the banks can also look to be acquired or issue more equity. This was all about offering some breathing room while the destructive herd animals known as humans get their stuff together.
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Re: [Bank failure discussion mega-thread]

Post by alex_686 »

exodusNH wrote: Fri Mar 17, 2023 12:29 pm
novolog wrote: Fri Mar 17, 2023 8:25 am if BTFP is a 1 year loan, what are we doing 1 year from now?

presumably the only way banks can pay off the BTFP loan is if the bonds return to their original value, and it seems like the only way that occurs is if rates go back down significantly?

am i missing something?
As noted, these banks have other sources of income to pay back the loans. CME FedWatch shows that people believe interest rates will drop Q3/4.

In the meantime, the banks can also look to be acquired or issue more equity. This was all about offering some breathing room while the destructive herd animals known as humans get their stuff together.
For context, SVB was trying to raise fresh equity in the week prior to the collapse.

Not saying that banks shouldn’t raise new capital, but it is like getting kids to eat their vegetables.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
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Re: [Bank failure discussion mega-thread]

Post by CuriousTacos »

exodusing wrote: Fri Mar 17, 2023 12:21 pm
CuriousTacos wrote: Fri Mar 17, 2023 12:09 pm
exodusing wrote: Fri Mar 17, 2023 11:35 am Another take:
At a high level and in very brief summary: there have been regulations since the 2010s which are meant to set limits on the ability of banks to “borrow short / lend long”. They’re not meant to prevent it – how could you prevent a bank from doing liquidity transformation, that’s what it’s for! But they put limits on it. In an important sense, most bank regulations are really just codifications of best practice (in this case, sensible management of a bank’s treasury). Their purpose is really to draw a line under best practice, in an industry where people who don’t follow good practices can gain a lot of market share really quickly.

The USA didn’t do a good job of implementing these regulations – it only applied them properly to a category of banks which didn’t include SVB. You don’t really need to know much more than that about the global regulatory politics.
https://backofmind.substack.com/
Are you referring to the 2018 rollback, or the regulations even before that?
Dan Davies is referring to the 2018 rollbacks. Before then, more regs applied to SVB.
Right, that was a quote from the link, sorry. But even in his post, he doesn't specifically refer to 2018 or rollbacks, but I'll take your word.

If so, there are opinions on both sides as to whether the specific regulations that would have applied pre-2018 would have flagged the specific risks faced by these first failures. Frank himself seems to think not, but his role in Signature bank may have biased him.

Which gets back to my larger point that we're never going to craft regulations that prevent the next crisis as long as the goal is to allow banks to fly close-but-not-too-close to the sun. And by that I mean fractional reserves, at least with anywhere close to as low as a level as we have now.
exodusNH
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Re: [Bank failure discussion mega-thread]

Post by exodusNH »

alex_686 wrote: Fri Mar 17, 2023 12:51 pm
exodusNH wrote: Fri Mar 17, 2023 12:29 pm
novolog wrote: Fri Mar 17, 2023 8:25 am if BTFP is a 1 year loan, what are we doing 1 year from now?

presumably the only way banks can pay off the BTFP loan is if the bonds return to their original value, and it seems like the only way that occurs is if rates go back down significantly?

am i missing something?
As noted, these banks have other sources of income to pay back the loans. CME FedWatch shows that people believe interest rates will drop Q3/4.

In the meantime, the banks can also look to be acquired or issue more equity. This was all about offering some breathing room while the destructive herd animals known as humans get their stuff together.
For context, SVB was trying to raise fresh equity in the week prior to the collapse.

Not saying that banks shouldn’t raise new capital, but it is like getting kids to eat their vegetables.
I defer to you on most of this stuff, so feel free to poo-poo this.

They announced this right as Silvergate collapsed. A relatively small group of people with outsized deposits panicked, and caused a run that saw 25% of assets withdrawn basically overnight.

