[Bank failure discussion mega-thread]

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
technovelist
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Re: [Bank failure discussion mega-thread]

Post by technovelist »

coachd50 wrote: Mon Mar 20, 2023 10:25 pm
technovelist wrote: Mon Mar 20, 2023 8:45 pm
km91 wrote: Mon Mar 20, 2023 8:16 pm
technovelist wrote: Mon Mar 20, 2023 8:03 pm
Do you or granny have more than the $250k limit in one account?
Because that's what T-bills are for.
I mean the entire banking system is premised on the belief that for all intents and purposes deposits are money. If the government is faced with the choice between maintaining faith in the financial system or teaching me and granny a hard lesson about the limits of FDIC insurance, I think they should probably aim for supporting the banking system
I'm not saying that anyone should be taught a hard lesson.

How about if they pass a regulation that banks have to tell depositors with over $250k that they should buy T-bills with the excess, and maybe even provide education and help as to how they can do that?

Having an unlimited "limit" for FDIC insurance destabilizes the banking system by giving bank executives more reasons to swing for the fences because no depositor will care how dangerously the executives invest, even to the extent that they do now.

My proposal would be a lot less disruptive to the banking system than that.
A few things:
1) it is kind of ironic that you want to force the depositors to buy Treasuries- and yet Treasuries (albeit notes, not bills) are a main culprit in the SVB downfall.
2) How many of these uninsured depositors were grannies and how many were commercial accounts?
3) Do you really think that depositors as a group will be able to monitor how management uses those deposits? Having worked in retail banking as a teller at ages ago, the amount of customers who didn't understand how they could be overdrawn when they still had checks, or who didn't understand why I wouldn't cash a "not on us check" for $2,000 when they had an ACB (average collected balance) of $17.50 was shocking. You think these people will provide the checks and balances for bank management to avoid "dangerous" investments?
4) Off shoot of 3-- again SVB's DANGEROUS investments seemed to be Treasury Notes...and unfortunately because of the economic conditions and prevailing rates, the only way to make a spread was to push the duration on Treasuries or make more commercial loans.
1. It is precisely the mismatch of maturities between notes and demand deposits that caused the problem.

How much is the price of a 1-year t-bill affected by a rise in interest rates? Approximately equal to the rise, e.g. 4% or so in this case.
How much is the price of a 6-year t-note affected by a rise in interest rates? Approximately equal to 6x the rise, e.g. 24% or so in this case.

Had they had t-bills they would have survived the run.
In theory, theory and practice are identical. In practice, they often differ.
exodusing
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Re: [Bank failure discussion mega-thread]

Post by exodusing »

According to the WSJ:
Treasury Secretary Janet Yellen is expected to tell a banking conference on Tuesday that the federal government could step in to protect depositors at additional banks if regulators see a risk of a run on the banking system.
...
“Our intervention was necessary to protect the broader U.S. banking system. And similar actions could be warranted if smaller institutions suffer deposit runs that pose the risk of contagion,” Ms. Yellen will say, according to excerpts of her prepared remarks.
...
Treasury officials have said deposit outflows from regional banks have slowed or even reversed since the federal government staged its intervention last week.
If people believe the government will effectively guarantee all deposits, then there won't be bank runs due to worry about losing deposits and therefore the government won't have to do anything. An iconic example of this type of action is Mario Draghi's famous "whatever it takes speech" that solved the European sovereign debt crisis.
exodusing
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Re: [Bank failure discussion mega-thread]

Post by exodusing »

technovelist wrote: Tue Mar 21, 2023 9:36 am 1. It is precisely the mismatch of maturities between notes and demand deposits that caused the problem.
The mismatch was a necessary but not sufficient condition for the problem. Without a bank run, SVB would be fine. It's not one or the other issue, it's both.

A more typical modern bank would have had a much larger share of its assets in individual and consumer loans, which are less liquid, riskier and harder to value than treasuries.
technovelist
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Re: [Bank failure discussion mega-thread]

Post by technovelist »

exodusing wrote: Tue Mar 21, 2023 9:45 am
technovelist wrote: Tue Mar 21, 2023 9:36 am 1. It is precisely the mismatch of maturities between notes and demand deposits that caused the problem.
The mismatch was a necessary but not sufficient condition for the problem. Without a bank run, SVB would be fine. It's not one or the other issue, it's both.

A more typical modern bank would have had a much larger share of its assets in individual and consumer loans, which are less liquid, riskier and harder to value than treasuries.
Yes, if there hadn't been a bank run, SVB would have been fine (we assume).
But bank runs are always possible when people get nervous.
The question is what happens when a bank run starts (relatively) slowly, which this one did. They lost 24% of their deposits in a week. Had they had t-bills instead of notes, that would not have wiped out their capital.
In theory, theory and practice are identical. In practice, they often differ.
technovelist
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Re: [Bank failure discussion mega-thread]

Post by technovelist »

exodusing wrote: Tue Mar 21, 2023 9:40 am According to the WSJ:
Treasury Secretary Janet Yellen is expected to tell a banking conference on Tuesday that the federal government could step in to protect depositors at additional banks if regulators see a risk of a run on the banking system.
...
“Our intervention was necessary to protect the broader U.S. banking system. And similar actions could be warranted if smaller institutions suffer deposit runs that pose the risk of contagion,” Ms. Yellen will say, according to excerpts of her prepared remarks.
...
Treasury officials have said deposit outflows from regional banks have slowed or even reversed since the federal government staged its intervention last week.
If people believe the government will effectively guarantee all deposits, then there won't be bank runs due to worry about losing deposits and therefore the government won't have to do anything. An iconic example of this type of action is Mario Draghi's famous "whatever it takes speech" that solved the European sovereign debt crisis.
Right, bank runs can be handled by that method. But there's a reason governments don't do that. What is it?
In theory, theory and practice are identical. In practice, they often differ.
alex_686
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Re: [Bank failure discussion mega-thread]

Post by alex_686 »

technovelist wrote: Tue Mar 21, 2023 10:22 am Yes, if there hadn't been a bank run, SVB would have been fine (we assume).
We don't assume that. The balance sheet was showing the stress of the duration mismatch. The probably colipase was written on the wall. The bank run just sealed the deal.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
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JohnnyStorm
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Re: [Bank failure discussion mega-thread]

Post by JohnnyStorm »

coachd50 wrote: Mon Mar 20, 2023 10:25 pm
...
3) Do you really think that depositors as a group will be able to monitor how management uses those deposits? Having worked in retail banking as a teller at ages ago, the amount of customers who didn't understand how they could be overdrawn when they still had checks, or who didn't understand why I wouldn't cash a "not on us check" for $2,000 when they had an ACB (average collected balance) of $17.50 was shocking. You think these people will provide the checks and balances for bank management to avoid "dangerous" investments?
#3 is irrelevant - depositors with more than 250k are not going to be people you are describing.

The market discipline that IS relevant are those who are depositing more than the insured amount - those individuals and companies should be subject to the risk. You had examples at SVB of very sophisticated startups and VC's that apparently without a thought put tens of millions into deposit accounts with SVB so that 91% (!!) of deposits at SVB were uninsured (most banks have uninsured deposits around 45%). If those uninsured depositors lost their money you can BET that the next time a bank requires a credit line extension to be subject to keeping all deposits with it there will be pushback.


Good article by Greg Ip in today's WSJ: "SVB-Fueled Turmoil Junks Lessons of the Global Financial Crisis" https://archive.is/dcdc8

The plain fact is that nothing regulates the markets like the markets. Government can soften the edges but over regulation leads to distortions and further damaging unintended consequences (witness the favoritism in the bank capital requirements that was accorded to long term treasuries - and apparently per Ip's article the regulators themselves overlooked the interest rate risk !! despite similar risks causing the S&L crisis).

Government central regulation based on the last crisis leads to failures like SVB who went a year without a risk manager and just followed the models that kept them in compliance with the formulaic capital requirements. From Ip's article:
The problem is that financiers tend to double down on a safe strategy until it becomes unsafe. Between 2007 and 2022 banks boosted their holdings of Treasurys and federally backed mortgage securities to 20% from 12% of total assets, while the uninsured share of domestic deposits rose to 45% from 38%.


How is that making banks safer ? Nothing disciplines future market activity more than suffering the consequence of one's mistakes.