Had they announced a week before or after, might it have flown under the radar? It's not like they were loaded with CDO^2.
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Re: [Bank failure discussion mega-thread]

Post by rockstar »

Does this whole fail boil down to chasing yield with duration is bad?
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Re: [Bank failure discussion mega-thread]

Post by alex_686 »

exodusNH wrote: Fri Mar 17, 2023 1:08 pm I defer to you on most of this stuff, so feel free to poo-poo this.

They announced this right as Silvergate collapsed. A relatively small group of people with outsized deposits panicked, and caused a run that saw 25% of assets withdrawn basically overnight.

Had they announced a week before or after, might it have flown under the radar? It's not like they were loaded with CDO^2.
I am going to defer judgement on SBV for a while. Lots of partial facts, speculation, fear mongering, and free floating anxiety.

That being said, I am kind of poo-poo this idea. As the saying goes, bankruptcy first happens slowly, then fast. I think you have the end game right, but the real issues were probably popping up months ago. That was the time to raise capital, not the weeks before the collapse.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
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Re: [Bank failure discussion mega-thread]

Post by alex_686 »

rockstar wrote: Fri Mar 17, 2023 1:15 pm Does this whole fail boil down to chasing yield with duration is bad?
Yes and no.

The transformation of illiquid assets into liquid assets, the managing of money, is the primary social good provides to society.

Thus managing duration risk has to be a core competence of a bank. SVB obviously failed at this.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
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Re: [Bank failure discussion mega-thread]

Post by exodusing »

rockstar wrote: Fri Mar 17, 2023 1:15 pm Does this whole fail boil down to chasing yield with duration is bad?
That's part of it, but the whole is more complicated than that. If you want one simplistic sentence, don't have liabilities that are demanding to be paid now when all you have to pay is assets that can not be liquidated to raise enough to pay such liabilities.
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Re: [Bank failure discussion mega-thread]

Post by technovelist »

simplesimon wrote: Fri Mar 17, 2023 6:50 am
technovelist wrote: Fri Mar 17, 2023 6:33 am This last statement is not necessarily true. I was once a customer of a bank that had over 100% liquidity so if everyone who had a demand deposit presented it at the same time, the bank would just sell liquid assets and give them their money. For obvious reasons, they didn't ever have a run.
Were they not in the business of lending? How did they make money?
They lent money only on assets they held, including gold and silver, and maybe stocks too.
Since those were margin loans, they were callable at any time; if the margin call wasn't met, they would sell the collateral, which was highly liquid so they could get the money immediately.
In theory, theory and practice are identical. In practice, they often differ.
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Re: [Bank failure discussion mega-thread]

Post by exodusing »

technovelist wrote: Fri Mar 17, 2023 1:29 pm
simplesimon wrote: Fri Mar 17, 2023 6:50 am
technovelist wrote: Fri Mar 17, 2023 6:33 am This last statement is not necessarily true. I was once a customer of a bank that had over 100% liquidity so if everyone who had a demand deposit presented it at the same time, the bank would just sell liquid assets and give them their money. For obvious reasons, they didn't ever have a run.
Were they not in the business of lending? How did they make money?
They lent money only on assets they held, including gold and silver, and maybe stocks too.
Since those were margin loans, they were callable at any time; if the margin call wasn't met, they would sell the collateral, which was highly liquid so they could get the money immediately.
What bank was this?
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Re: [Bank failure discussion mega-thread]

Post by technovelist »

exodusing wrote: Fri Mar 17, 2023 1:38 pm
technovelist wrote: Fri Mar 17, 2023 1:29 pm
simplesimon wrote: Fri Mar 17, 2023 6:50 am
technovelist wrote: Fri Mar 17, 2023 6:33 am This last statement is not necessarily true. I was once a customer of a bank that had over 100% liquidity so if everyone who had a demand deposit presented it at the same time, the bank would just sell liquid assets and give them their money. For obvious reasons, they didn't ever have a run.
Were they not in the business of lending? How did they make money?
They lent money only on assets they held, including gold and silver, and maybe stocks too.
Since those were margin loans, they were callable at any time; if the margin call wasn't met, they would sell the collateral, which was highly liquid so they could get the money immediately.
What bank was this?
Why do you ask?
It was acquired decades ago, so is no longer available for use, if that's what you were thinking.
Last edited by technovelist on Fri Mar 17, 2023 1:56 pm, edited 1 time in total.
In theory, theory and practice are identical. In practice, they often differ.
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9-5 Suited
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Re: [Bank failure discussion mega-thread]