The whole desire to over regulate and insure rather than allow the markets to discipline reminds me of the "safe" playground fallacy "Making Playgrounds a Little More Dangerous" https://www.nytimes.com/2019/05/10/wel ... ounds.html:

“I came to the counterintuitive conclusion that engaging in risk is actually very important in preventing injuries,” a researcher says.
exodusNH
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Re: [Bank failure discussion mega-thread]

Post by exodusNH »

Harry Livermore wrote: Tue Mar 21, 2023 7:21 am
technovelist wrote: Mon Mar 20, 2023 8:45 pm
How about if they pass a regulation that banks have to tell depositors with over $250k that they should buy T-bills with the excess, and maybe even provide education and help as to how they can do that?
Not a bad idea! Maybe even have a pathway to buy said bills right there in person/ online, through the bank. Education would be the key. Explain the duration and interest rate risks, in plain language.
I'm sure our regulators and bankers have a dozen reasons why this is a "bad" idea. But it sounds pretty good to a dumb old layman like me.
Cheers
It's a great hypothetical, but completely unworkable in practice.

Someone has to develop the educational materials that cover the all of the questions and objections of people ranging in age from 18 to 100, with differing intellectual capabilities. Throw in various languages / grasp of English.

Who will conduct this education? Tellers making $15/hr? How long will this average transaction take? Specialized bank employees? Who will cover this additional employee expense, either because transactions take 10x as long or you have a queue of specialized employees.
Valuethinker
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Re: [Bank failure discussion mega-thread]

Post by Valuethinker »

valleyrock wrote: Tue Mar 21, 2023 9:22 am I recently listened to the latest Wealthtrack. (https://wealthtrack.com/wheres-the-rece ... e-economy/)

The economist there seems pretty savvy, and says these bank failures are something of a canary in the coal mine in terms of indicating a recession is coming. Another indicator of the pending recession (and accompanying drop in share prices) is the layoffs in big tech, which will soon move over to retail when the retail companies can't continue to increase their profits. She says a recession has been staved off due to all the liquidity in the economy.

This thinking seems to make sense, but does it, really? And is it actionable (to some of us; for example, those of us who are retired)?
I do not recommend changing your target percentages. Experience shows that it's really difficult to time that well, and it's easy to be caught with too much cash when the market is recovering or buying equities just before things go to heck in a handbasket (raises hand: August 2008).

If you had known about Covid, say you were in the epidemiology business, in Jan-early Feb 2020, and you got it right and liquidated your stock portfolio, would you also have gotten it right in April 2020 and bought back in? With freezer trailers outside NYC hospitals to hold the corpses, with the hospital mortuaries full. When your knowledge of epidemiology would have told you that maybe 50k people were dead worldwide and there were (at least) another 10m to go? That for example in the UK in Mar 2020 less than 100 people a day were dying, and 12 months later, *after vaccines had been discovered*, over 1000 would be dying a day?

World trade in Q1 2009 fell faster than it did at the worst of the Great Depression. Major financial institutions had had to be rescued by the governments and further rescues were in progress. Would you have known enough to buy back in before March 2009?

There's some pretty stunning statistics about what happens if you miss the "best 100 days" of stock market performance in the last 40 years. Costs you several per cent pa in performance, I believe. And the very best days often come when the market is just at its point of culmination.

If you have a labour income, ie pre retirement, I have suggested (as I did in c. Oct 2008 on this forum) raising more cash. Depending on profession & industry.

Higher bond yields, particularly higher TIPS yields, are an opportunity in retirement to "lock in" better returns - better match future needs to future cash flows.
CuriousTacos
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Re: [Bank failure discussion mega-thread]

Post by CuriousTacos »

JohnnyStorm wrote: Tue Mar 21, 2023 11:18 am The plain fact is that nothing regulates the markets like the markets. Government can soften the edges but over regulation leads to distortions and further damaging unintended consequences (witness the favoritism in the bank capital requirements that was accorded to long term treasuries - and apparently per Ip's article the regulators themselves overlooked the interest rate risk !! despite similar risks causing the S&L crisis).
The million dollar question is what to do with an industry that is fundamentally built upon government mandated fiat currency, fractional reserves, a lender of last resort, a Fed attempting to manipulate financial markets to achieve various goals, FDIC insurance for the "little guy", etc.

Are we already backed into a corner where the choices are: contagion, repeated government rescues, or regulation? And since regulation is likely to be simultaneously overbearing and inadequate as you say (either because of political motives, practical limitations in knowing the current state of things and predicting the future, or incompetency), then perhaps we're really just stuck with choosing between contagion or rescue?

In other words, I generally agree with you, but I think the current system is too broken to expect market forces to work without fixing the underlying issues. I think government backing plus fractional reserves are an unworkable combination, but few others agree, so I don't expect a true fix to happen.
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Harry Livermore
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Re: [Bank failure discussion mega-thread]

Post by Harry Livermore »

exodusNH wrote: Tue Mar 21, 2023 11:29 am
Harry Livermore wrote: Tue Mar 21, 2023 7:21 am
technovelist wrote: Mon Mar 20, 2023 8:45 pm
How about if they pass a regulation that banks have to tell depositors with over $250k that they should buy T-bills with the excess, and maybe even provide education and help as to how they can do that?
Not a bad idea! Maybe even have a pathway to buy said bills right there in person/ online, through the bank. Education would be the key. Explain the duration and interest rate risks, in plain language.
I'm sure our regulators and bankers have a dozen reasons why this is a "bad" idea. But it sounds pretty good to a dumb old layman like me.
Cheers
It's a great hypothetical, but completely unworkable in practice.

Someone has to develop the educational materials that cover the all of the questions and objections of people ranging in age from 18 to 100, with differing intellectual capabilities. Throw in various languages / grasp of English.

Who will conduct this education? Tellers making $15/hr? How long will this average transaction take? Specialized bank employees? Who will cover this additional employee expense, either because transactions take 10x as long or you have a queue of specialized employees.
The language could be plain, direct, and quickly written by banking regulators and other federal employees who ALREADY write plain language pamphlets. It's not as if we have a shortage of federal government workers!

How many depositors with more than $250K in a plain-vanilla bank account are incapable of understanding simple concepts like:
"We have noticed you have one or more accounts with over $250K. Any amounts you have over $250K will not be guaranteed by the FDIC, and if our bank is taken over by them, you might lose all the excess"
"We can help you put the excess into Treasury bills that are guaranteed by the US government. Would you like to make an appointment with our specialist to do so?"

Maybe the roving specialist who already deals with mortgages and other products, who is in a different branch each day of the week, gets some simple training.

And what brick-and-mortar bank, in an area that sees high rates of customers speaking something other than English, don't already have translation abilities? There are likely already tellers who speak Spanish or Mandarin or French, depending on the local population.

It's also not like this is a sudden 5-alarm fire. The process of formalizing and codifying the overt declaration that amounts over $250K will likely NOT be covered, and the process for steering high-balance depositors into appropriate Treasury products (or iBonds) could roll out over a period of years. And not everyone has to choose to follow the banks' advice. Sure seems like some folks already don't do this. The cost of compliance could be kicked in by the FDIC/ member banks, the states, and the consumers, each in some fraction. I don't think it's far-fetched at all, nor do I NOT think there may be other or better solutions too!
The point might be, maybe it's time we look at banking as a component in a more holistic personal finance ecosphere for ALL citizens. Would you argue that a better educated consumer, and a more helpful approach from banks (and investment firms), might make for a more stable version of capitalism? I sure think so. Here, we argue somewhat for the democratization of investing, through DIY and low-cost funds. Education is paramount. Why not bring a little spirit into other parts of personal finance?
Ideas like technovelist's could have a place if we keep an open mind.
Cheers

ETA: Grammar
Last edited by Harry Livermore on Tue Mar 21, 2023 2:22 pm, edited 1 time in total.
exodusing
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Re: [Bank failure discussion mega-thread]

Post by exodusing »

technovelist wrote: Tue Mar 21, 2023 10:23 am
exodusing wrote: Tue Mar 21, 2023 9:40 am According to the WSJ:
Treasury Secretary Janet Yellen is expected to tell a banking conference on Tuesday that the federal government could step in to protect depositors at additional banks if regulators see a risk of a run on the banking system.
...
“Our intervention was necessary to protect the broader U.S. banking system. And similar actions could be warranted if smaller institutions suffer deposit runs that pose the risk of contagion,” Ms. Yellen will say, according to excerpts of her prepared remarks.
...
Treasury officials have said deposit outflows from regional banks have slowed or even reversed since the federal government staged its intervention last week.
If people believe the government will effectively guarantee all deposits, then there won't be bank runs due to worry about losing deposits and therefore the government won't have to do anything. An iconic example of this type of action is Mario Draghi's famous "whatever it takes speech" that solved the European sovereign debt crisis.
Right, bank runs can be handled by that method. But there's a reason governments don't do that. What is it?
Consider Yellen's speech today to the ABA and consider how much the ECB had to spend as a result of Draghi's whatever it takes speech.

As a matter of policy, there are trade-offs involving moral hazard, the costs of monitoring by depositors and regulators, the consequences of large scale bank runs and any number of other related factors.
technovelist
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Re: [Bank failure discussion mega-thread]

Post by technovelist »

exodusing wrote: Tue Mar 21, 2023 12:22 pm
technovelist wrote: Tue Mar 21, 2023 10:23 am
exodusing wrote: Tue Mar 21, 2023 9:40 am According to the WSJ:
Treasury Secretary Janet Yellen is expected to tell a banking conference on Tuesday that the federal government could step in to protect depositors at additional banks if regulators see a risk of a run on the banking system.
...
“Our intervention was necessary to protect the broader U.S. banking system. And similar actions could be warranted if smaller institutions suffer deposit runs that pose the risk of contagion,” Ms. Yellen will say, according to excerpts of her prepared remarks.
...
Treasury officials have said deposit outflows from regional banks have slowed or even reversed since the federal government staged its intervention last week.
If people believe the government will effectively guarantee all deposits, then there won't be bank runs due to worry about losing deposits and therefore the government won't have to do anything. An iconic example of this type of action is Mario Draghi's famous "whatever it takes speech" that solved the European sovereign debt crisis.
Right, bank runs can be handled by that method. But there's a reason governments don't do that. What is it?
Consider Yellen's speech today to the ABA and consider how much the ECB had to spend as a result of Draghi's whatever it takes speech.

As a matter of policy, there are trade-offs involving moral hazard, the costs of monitoring by depositors and regulators, the consequences of large scale bank runs and any number of other related factors.
Yes, exactly.
In theory, theory and practice are identical. In practice, they often differ.
technovelist
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Re: [Bank failure discussion mega-thread]

Post by technovelist »

Harry Livermore wrote: Tue Mar 21, 2023 12:10 pm
exodusNH wrote: Tue Mar 21, 2023 11:29 am
Harry Livermore wrote: Tue Mar 21, 2023 7:21 am
technovelist wrote: Mon Mar 20, 2023 8:45 pm
How about if they pass a regulation that banks have to tell depositors with over $250k that they should buy T-bills with the excess, and maybe even provide education and help as to how they can do that?
Not a bad idea! Maybe even have a pathway to buy said bills right there in person/ online, through the bank. Education would be the key. Explain the duration and interest rate risks, in plain language.
I'm sure our regulators and bankers have a dozen reasons why this is a "bad" idea. But it sounds pretty good to a dumb old layman like me.
Cheers
It's a great hypothetical, but completely unworkable in practice.

Someone has to develop the educational materials that cover the all of the questions and objections of people ranging in age from 18 to 100, with differing intellectual capabilities. Throw in various languages / grasp of English.

Who will conduct this education? Tellers making $15/hr? How long will this average transaction take? Specialized bank employees? Who will cover this additional employee expense, either because transactions take 10x as long or you have a queue of specialized employees.
The language could be plain, direct, and quickly written by banking regulators and other federal employees who ALREADY write plain language pamphlets. It's not as if we have a shortage of federal government workers!

How many depositors with more than $250K in a plain-vanilla bank account are incapable of understanding simple concepts like:
"We have noticed you have one or more accounts with over $250K. Any amounts you have over $250K will not be guaranteed by the FDIC, and if our bank is taken over by them, you might lose all the excess"
"We can help you put the excess into Treasury bills that are guaranteed by the US government. Would you like to make an appointment with our specialist to do so?"

Maybe the roving specialist who already deals with mortgages and other products, who is in a different branch each day of the week, gets some simple training.

And what brick-and-mortar bank, in an area that sees high rates of customers speaking something other than English, don't already have translation abilities? There are likely already tellers who speak Spanish or Mandarin or French, depending on the local population.

It's also not like this is a sudden 5-alarm fire. The process of formalizing and codifying the overt declaration that amounts over $250K will likely NOT be covered, and the process for steering high-balance depositors into appropriate Treasury products (or iBonds) could roll out over a period of years. And not everyone has to choose to follow the banks' advice. Sure seems like some folks already don't do this. The cost of compliance could be kicked in by the FDIC/ member banks, the states, and the consumers, each in some fraction. I don't think it's far-fetched at all, nor do I think there may be other or better solutions too!
The point might be, maybe it's time we look at banking as a component in a more holistic personal finance ecosphere for ALL citizens. Would you argue that a better educated consumer, and a more helpful approach from banks (and investment firms), might make for a more stable version of capitalism? I sure think so. Here, we argue somewhat for the democratization of investing, through DIY and low-cost funds. Education is paramount. Why not bring a little spirit into other parts of personal finance?
Ideas like technovelist's could have a place if we keep an open mind.
Cheers
Thanks! Also note that for most banks the number of people who would need this education is a minority, possibly a small minority, of their depositor base.
In theory, theory and practice are identical. In practice, they often differ.
rockstar
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Re: [Bank failure discussion mega-thread]

Post by rockstar »

technovelist wrote: Tue Mar 21, 2023 12:24 pm
exodusing wrote: Tue Mar 21, 2023 12:22 pm
technovelist wrote: Tue Mar 21, 2023 10:23 am
exodusing wrote: Tue Mar 21, 2023 9:40 am According to the WSJ:
Treasury Secretary Janet Yellen is expected to tell a banking conference on Tuesday that the federal government could step in to protect depositors at additional banks if regulators see a risk of a run on the banking system.
...
“Our intervention was necessary to protect the broader U.S. banking system. And similar actions could be warranted if smaller institutions suffer deposit runs that pose the risk of contagion,” Ms. Yellen will say, according to excerpts of her prepared remarks.
...
Treasury officials have said deposit outflows from regional banks have slowed or even reversed since the federal government staged its intervention last week.
If people believe the government will effectively guarantee all deposits, then there won't be bank runs due to worry about losing deposits and therefore the government won't have to do anything. An iconic example of this type of action is Mario Draghi's famous "whatever it takes speech" that solved the European sovereign debt crisis.
Right, bank runs can be handled by that method. But there's a reason governments don't do that. What is it?
Consider Yellen's speech today to the ABA and consider how much the ECB had to spend as a result of Draghi's whatever it takes speech.

As a matter of policy, there are trade-offs involving moral hazard, the costs of monitoring by depositors and regulators, the consequences of large scale bank runs and any number of other related factors.
Yes, exactly.
What level of bank run should be considered doable? 25%? 50%? 75%?
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ray.james
Posts: 1902
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Re: [Bank failure discussion mega-thread]

Post by ray.james »

Valuethinker wrote: Tue Mar 21, 2023 11:42 am
valleyrock wrote: Tue Mar 21, 2023 9:22 am I recently listened to the latest Wealthtrack. (https://wealthtrack.com/wheres-the-rece ... e-economy/)

The economist there seems pretty savvy, and says these bank failures are something of a canary in the coal mine in terms of indicating a recession is coming. Another indicator of the pending recession (and accompanying drop in share prices) is the layoffs in big tech, which will soon move over to retail when the retail companies can't continue to increase their profits. She says a recession has been staved off due to all the liquidity in the economy.

This thinking seems to make sense, but does it, really? And is it actionable (to some of us; for example, those of us who are retired)?
I do not recommend changing your target percentages. Experience shows that it's really difficult to time that well, and it's easy to be caught with too much cash when the market is recovering or buying equities just before things go to heck in a handbasket (raises hand: August 2008).

If you had known about Covid, say you were in the epidemiology business, in Jan-early Feb 2020, and you got it right and liquidated your stock portfolio, would you also have gotten it right in April 2020 and bought back in? With freezer trailers outside NYC hospitals to hold the corpses, with the hospital mortuaries full. When your knowledge of epidemiology would have told you that maybe 50k people were dead worldwide and there were (at least) another 10m to go? That for example in the UK in Mar 2020 less than 100 people a day were dying, and 12 months later, *after vaccines had been discovered*, over 1000 would be dying a day?

World trade in Q1 2009 fell faster than it did at the worst of the Great Depression. Major financial institutions had had to be rescued by the governments and further rescues were in progress. Would you have known enough to buy back in before March 2009?

There's some pretty stunning statistics about what happens if you miss the "best 100 days" of stock market performance in the last 40 years. Costs you several per cent pa in performance, I believe. And the very best days often come when the market is just at its point of culmination.