Post by 9-5 Suited »

I'm not sure exactly what to make of this, but find it interesting.

After the 2022 elections, there were posts across the various Boglehead and personal finance boards where people were extremely nervous about treasury bills/bonds and asking if bank accounts were a safer place for their holdings in the event of a debt ceiling fiasco. Now that we have issues a mere three months later with the banking sector, I'm seeing on those exact same forums a fair number of the exact opposite question: are treasury bills/bonds safer than bank holdings?

I sometimes think paying too much attention can be to the detriment of investors. Someone who 1) made appropriate use of FDIC limits and 2) invested their additional fixed income holdings in US treasuries at a reputable custodian could probably have gone for a 6 month hibernation and been financially unharmed for it but in a better mental place than those individuals.

Mr. Bogle takes some understandable flack for the limits of his "don't peek" advice - not great in a world where you are responsible for monitoring your accounts against fraud and other misdeeds - but in a broader sense his wisdom is quite valuable, as usual.
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Re: [Bank failure discussion mega-thread]

Post by technovelist »

It doesn't appear that the support of other banks for First Republic is calming the markets down.
Gold is up over $60, the Dow is down 500 points, and First Republic's stock is down 30%.
I wonder what is going to happen this weekend...
In theory, theory and practice are identical. In practice, they often differ.
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Re: [Bank failure discussion mega-thread]

Post by rockstar »

technovelist wrote: Fri Mar 17, 2023 1:55 pm It doesn't appear that the support of other banks for First Republic is calming the markets down.
Gold is up over $60, the Dow is down 500 points, and First Republic's stock is down 30%.
I wonder what is going to happen this weekend...
Makes sense. Support is a message that they’re not as sound as they say. So is the support sufficient?
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Re: [Bank failure discussion mega-thread]

Post by simplesimon »

technovelist wrote: Fri Mar 17, 2023 1:47 pm
exodusing wrote: Fri Mar 17, 2023 1:38 pm
technovelist wrote: Fri Mar 17, 2023 1:29 pm
simplesimon wrote: Fri Mar 17, 2023 6:50 am
technovelist wrote: Fri Mar 17, 2023 6:33 am This last statement is not necessarily true. I was once a customer of a bank that had over 100% liquidity so if everyone who had a demand deposit presented it at the same time, the bank would just sell liquid assets and give them their money. For obvious reasons, they didn't ever have a run.
Were they not in the business of lending? How did they make money?
They lent money only on assets they held, including gold and silver, and maybe stocks too.
Since those were margin loans, they were callable at any time; if the margin call wasn't met, they would sell the collateral, which was highly liquid so they could get the money immediately.
What bank was this?
Why do you ask?
It was acquired decades ago, so is no longer available for use, if that's what you were thinking.
Doesn't sound like a typical bank. They called those holdings "demand deposits"?
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Re: [Bank failure discussion mega-thread]

Post by CuriousTacos »