If you have a labour income, ie pre retirement, I have suggested (as I did in c. Oct 2008 on this forum) raising more cash. Depending on profession & industry.

Higher bond yields, particularly higher TIPS yields, are an opportunity in retirement to "lock in" better returns - better match future needs to future cash flows.
+1. I moved from 80-20 to 60-40 a rebalance but I did that when P/E crossed 30 & again at 35 in 10% moves. During covid downturn I moved 5% from bonds to stock. A lot of this is almost impossible to workout always in one's favor. But it is much easier decision now due to 5% treasuries. Compare that against last decade, it was very tough to be in bonds to reduce risk.
Last edited by ray.james on Tue Mar 21, 2023 12:28 pm, edited 1 time in total.
When in doubt, http://www.bogleheads.org/forum/viewtopic.php?f=1&t=79939
exodusing
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Re: [Bank failure discussion mega-thread]

Post by exodusing »

alex_686 wrote: Tue Mar 21, 2023 10:35 am
technovelist wrote: Tue Mar 21, 2023 10:22 am Yes, if there hadn't been a bank run, SVB would have been fine (we assume).
We don't assume that. The balance sheet was showing the stress of the duration mismatch. The probably colipase was written on the wall. The bank run just sealed the deal.
Showing signs of stress is one thing. Actually collapsing is another. Many things could have happened that would allow SVB to continue on its merry way, such as a better handled capital raise, rates declining or probably even stabilizing, the Fed's new lending program. We just don't know how it might have played out.
coachd50
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Re: [Bank failure discussion mega-thread]

Post by coachd50 »

technovelist wrote: Tue Mar 21, 2023 9:36 am
coachd50 wrote: Mon Mar 20, 2023 10:25 pm
technovelist wrote: Mon Mar 20, 2023 8:45 pm
km91 wrote: Mon Mar 20, 2023 8:16 pm
technovelist wrote: Mon Mar 20, 2023 8:03 pm
Do you or granny have more than the $250k limit in one account?
Because that's what T-bills are for.
I mean the entire banking system is premised on the belief that for all intents and purposes deposits are money. If the government is faced with the choice between maintaining faith in the financial system or teaching me and granny a hard lesson about the limits of FDIC insurance, I think they should probably aim for supporting the banking system
I'm not saying that anyone should be taught a hard lesson.

How about if they pass a regulation that banks have to tell depositors with over $250k that they should buy T-bills with the excess, and maybe even provide education and help as to how they can do that?

Having an unlimited "limit" for FDIC insurance destabilizes the banking system by giving bank executives more reasons to swing for the fences because no depositor will care how dangerously the executives invest, even to the extent that they do now.

My proposal would be a lot less disruptive to the banking system than that.
A few things:
1) it is kind of ironic that you want to force the depositors to buy Treasuries- and yet Treasuries (albeit notes, not bills) are a main culprit in the SVB downfall.
2) How many of these uninsured depositors were grannies and how many were commercial accounts?
3) Do you really think that depositors as a group will be able to monitor how management uses those deposits? Having worked in retail banking as a teller at ages ago, the amount of customers who didn't understand how they could be overdrawn when they still had checks, or who didn't understand why I wouldn't cash a "not on us check" for $2,000 when they had an ACB (average collected balance) of $17.50 was shocking. You think these people will provide the checks and balances for bank management to avoid "dangerous" investments?
4) Off shoot of 3-- again SVB's DANGEROUS investments seemed to be Treasury Notes...and unfortunately because of the economic conditions and prevailing rates, the only way to make a spread was to push the duration on Treasuries or make more commercial loans.
1. It is precisely the mismatch of maturities between notes and demand deposits that caused the problem.

How much is the price of a 1-year t-bill affected by a rise in interest rates? Approximately equal to the rise, e.g. 4% or so in this case.
How much is the price of a 6-year t-note affected by a rise in interest rates? Approximately equal to 6x the rise, e.g. 24% or so in this case.

Had they had t-bills they would have survived the run.

But would they have been able to survive regular operations with such a low interest interest rate margin? What were the 1 year bills paying? 0.3% ?? Less ?

I think most here understand the mechanics of what happened. Remember, the bank would also
Have survived the run if they held all the extra deposits in their vaults as $100.00 bills. Probably would not have stayed in business there.
technovelist
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Re: [Bank failure discussion mega-thread]

Post by technovelist »

alex_686 wrote: Tue Mar 21, 2023 10:35 am
technovelist wrote: Tue Mar 21, 2023 10:22 am Yes, if there hadn't been a bank run, SVB would have been fine (we assume).
We don't assume that. The balance sheet was showing the stress of the duration mismatch. The probably colipase was written on the wall. The bank run just sealed the deal.
True if their income statement was sufficiently in the red due to paying more out in interest than they were taking in.
Otherwise they might have made it to the duration of the Treasurys.
In theory, theory and practice are identical. In practice, they often differ.
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Re: [Bank failure discussion mega-thread]

Post by skierincolorado »

JohnnyStorm wrote: Tue Mar 21, 2023 11:18 am
coachd50 wrote: Mon Mar 20, 2023 10:25 pm
...
3) Do you really think that depositors as a group will be able to monitor how management uses those deposits? Having worked in retail banking as a teller at ages ago, the amount of customers who didn't understand how they could be overdrawn when they still had checks, or who didn't understand why I wouldn't cash a "not on us check" for $2,000 when they had an ACB (average collected balance) of $17.50 was shocking. You think these people will provide the checks and balances for bank management to avoid "dangerous" investments?
#3 is irrelevant - depositors with more than 250k are not going to be people you are describing.

The market discipline that IS relevant are those who are depositing more than the insured amount - those individuals and companies should be subject to the risk. You had examples at SVB of very sophisticated startups and VC's that apparently without a thought put tens of millions into deposit accounts with SVB so that 91% (!!) of deposits at SVB were uninsured (most banks have uninsured deposits around 45%). If those uninsured depositors lost their money you can BET that the next time a bank requires a credit line extension to be subject to keeping all deposits with it there will be pushback.


Good article by Greg Ip in today's WSJ: "SVB-Fueled Turmoil Junks Lessons of the Global Financial Crisis" https://archive.is/dcdc8

The plain fact is that nothing regulates the markets like the markets. Government can soften the edges but over regulation leads to distortions and further damaging unintended consequences (witness the favoritism in the bank capital requirements that was accorded to long term treasuries - and apparently per Ip's article the regulators themselves overlooked the interest rate risk !! despite similar risks causing the S&L crisis).

Government central regulation based on the last crisis leads to failures like SVB who went a year without a risk manager and just followed the models that kept them in compliance with the formulaic capital requirements. From Ip's article:
The problem is that financiers tend to double down on a safe strategy until it becomes unsafe. Between 2007 and 2022 banks boosted their holdings of Treasurys and federally backed mortgage securities to 20% from 12% of total assets, while the uninsured share of domestic deposits rose to 45% from 38%.


How is that making banks safer ? Nothing disciplines future market activity more than suffering the consequence of one's mistakes.


The whole desire to over regulate and insure rather than allow the markets to discipline reminds me of the "safe" playground fallacy "Making Playgrounds a Little More Dangerous" https://www.nytimes.com/2019/05/10/wel ... ounds.html:

“I came to the counterintuitive conclusion that engaging in risk is actually very important in preventing injuries,” a researcher says.
I know several CFOs of mid sized companies. What you are preaching is unrealistic and absurd. Maybe at large companies it is somewhat realistic. But CFOs at small and mid-size companies are never going to properly analyze the risk of their deposits. That's the job of the shareholders, managers, and bondholders of the bank. CFOs have companies to run and don't have the knowledge, resources or information to properly analyze the solvency of their bank. A CFO at a company with 20-200 employees is really not that sophisticated and has a lot going on. There is no moral hazard because shareholders managers and bondholders are still responsible and matter far more.
skierincolorado
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Re: [Bank failure discussion mega-thread]

Post by skierincolorado »

exodusing wrote: Tue Mar 21, 2023 12:28 pm
alex_686 wrote: Tue Mar 21, 2023 10:35 am
technovelist wrote: Tue Mar 21, 2023 10:22 am Yes, if there hadn't been a bank run, SVB would have been fine (we assume).
We don't assume that. The balance sheet was showing the stress of the duration mismatch. The probably colipase was written on the wall. The bank run just sealed the deal.
Showing signs of stress is one thing. Actually collapsing is another. Many things could have happened that would allow SVB to continue on its merry way, such as a better handled capital raise, rates declining or probably even stabilizing, the Fed's new lending program. We just don't know how it might have played out.
Their balance sheet was negative. Hoping rates drop is not a business plan. Hoping to make it until the bonds expire isn't a business plan either because they are locked into low rates but having to pay high rates on on-demand deposits to stay competitive with customers. They would continue bleeding money.
HP-12Cing
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Re: [Bank failure discussion mega-thread]