CuriousTacos wrote: Fri Mar 17, 2023 10:26 am
JackoC wrote: Fri Mar 17, 2023 8:40 am Yeah that was long. :happy And, though maybe because you snipped most of my post to make room for it, none of really answered the point of mine that you left in the snip. Which is really basic, I think anyone thinking I'm basically off track here is overcomplicating things then going off on various tangents. Savers have a different preference for liquidity and duration than the demand for investments. Eg. a large proportion of checking and savings account are short term because that's what the depositors prefer. But many uses to invest that capital are by borrowers who require longer term and/or fixed rate. Forcing assets and liabilities to exactly match would have a huge economic opportunity cost. Some kind of risk taking intermediary converting between the preferences, in return for expected profit, but risking a capital base, adds greatly to economic efficiency. This isn't debateable as a general principal, it's an Econ 101 thing. There would be a huge cost to requiring a complete match in duration between bank assets and liabilities (no 30 yr mortgages prepayable at borrower's option for example, funded by banks at least, except to the degree depositors accept 30 yr fixed deposits prepayable at bank's option). But that kind of economic straight jacket is required because banks fail every once in a while? Ridiculous. Any reasonable discussion is on the basis of what degree of risk banks are allowed to take on what base of capital, not eliminating bank risk.

But back to deposit insurance, have to say the thread is itself evidence of general degree of ignorance how banks and the economy work, which makes the moral hazard of small (like $250k, though that number hasn't been adjusted for inflation in a long time it's true) deposit insurance limits probably for the best, net. $100mil deposits being de facto insured though is a mistake IMO because the balance of moral hazard and reasonable expectation of what those depositors should know, is different. Just like there can be reasonable discussion eg. 'is the 30 y prepayable mortgage really necessary?' since it generates a lot of and not so simple to hedge (because of the prepayment option) risk. In some other countries almost all mortgages are floating (rate risk, though not liquidity-wise, matched to their demand deposits). That could be a reasonable debate, like the level of deposit insurance (maybe it's time it be $500k...still not $400mil :shock: ). But riskless banking is a silly discussion, sorry if too blunt.
Deleted. I'd like to take another stab with a better response
There are several issues that get intertwined, and I didn't do a good job of keeping them separate in my previous posts. I'll try to clarify that.

First, demand deposits are a unique thing. Since monetary savings is an important representation of actual useful capital, a system that allows multiple people to have immediate claim on the same funds sends an incorrect signal to credit markets about available capital. Without fractional reserves, it's tough to take risk with demand deposits, so yes, I'm saying banks shouldn't take risks with these. There isn't an opportunity cost to that, since systematically making it appear that there's more capital than there really is does not lead to sustainable growth but rather to boom/bust.

That's separate from the issue of term mismatch as a whole. In a hypothetical completely free market (i.e. without government fiat, lender of last resort, government deposit insurance, etc, and perhaps also with greater liability of owners), banks that engage in term mismatch would be on the hook to estimate future availability of capital and future economic activity, since they have to be able to replace maturing deposits in the future with new ones without any government help. Some banks could overestimate and some could underestimate, but there wouldn't be a reason for systematic bias one way or the other. Borrowers would also have more skin in the game, since loans requiring extreme term-mismatch would have tougher terms (i.e. callability, collateral requirements, higher interest rates, bank-friendly interest rate flexibility). Likewise, depositors would be incentivized to consider the risk/reward of various term deposit options (and bond funds) and at least properly segregate them from their demand deposits.

Once you provide a government promise of help or liquidity to banks and insurance to depositors, that causes everyone to act as though there's more capital (now and/or in the future) than there truly is, leading to a boom and bust. So there isn't an "opportunity cost" of not encouraging excessive term mismatch either. Instead, we want banks to have to make realistic projections of current/future capital without any bias. If we've decided that we must have certain government promises, then regulation should attempt to fully counteract the systematic bias created by those promises. I'm not sure that a bunch of well-intended experts could do this in theory, and much less so in practice given prevalent opinions/interests.
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Re: [Bank failure discussion mega-thread]