Post by HP-12Cing »

skierincolorado wrote: Tue Mar 21, 2023 2:28 pm
exodusing wrote: Tue Mar 21, 2023 12:28 pm
alex_686 wrote: Tue Mar 21, 2023 10:35 am
technovelist wrote: Tue Mar 21, 2023 10:22 am Yes, if there hadn't been a bank run, SVB would have been fine (we assume).
We don't assume that. The balance sheet was showing the stress of the duration mismatch. The probably colipase was written on the wall. The bank run just sealed the deal.
Showing signs of stress is one thing. Actually collapsing is another. Many things could have happened that would allow SVB to continue on its merry way, such as a better handled capital raise, rates declining or probably even stabilizing, the Fed's new lending program. We just don't know how it might have played out.
Their balance sheet was negative. Hoping rates drop is not a business plan. Hoping to make it until the bonds expire isn't a business plan either because they are locked into low rates but having to pay high rates on on-demand deposits to stay competitive with customers. They would continue bleeding money.
Was their balance sheet negative before the run, though? Looking at the 12/31/22 filings, they reported normal/positive levels of equity capital and earnings. Liquidity problems can close a bank in a day, whereas elevated interest rate risk exposure could eventually lead to negative earnings which could eventually deplete capital to a point where it is closed by regulators. IMO, the biggest story at this bank was its liquidity risk arising from its funding concentration. Without that piece of the puzzle, SVB not be in the news. There are plenty of other banks with very low reported levels of equity capital due to large levels of unrealized securities losses, but all should be able to ride things out provided they don't face a mass exodus of deposits.
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Re: [Bank failure discussion mega-thread]

Post by lws »

Is the free market dead then?
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Re: [Bank failure discussion mega-thread]

Post by CuriousTacos »

skierincolorado wrote: Tue Mar 21, 2023 2:23 pm
JohnnyStorm wrote: Tue Mar 21, 2023 11:18 am
coachd50 wrote: Mon Mar 20, 2023 10:25 pm
...
3) Do you really think that depositors as a group will be able to monitor how management uses those deposits? Having worked in retail banking as a teller at ages ago, the amount of customers who didn't understand how they could be overdrawn when they still had checks, or who didn't understand why I wouldn't cash a "not on us check" for $2,000 when they had an ACB (average collected balance) of $17.50 was shocking. You think these people will provide the checks and balances for bank management to avoid "dangerous" investments?
#3 is irrelevant - depositors with more than 250k are not going to be people you are describing.

The market discipline that IS relevant are those who are depositing more than the insured amount - those individuals and companies should be subject to the risk. You had examples at SVB of very sophisticated startups and VC's that apparently without a thought put tens of millions into deposit accounts with SVB so that 91% (!!) of deposits at SVB were uninsured (most banks have uninsured deposits around 45%). If those uninsured depositors lost their money you can BET that the next time a bank requires a credit line extension to be subject to keeping all deposits with it there will be pushback.


Good article by Greg Ip in today's WSJ: "SVB-Fueled Turmoil Junks Lessons of the Global Financial Crisis" https://archive.is/dcdc8

The plain fact is that nothing regulates the markets like the markets. Government can soften the edges but over regulation leads to distortions and further damaging unintended consequences (witness the favoritism in the bank capital requirements that was accorded to long term treasuries - and apparently per Ip's article the regulators themselves overlooked the interest rate risk !! despite similar risks causing the S&L crisis).

Government central regulation based on the last crisis leads to failures like SVB who went a year without a risk manager and just followed the models that kept them in compliance with the formulaic capital requirements. From Ip's article:
The problem is that financiers tend to double down on a safe strategy until it becomes unsafe. Between 2007 and 2022 banks boosted their holdings of Treasurys and federally backed mortgage securities to 20% from 12% of total assets, while the uninsured share of domestic deposits rose to 45% from 38%.


How is that making banks safer ? Nothing disciplines future market activity more than suffering the consequence of one's mistakes.


The whole desire to over regulate and insure rather than allow the markets to discipline reminds me of the "safe" playground fallacy "Making Playgrounds a Little More Dangerous" https://www.nytimes.com/2019/05/10/wel ... ounds.html:

“I came to the counterintuitive conclusion that engaging in risk is actually very important in preventing injuries,” a researcher says.
I know several CFOs of mid sized companies. What you are preaching is unrealistic and absurd. Maybe at large companies it is somewhat realistic. But CFOs at small and mid-size companies are never going to properly analyze the risk of their deposits. That's the job of the shareholders, managers, and bondholders of the bank. CFOs have companies to run and don't have the knowledge, resources or information to properly analyze the solvency of their bank. A CFO at a company with 20-200 employees is really not that sophisticated and has a lot going on. There is no moral hazard because shareholders managers and bondholders are still responsible and matter far more.
Yeah, I don't think the problem goes away merely by allowing depositors to lose money. The system is too messed up for that alone to work. That doesn't mean I want all deposits guaranteed, just that I think the solution primarily lies elsewhere.

And the issue isn't that CFOs and other depositors aren't able to analyze the solvency of a bank, since they could refer to other experts. The problem is that there's just no such thing as "early warning" for a fractional reserve bank. Even if we had perfect rating agencies, as soon as there's any report of risk, depositors will immediately run for the exits and whoever is last will lose money (and/or have to wait a while to get funds). Our best hope in the current system is that the FDIC steps in before that happens, but that obviously doesn't prevent contagion without additional government intervention.

Since most people here aren't bothered by the fractional reserve system as a whole, and since requiring much greater reserves as a compromise doesn't seem popular either, then of the other solutions I've heard, I like the idea to have much greater liability for bank managers. It would be a step towards rightly labeling it fraud when a bank squanders customer deposits, and would likely result in much higher reserves anyway.
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Re: [Bank failure discussion mega-thread]

Post by CuriousTacos »

lws wrote: Tue Mar 21, 2023 4:28 pm Is the free market dead then?
No, but maybe the current system (with its many government interventions) should be
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Re: [Bank failure discussion mega-thread]

Post by rockstar »

CuriousTacos wrote: Tue Mar 21, 2023 5:36 pm
lws wrote: Tue Mar 21, 2023 4:28 pm Is the free market dead then?
No, but maybe the current system (with its many government interventions) should be
If we had a true free market, lots of companies would fail.
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Re: [Bank failure discussion mega-thread]

Post by exodusing »

A nice explanation of the government response to SVB: https://twitter.com/Brad_Setser/status/ ... 2689548291

I hadn't realized the Fed changed discount window terms.
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Re: [Bank failure discussion mega-thread]

Post by LadyGeek »

I removed an off-topic interchange regarding a classic movie. As a reminder, see: General Etiquette
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Re: [Bank failure discussion mega-thread]

Post by Tanelorn »

HP-12Cing wrote: Tue Mar 21, 2023 3:25 pm Was their balance sheet negative before the run, though? Looking at the 12/31/22 filings, they reported normal/positive levels of equity capital and earnings.
It was very close as of the end of 2022, and very likely negative by the run but they didn’t have risk systems to tell them that or at least they didn’t share it since then. You can see the balance sheet where they had $16B in equity and $15B in HTM losses.

https://www.bamsec.com/filing/719739230 ... &table=101

So they had only $1B in equity, net of losses, to support over $200B in assets. That’s under 0.5% equity, not the 10-15% that might be typical of a normal bank.
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Re: [Bank failure discussion mega-thread]

Post by CuriousTacos »

rockstar wrote: Tue Mar 21, 2023 5:37 pm
CuriousTacos wrote: Tue Mar 21, 2023 5:36 pm
lws wrote: Tue Mar 21, 2023 4:28 pm Is the free market dead then?
No, but maybe the current system (with its many government interventions) should be
If we had a true free market, lots of companies would fail.
No argument there
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Re: [Bank failure discussion mega-thread]

Post by Apathizer »