Post by exodusing »

technovelist wrote: Fri Mar 17, 2023 1:47 pm
exodusing wrote: Fri Mar 17, 2023 1:38 pm
technovelist wrote: Fri Mar 17, 2023 1:29 pm
simplesimon wrote: Fri Mar 17, 2023 6:50 am
technovelist wrote: Fri Mar 17, 2023 6:33 am This last statement is not necessarily true. I was once a customer of a bank that had over 100% liquidity so if everyone who had a demand deposit presented it at the same time, the bank would just sell liquid assets and give them their money. For obvious reasons, they didn't ever have a run.
Were they not in the business of lending? How did they make money?
They lent money only on assets they held, including gold and silver, and maybe stocks too.
Since those were margin loans, they were callable at any time; if the margin call wasn't met, they would sell the collateral, which was highly liquid so they could get the money immediately.
What bank was this?
Why do you ask?
It was acquired decades ago, so is no longer available for use, if that's what you were thinking.
I'm thinking it's far from a traditional bank and had a business model that doesn't make sense to me, so I'd like to look into it to better understand what was going on.
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Re: [Bank failure discussion mega-thread]

Post by UpperNwGuy »

nps wrote: Fri Mar 17, 2023 4:33 am
theac wrote: Thu Mar 16, 2023 11:38 pm I hold my cash at Schwab in their Value Advantage Money Fund® – Investor Shares (SWVXX) at 4.49%

So would you say it's a good idea to move it to a safer place like Schwab U.S. Treasury Money Fund - Investor Shares at 4.31%

I'm guessing the answer is "yes"?

Edit: Wow,
I skimmed thru the SWVXX holdings and I think I have to change that answer to:
DEFINITELY YES! :D

I'd still like to hear any views on it tho.
Schwab already saw $8.8B in net outflows from its Value Advantage funds this week. You would be in good company.
What is motivating the exodus of funds from SWVXX? I thought that the SEC regs would keep the problems with Schwab bank from spilling over into Schwab brokerage.
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Re: [Bank failure discussion mega-thread]

Post by alex_686 »

UpperNwGuy wrote: Fri Mar 17, 2023 4:22 pm What is motivating the exodus of funds from SWVXX? I thought that the SEC regs would keep the problems with Schwab bank from spilling over into Schwab brokerage.
The Regs do. None of the weird edge cases that I can think of apply? Does anyone know if Schwab’s bank runs a money center? Spot for institutional money to get parked? Normally only deals with 10s of millions? Sometimes the bank will link their client to a money market as a adjunct. If the client is terminating the relationship with the bank the money market mutual fund relationship would tend to follow.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
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Re: [Bank failure discussion mega-thread]

Post by PersonalFinanceJam »

UpperNwGuy wrote: Fri Mar 17, 2023 4:22 pm
nps wrote: Fri Mar 17, 2023 4:33 am
theac wrote: Thu Mar 16, 2023 11:38 pm I hold my cash at Schwab in their Value Advantage Money Fund® – Investor Shares (SWVXX) at 4.49%

So would you say it's a good idea to move it to a safer place like Schwab U.S. Treasury Money Fund - Investor Shares at 4.31%

I'm guessing the answer is "yes"?

Edit: Wow,
I skimmed thru the SWVXX holdings and I think I have to change that answer to:
DEFINITELY YES! :D

I'd still like to hear any views on it tho.
Schwab already saw $8.8B in net outflows from its Value Advantage funds this week. You would be in good company.
What is motivating the exodus of funds from SWVXX? I thought that the SEC regs would keep the problems with Schwab bank from spilling over into Schwab brokerage.
It's a Prime money market fund. Prime money market funds invest in things other than government backed securities such as commercial paper and bank CD's. They are considered a bit more risky than money market funds backed by government securities or just plain old t-bills. Since the financial crisis they can also impose liquidity/redemption gates in times of stress which prevents people from getting their money out exactly when they want to. It really has nothing to do with Schwab Bank, or it should. There is so much hysteria flying out there it's hard to speculate what people may be thinking. The article notes that the prime funds have been seeing outflows but the Schwab government funds have seen net inflows so it seems little more than shifting assets to a less risky money fund..
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Re: [Bank failure discussion mega-thread]

Post by AnnetteLouisan »

Is SPAXX ok?
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