CuriousTacos wrote: Tue Mar 21, 2023 7:26 pm
rockstar wrote: Tue Mar 21, 2023 5:37 pm
CuriousTacos wrote: Tue Mar 21, 2023 5:36 pm
lws wrote: Tue Mar 21, 2023 4:28 pm Is the free market dead then?
No, but maybe the current system (with its many government interventions) should be
If we had a true free market, lots of companies would fail.
No argument there
I think it depends how free is defined. To me competitive sports is a fairly accurate analogy. Teams compete, but there are rules and referees and officials that enforce those rules. That's very much how I think financial markets should operate.
ROTH: 50% AVGE, 10% DFAX, 40% BNDW. Taxable: 50% BNDW, 40% AVGE, 10% DFAX.
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Re: [Bank failure discussion mega-thread]

Post by arcticpineapplecorp. »

It's hard to accept the truth when the lies were exactly what you wanted to hear. Investing is simple, but not easy. Buy, hold & rebalance low cost index funds & manage taxable events. Asking Portfolio Questions | Wiki
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Re: [Bank failure discussion mega-thread]

Post by CuriousTacos »

Apathizer wrote: Tue Mar 21, 2023 7:29 pm
CuriousTacos wrote: Tue Mar 21, 2023 7:26 pm
rockstar wrote: Tue Mar 21, 2023 5:37 pm
CuriousTacos wrote: Tue Mar 21, 2023 5:36 pm
lws wrote: Tue Mar 21, 2023 4:28 pm Is the free market dead then?
No, but maybe the current system (with its many government interventions) should be
If we had a true free market, lots of companies would fail.
No argument there
I think it depends how free is defined. To me competitive sports is a fairly accurate analogy. Teams compete, but there are rules and referees and officials that enforce those rules. That's very much how I think financial markets should operate.
Agree that it depends how "free" is defined. There are a lot of people who say they want "free" but they don't mean really it.

Within Austrian Economics, there are opposing opinions on fractional reserve banking- some define it as fraud (you can't tell multiple people they all have a claim on the same thing) and therefore should be prohibited by basic rights, while the other does not define it as fraud and therefore thinks it should be allowed- just not backed up in any way by government.

However, even with variations like this, any system intending only to enforce basic rights will look very different from a system intending to nudge the results one way or another.
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Re: [Bank failure discussion mega-thread]

Post by Valuethinker »

skierincolorado wrote: Tue Mar 21, 2023 2:23 pm
I know several CFOs of mid sized companies. What you are preaching is unrealistic and absurd. Maybe at large companies it is somewhat realistic. But CFOs at small and mid-size companies are never going to properly analyze the risk of their deposits. That's the job of the shareholders, managers, and bondholders of the bank. CFOs have companies to run and don't have the knowledge, resources or information to properly analyze the solvency of their bank. A CFO at a company with 20-200 employees is really not that sophisticated and has a lot going on. There is no moral hazard because shareholders managers and bondholders are still responsible and matter far more.
I would just like to endorse this opinion.

I have a relation who works for a highly leveraged company - Private Equity backed.

They are incredibly tight on costs. But they had to beef up their finance function. Treasury Manager, Bloomberg terminal (that's something like $3k pcm-- no special deals), etc.

As you can imagine the last 7 days have been one long phonecall, reassuring the Board and investors.

This is a 1000+ person company, with a lot of debt. Even so, the CFO would not have been sophisticated on this. You need a specialist.

One of the problems is the people who understand this stuff work for banks. And their job is to sell you stuff. That's how corporates get into swap deals which bring forward profits, in effect, at the cost of more pain years later. The imbalance of technology and brain power is very much towards the sell side.
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Re: [Bank failure discussion mega-thread]

Post by Valuethinker »

First Republic. Credit Suisse.

You can smell the fear in the Central Banking room. Everyone will be having PTSD over 2008-09. Decisions made in the middle of the night after exhausting days of calls & negotiations. Presentations to the most senior government people there are**:

https://www.youtube.com/watch?v=OqYTQB6lrQQ

Big firewalls were put in place post 2008. Now we get to find out if they work. Equity buffers. Liquidity buffers.

So far the AT1 bonds have ... misfired. Badly. That's not a good place to be.

** Famous line from the crash. Young Goldman Sachs banker in the taxi to the Principal. "I am not sure how much more of this I can take". Answer: "You are not landing in a Higgins Boat on Omaha Beach on D Day. You can take it". Captures the very unfortunate macho culture of investment banks but also catches the spirit of the moment.
Last edited by Valuethinker on Wed Mar 22, 2023 9:16 am, edited 1 time in total.
technovelist
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Re: [Bank failure discussion mega-thread]

Post by technovelist »

Valuethinker wrote: Wed Mar 22, 2023 5:25 am
First Republic. Credit Suisse.

You can smell the fear in the Central Banking room. Everyone will be having PTSD over 2008-09. Decisions made in the middle of the night after exhausting days of calls & negotiations. Presentations to the most senior government people there are**:

https://www.youtube.com/watch?v=OqYTQB6lrQQ

Big firewalls were put in place post 2008. Now we get to find out if they work. Equity buffers. Liquidity buffers.

So far the AT1 bonds have ... misfired. Badly. That's not a good place to be.

** Famous line from the crash. Young Goldman Sachs banker in the taxi to the Principal. "I am not sure how much more of this I can take". Answer: "You are not getting out of Higgins Boat on Omaha Beach on D Day. You can take it". Captures the very unfortunate macho culture of investment banks but also catches the spirit of the moment.
A bank run is an uninsurable event because the insurance company would need reserves approximately equal to the entire demand deposit base.

The banking system therefore relies on confidence of the depositors, which has been shaken and is harder to get back than it is to shake.

And then we have the longer-term problem that even if there is no run, banks have a lot of real-estate exposure, mostly commercial, and that isn't doing very well either.
In theory, theory and practice are identical. In practice, they often differ.
exodusing
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Re: [Bank failure discussion mega-thread]

Post by exodusing »

technovelist wrote: Wed Mar 22, 2023 6:45 am
Valuethinker wrote: Wed Mar 22, 2023 5:25 am
First Republic. Credit Suisse.

You can smell the fear in the Central Banking room. Everyone will be having PTSD over 2008-09. Decisions made in the middle of the night after exhausting days of calls & negotiations. Presentations to the most senior government people there are**:

https://www.youtube.com/watch?v=OqYTQB6lrQQ

Big firewalls were put in place post 2008. Now we get to find out if they work. Equity buffers. Liquidity buffers.

So far the AT1 bonds have ... misfired. Badly. That's not a good place to be.

** Famous line from the crash. Young Goldman Sachs banker in the taxi to the Principal. "I am not sure how much more of this I can take". Answer: "You are not getting out of Higgins Boat on Omaha Beach on D Day. You can take it". Captures the very unfortunate macho culture of investment banks but also catches the spirit of the moment.
A bank run is an uninsurable event because the insurance company would need reserves approximately equal to the entire demand deposit base.

The banking system therefore relies on confidence of the depositors, which has been shaken and is harder to get back than it is to shake.

And then we have the longer-term problem that even if there is no run, banks have a lot of real-estate exposure, mostly commercial, and that isn't doing very well either.
Which is why a "whatever it takes" statement by regulators is helpful. If depositors believe the government will effectively insure all of their deposits, then there's no need for panic bank runs. Of course, that doesn't help with the other problems, such as loan exposure, and it certainly doesn't help with moral hazard, as discussed extensively above.

Today's FOMC statement and press conference should be interesting.
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Re: [Bank failure discussion mega-thread]

Post by JohnnyStorm »

skierincolorado wrote: Tue Mar 21, 2023 2:23 pm
I know several CFOs of mid sized companies. What you are preaching is unrealistic and absurd. Maybe at large companies it is somewhat realistic. But CFOs at small and mid-size companies are never going to properly analyze the risk of their deposits.
If a CFo can't understand that uninsured deposits aren't insured I don't know why they are a CFO. If it's not the CFO's job then it's the treasurer's. Or the accountant or bookkeeper or whoever is putting the money into the account but understanding that money that is uninsured is not insured is not a difficult concept.

Maybe trying to figure out what to do with the money is a little bit more difficult but not that much. Just get a good financial advisor. There are many options The least and easiest of which is to put it into a good treasury money market.

The failure to do this is just simple and utter incompetence to handle an obvious business risk.
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Re: [Bank failure discussion mega-thread]

Post by km91 »

JohnnyStorm wrote: Wed Mar 22, 2023 8:22 am If a CFo can't understand that uninsured deposits aren't insured I don't know why they are a CFO. If it's not the CFO's job then it's the treasurer's. Or the accountant or bookkeeper or whoever is putting the money into the account but understanding that money that is uninsured is not insured is not a difficult concept.
Maybe some companies need to have more than $250k cash on hand? I think the fact that so many companies were caught offsides by the current situation suggests that cash management, even for more established companies, isn't as straightforward as you make it seems. That or the corporate world is just full of incompetent CFOs and treasurers
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Re: [Bank failure discussion mega-thread]

Post by rockstar »

km91 wrote: Wed Mar 22, 2023 8:28 am
JohnnyStorm wrote: Wed Mar 22, 2023 8:22 am If a CFo can't understand that uninsured deposits aren't insured I don't know why they are a CFO. If it's not the CFO's job then it's the treasurer's. Or the accountant or bookkeeper or whoever is putting the money into the account but understanding that money that is uninsured is not insured is not a difficult concept.
Maybe some companies need to have more than $250k cash on hand? I think the fact that so many companies were caught offsides by the current situation suggests that cash management, even for more established companies, isn't as straightforward as you make it seems. That or the corporate world is just full of incompetent CFOs and treasurers
It’s not taught in school, so folks are learning this on the job. If you’re a start up, then your likelihood of messing this up is high.
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Re: [Bank failure discussion mega-thread]

Post by technovelist »

exodusing wrote: Wed Mar 22, 2023 7:32 am
technovelist wrote: Wed Mar 22, 2023 6:45 am
Valuethinker wrote: Wed Mar 22, 2023 5:25 am
First Republic. Credit Suisse.

You can smell the fear in the Central Banking room. Everyone will be having PTSD over 2008-09. Decisions made in the middle of the night after exhausting days of calls & negotiations. Presentations to the most senior government people there are**:

https://www.youtube.com/watch?v=OqYTQB6lrQQ

Big firewalls were put in place post 2008. Now we get to find out if they work. Equity buffers. Liquidity buffers.

So far the AT1 bonds have ... misfired. Badly. That's not a good place to be.

** Famous line from the crash. Young Goldman Sachs banker in the taxi to the Principal. "I am not sure how much more of this I can take". Answer: "You are not getting out of Higgins Boat on Omaha Beach on D Day. You can take it". Captures the very unfortunate macho culture of investment banks but also catches the spirit of the moment.
A bank run is an uninsurable event because the insurance company would need reserves approximately equal to the entire demand deposit base.

The banking system therefore relies on confidence of the depositors, which has been shaken and is harder to get back than it is to shake.

And then we have the longer-term problem that even if there is no run, banks have a lot of real-estate exposure, mostly commercial, and that isn't doing very well either.
Which is why a "whatever it takes" statement by regulators is helpful. If depositors believe the government will effectively insure all of their deposits, then there's no need for panic bank runs. Of course, that doesn't help with the other problems, such as loan exposure, and it certainly doesn't help with moral hazard, as discussed extensively above.

Today's FOMC statement and press conference should be interesting.
Agreed.
In theory, theory and practice are identical. In practice, they often differ.
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Re: [Bank failure discussion mega-thread]

Post by alex_686 »

rockstar wrote: Wed Mar 22, 2023 8:42 am
km91 wrote: Wed Mar 22, 2023 8:28 am
JohnnyStorm wrote: Wed Mar 22, 2023 8:22 am If a CFo can't understand that uninsured deposits aren't insured I don't know why they are a CFO. If it's not the CFO's job then it's the treasurer's. Or the accountant or bookkeeper or whoever is putting the money into the account but understanding that money that is uninsured is not insured is not a difficult concept.
Maybe some companies need to have more than $250k cash on hand? I think the fact that so many companies were caught offsides by the current situation suggests that cash management, even for more established companies, isn't as straightforward as you make it seems. That or the corporate world is just full of incompetent CFOs and treasurers
It’s not taught in school, so folks are learning this on the job. If you’re a start up, then your likelihood of messing this up is high.
Heck, I am working with grad students who are being taught this stuff right now. I think it great that they are living through this stuff. One guy couldn’t understand why the money center lady wouldn’t “get out of bed for less than $1 million dollars”. Now he knows. Theory verse practice.

Banks and uninsured accounts are in many cases the only practical solution.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
Valuethinker
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Re: [Bank failure discussion mega-thread]

Post by Valuethinker »

alex_686 wrote: Wed Mar 22, 2023 9:07 am
rockstar wrote: Wed Mar 22, 2023 8:42 am
km91 wrote: Wed Mar 22, 2023 8:28 am
JohnnyStorm wrote: Wed Mar 22, 2023 8:22 am If a CFo can't understand that uninsured deposits aren't insured I don't know why they are a CFO. If it's not the CFO's job then it's the treasurer's. Or the accountant or bookkeeper or whoever is putting the money into the account but understanding that money that is uninsured is not insured is not a difficult concept.
Maybe some companies need to have more than $250k cash on hand? I think the fact that so many companies were caught offsides by the current situation suggests that cash management, even for more established companies, isn't as straightforward as you make it seems. That or the corporate world is just full of incompetent CFOs and treasurers
It’s not taught in school, so folks are learning this on the job. If you’re a start up, then your likelihood of messing this up is high.
Heck, I am working with grad students who are being taught this stuff right now. I think it great that they are living through this stuff. One guy couldn’t understand why the money center lady wouldn’t “get out of bed for less than $1 million dollars”. Now he knows. Theory verse practice.

Banks and uninsured accounts are in many cases the only practical solution.
You don't know it until you have lived it. That is surely true. Liquidity risk isn't something you understand until you are illiquid, or faced with it.

It's like reading about car crashes v being in one. Thinking about taking your kid to the hospital vs riding in the ambulance with them to Emergency.*

* A friend of mine drove along the highway as his child was evacuated by helicopter to a hospital 30 miles to the west. I can't even begin to imagine what that felt like.
km91
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Re: [Bank failure discussion mega-thread]

Post by km91 »

rockstar wrote: Wed Mar 22, 2023 8:42 am It’s not taught in school, so folks are learning this on the job. If you’re a start up, then your likelihood of messing this up is high.
And let's not forget that the yield on t bills was effectively 0% for the better part of the last decade. Why spend the time and resources building out a cash management function more complex than a bank account when the marginal gain was next to nothing
rockstar
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Re: [Bank failure discussion mega-thread]

Post by rockstar »

alex_686 wrote: Wed Mar 22, 2023 9:07 am
rockstar wrote: Wed Mar 22, 2023 8:42 am
km91 wrote: Wed Mar 22, 2023 8:28 am
JohnnyStorm wrote: Wed Mar 22, 2023 8:22 am If a CFo can't understand that uninsured deposits aren't insured I don't know why they are a CFO. If it's not the CFO's job then it's the treasurer's. Or the accountant or bookkeeper or whoever is putting the money into the account but understanding that money that is uninsured is not insured is not a difficult concept.
Maybe some companies need to have more than $250k cash on hand? I think the fact that so many companies were caught offsides by the current situation suggests that cash management, even for more established companies, isn't as straightforward as you make it seems. That or the corporate world is just full of incompetent CFOs and treasurers
It’s not taught in school, so folks are learning this on the job. If you’re a start up, then your likelihood of messing this up is high.
Heck, I am working with grad students who are being taught this stuff right now. I think it great that they are living through this stuff. One guy couldn’t understand why the money center lady wouldn’t “get out of bed for less than $1 million dollars”. Now he knows. Theory verse practice.

Banks and uninsured accounts are in many cases the only practical solution.
Theory is ridiculously high level. Practice is much harder. It’s why they can’t teach investing in school. If they had the secret sauce, everyone would take the secret sauce class to become rich.
skierincolorado
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Re: [Bank failure discussion mega-thread]

Post by skierincolorado »

JohnnyStorm wrote: Wed Mar 22, 2023 8:22 am
skierincolorado wrote: Tue Mar 21, 2023 2:23 pm
I know several CFOs of mid sized companies. What you are preaching is unrealistic and absurd. Maybe at large companies it is somewhat realistic. But CFOs at small and mid-size companies are never going to properly analyze the risk of their deposits.
If a CFo can't understand that uninsured deposits aren't insured I don't know why they are a CFO. If it's not the CFO's job then it's the treasurer's. Or the accountant or bookkeeper or whoever is putting the money into the account but understanding that money that is uninsured is not insured is not a difficult concept.

Maybe trying to figure out what to do with the money is a little bit more difficult but not that much. Just get a good financial advisor. There are many options The least and easiest of which is to put it into a good treasury money market.

The failure to do this is just simple and utter incompetence to handle an obvious business risk.
You obviously haven't worked at a company with 20-200 employees. What you've suggested is completely detached from reality. IF IF IF the CFO even thought about the solvency of their bank the only thing that would happen is they would move to one of the 3 largest banks in the country. Which only makes the situation worse. They are not wasting time analyzing balance sheets or coming up with more complicated or less liquid solutions. Start ups need on demand deposits.
Last edited by skierincolorado on Wed Mar 22, 2023 9:52 am, edited 1 time in total.
adam1712
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Re: [Bank failure discussion mega-thread]

Post by adam1712 »

technovelist wrote: Mon Mar 20, 2023 8:45 pm
km91 wrote: Mon Mar 20, 2023 8:16 pm
technovelist wrote: Mon Mar 20, 2023 8:03 pm
Do you or granny have more than the $250k limit in one account?
Because that's what T-bills are for.
I mean the entire banking system is premised on the belief that for all intents and purposes deposits are money. If the government is faced with the choice between maintaining faith in the financial system or teaching me and granny a hard lesson about the limits of FDIC insurance, I think they should probably aim for supporting the banking system
I'm not saying that anyone should be taught a hard lesson.

How about if they pass a regulation that banks have to tell depositors with over $250k that they should buy T-bills with the excess, and maybe even provide education and help as to how they can do that?

Having an unlimited "limit" for FDIC insurance destabilizes the banking system by giving bank executives more reasons to swing for the fences because no depositor will care how dangerously the executives invest, even to the extent that they do now.

My proposal would be a lot less disruptive to the banking system than that.
That just strikes me as terribly inefficient to expect a small business worrying about bi-weekly payroll or large capital expenses to have to worry about the price fluctuations in T-bills. Deposit accounts provide a valuable outsourcing of the need to have someone worrying about investing the money to meet upcoming expenses.
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Re: [Bank failure discussion mega-thread]

Post by nisiprius »

JohnnyStorm wrote: Wed Mar 22, 2023 8:22 am
skierincolorado wrote: Tue Mar 21, 2023 2:23 pm
I know several CFOs of mid sized companies. What you are preaching is unrealistic and absurd. Maybe at large companies it is somewhat realistic. But CFOs at small and mid-size companies are never going to properly analyze the risk of their deposits.
If a CFo can't understand that uninsured deposits aren't insured I don't know why they are a CFO. If it's not the CFO's job then it's the treasurer's. Or the accountant or bookkeeper or whoever is putting the money into the account but understanding that money that is uninsured is not insured is not a difficult concept.

Maybe trying to figure out what to do with the money is a little bit more difficult but not that much. Just get a good financial advisor. There are many options The least and easiest of which is to put it into a good treasury money market.

The failure to do this is just simple and utter incompetence to handle an obvious business risk.
It seems to me that "we" should take a big step back and rethink the system as a whole.

Individual investors need $250,000 of insurance Maybe more.

There is an intermediate class of investors, like small-to-medium businesses, that should not be expected to perform sophisticated due diligence for an ordinary necessity. There should be business accounts with a higher amount of insurance. What's the right number? $10 million? $50 million? Whatever it is, it should be a different account, and banks should have to pay a larger assessment into the FDIC to cover the additional insurance, which should get reflected back in the form of lower deposit rates.

Beyond that, depositors are big boys and uninsured should mean uninsured.

Customers who legitimately need more insurance should be able to get it, but they should have to pay for it in some way.

Whenever a bank's ability to meet withdrawals is challenged, they should be able to invoke mechanisms like liquidity fees and redemption gates, and be allowed to delay the withdrawal. Want to make a huge withdrawal? Great, we'll charge you a 1% liquidity fee of front, you'll get your money two days from now, and if you change your mind in the next two days you can cancel the withdrawal and we'll refund the fee.

The stock market, bond funds, money market mutual funds, are allowed to pump the brakes when descending a mountain, why not banks?
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
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Re: [Bank failure discussion mega-thread]

Post by mouth »

nisiprius wrote: Wed Mar 22, 2023 9:59 am
JohnnyStorm wrote: Wed Mar 22, 2023 8:22 am
skierincolorado wrote: Tue Mar 21, 2023 2:23 pm
I know several CFOs of mid sized companies. What you are preaching is unrealistic and absurd. Maybe at large companies it is somewhat realistic. But CFOs at small and mid-size companies are never going to properly analyze the risk of their deposits.
If a CFo can't understand that uninsured deposits aren't insured I don't know why they are a CFO. If it's not the CFO's job then it's the treasurer's. Or the accountant or bookkeeper or whoever is putting the money into the account but understanding that money that is uninsured is not insured is not a difficult concept.

Maybe trying to figure out what to do with the money is a little bit more difficult but not that much. Just get a good financial advisor. There are many options The least and easiest of which is to put it into a good treasury money market.

The failure to do this is just simple and utter incompetence to handle an obvious business risk.
It seems to me that "we" should take a big step back and rethink the system as a whole.

Individual investors need $250,000 of insurance Maybe more.

There is an intermediate class of investors, like small-to-medium businesses, that should not be expected to perform sophisticated due diligence for an ordinary necessity. There should be business accounts with a higher amount of insurance. What's the right number? $10 million? $50 million? Whatever it is, it should be a different account, and banks should have to pay a larger assessment into the FDIC to cover the additional insurance, which should get reflected back in the form of lower deposit rates.

Beyond that, depositors are big boys and uninsured should mean uninsured.

Customers who legitimately need more insurance should be able to get it, but they should have to pay for it in some way.

Whenever a bank's ability to meet withdrawals is challenged, they should be able to invoke mechanisms like liquidity fees and redemption gates, and be allowed to delay the withdrawal. Want to make a huge withdrawal? Great, we'll charge you a 1% liquidity fee of front, you'll get your money two days from now, and if you change your mind in the next two days you can cancel the withdrawal and we'll refund the fee.

The stock market, bond funds, money market mutual funds, are allowed to pump the brakes when descending a mountain, why not banks?
Thank you for saving me the trouble writing exactly this. So much of this thread speaks in black and white absolute terms about about moral hazards, over/under regulation, free markets (and their death), theory vs practice (sometimes rather ironically even!), greedy Vulture Capitalist vs grandmas in the heartland, without taking it ALL IN and acknowledging there ARE gray areas. There is a spectrum. There are realities about confidence that need to accepted as axiomatic and solutions derived from there.

Of course all very easy to say and we're talking about rebuilding the plane while we're flying. While no one here is making policy (I don't think at least!) but no good solutions will come from starting with what I will call myopic black and white absolutist thinking.
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Re: [Bank failure discussion mega-thread]

Post by Jaylat »

It’s very tempting to castigate the regulators for being incompetent, however let’s think through their personal and professional incentives.

Pretend you’re Silicon Valley Bank’s bank examiner, and you see in 2022 that its portfolio of LT bonds are underwater, making them technically insolvent. You know their depositors could fly at a moment’s notice, bringing the whole edifice down. What would you do?

If you step in and close down the bank you might be blamed for destroying the institution unnecessarily. That’s a huge personal risk that could cost you your promotion, or your job – especially if rates come down and the closure is seen (in retrospect) as premature.

Putting aside personal interests, proactively taking over SVB might not be the optimal strategy. It could spook the markets and cause exactly the kind of fear and contagion you are trying to avoid.

If you do nothing, (or “closely monitor the situation”) things might right themselves without any effort. After all, the Fed is telling you that inflation is down and rates should return to normal, so SVB might be able to eventually liquidate its bonds close to par. Why not wait a while and see if the problem will go away? Even a technically insolvent bank might survive indefinitely if its depositors don’t demand their money.

Further bolstering the wait and see argument, if things do go south, SVB is a relatively small bank and the Fed can easily cover depositors’ losses. The equity and debt holders are big boys and can fend for themselves. And every senior politician and bureaucrat would always choose to avoid making a mess now, and instead just kick the can down the road.

So my guess is the regulators knew exactly what was going on and made a deliberate decision not to act. Unfortunately for them, some savvy Silicon Valley investors figured out that SVB was insolvent and forced their hands.

Bonus point: Much has been made of the fact that SVB had no official chief risk officer for 8 months prior to the meltdown. Again, from a professional career perspective this makes perfect sense. Like a rat leaving a sinking ship, the prior CRO saw the writing on the wall and bolted rather than be around when things hit the fan.

And once SVB had become technically insolvent, what risk officer would be dumb enough to take the job? Anyone who took a look at the books would see exactly what the problem was. Who wants to destroy their career by becoming the poster child for bank mismanagement?

You can craft the perfect regulations to try to avoid these situations, but they will always be administered by individuals who have their own personal and professional incentives.
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