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> You're basically describing a bank run [...] A bank run is a very special case, and while it might have similarities, it pays to be cautious when drawing com

by robzyb 10y ago

> You're basically describing a bank run [...] A bank run is a very special case, and while it might have similarities, it pays to be cautious when drawing comparisons. Bank runs are special because of the fractional reserve banking system. (Usually its at this point that someone launches into a tirade vaguely conspiracy-theory-ish about fractional reserve banking system, and complains that money is debt, but I grok it)

MichaelApproved 10y ago
Fractional reserve banking is a banking system in which only a fraction of bank deposits are backed by actual cash on hand and are available for withdrawal. This is done to expand the economy by freeing up capital that can be loaned out to other parties. Meaning, rather than let the cash sit in a vault, the bank is allowed to loan that money out to other people. If everyone wanted their money back, the bank would not be able to fulfill the request until they have recalled all those loans or perhaps sold the loans to other banks.
- tacostakohashi 10y ago
  In general, loans are not able to be "recalled".
- branchless 10y ago
  Nope. You could have a full reserve banking system and lend out all deposits. BoE has some news for you: https://bankunderground.co.uk/2015/06/30/banks-are-not-intermediaries-of-loanable-funds-and-why-this-matters/ https://bankunderground.co.uk/2015/06/30/banks-are-not-inter...
  - eru 10y ago
    In a similar vein: the generally awesome Matt Levine has an article about how a bank with perfectly matched assets and liabilities would look like. http://www.bloomberg.com/view/articles/2014-08-27/lending-club-can-be-a-better-bank-than-the-banks http://www.bloomberg.com/view/articles/2014-08-27/lending-cl...
    - roymurdock 10y ago
      Here's the 30 second summary: Lending club is an entity that bears no risk because it simply matches capitalized lenders with borrowers in the present. It matches supply and demand right now. A bank is an entity that bears risk because it matches borrowers with lenders in the future - meaning that the borrower might simply be lending to his or her future self. The bank is willing to spread that risk among all of its shareholders, and is usually backed up by a government agency to provide that service.
      - abcampbell 10y ago
        Maybe in theory. But in practice they have 1) operational risk - insofar as they are the middle-man and so are exposed to investors suing them when the loans go south 2) Implicit credit risk - in that if their loans blow up the losses suffered by their levered investors will likely prevent them from coming back to the market place to 'roll the loans' 3) Explicit credit risk - in that they have invested capital in a subsidiary HF (Cirrix) which buys their loans and is on the hook for the losses (which could flow up to the parent) http://www.inc.com/business-insider/inside-lending-club-scandal.html http://www.inc.com/business-insider/inside-lending-club-scan... https://personalmoneyservice.com/lending-club-fraud/ https://personalmoneyservice.com/lending-club-fraud/ Key passage: "As a result, the company may need to use its own funds to purchase these loans in the coming months." In other words, LendingClub is going to fundamentally shift its business model from taking no risk to taking on the risk of borrowers defaulting. The startup sold itself as simply a marketplace, connecting borrowers with investors, but now it is buying its own product. The equivalent would be Airbnb buying up loads of houses to list on its own platform, to keep it growing."
Myrth 10y ago
I still don't understand what makes banks special from any other institution that practices leveraging and fractional storage of their clients' assets? Like Comex or LBMA vaults.
- twblalock 10y ago
  FDIC insurance, the Federal Reserve, a whole bunch of other banking-specific laws...
  - eru 10y ago
    That being said, there are good arguments for doing away with these, and regulating banks just like any other business. Historically, eg Canada and Australia had good experiences with that setup. They had a more stable and advanced banking system in the relevant times (around 19th century-ish, I think), than the much more invasively regulated US at the time.
eru 10y ago
It's pretty similar. The bank has some cash on hand, and the rest sits in less liquid assets (like loans). The fund has some cash around, and the rest sits in less liquid assets, too.
- toomuchtodo 10y ago
  Does SPIC insurance cover losses from gated funds the same way FDIC insurance protects depositors?
  - eru 10y ago
    Don't think so. Though they did have bank runs before government backed deposit insurance was a thing. (And I think not all countries do deposit insurance. But most major rich economies do.) As an aside: there's strong pressure to cover losses from money market funds. (Usually on the sponsors of the fund, but I think there was a government bailout recently?) Even though those funds don't have a formal guarantee. But they are supposed to be liquid.
    - toomuchtodo 10y ago
      http://www.finra.org/investors/alerts/treasurys-guarantee-program-money-market-mutual-funds-what-you-should-know http://www.finra.org/investors/alerts/treasurys-guarantee-pr... goes into depth about money market account versus money market fund insurance. "A money market fund is said to "break the buck" when its NAV falls below $1.00 per share. In the nearly 40-year history of money market mutual funds, this has happened on only two occasions—in 1994, when a fund lost approximately four cents on the dollar, and in September 2008, when the NAVs of money market funds issued by The Reserve Fund fell below $1.00. Typically, there has been an expectation that when a money market fund reaches a point where it might break the buck, the investment management firm that sponsors the fund will take action to infuse the fund with cash so that the fund can maintain a stable NAV of $1.00 per share. Most money market funds in the U.S. are sponsored by large financial institutions that may provide assistance in the case of instability."
- robzyb 10y ago

by robzyb 10y ago

MichaelApproved 10y ago

Fractional reserve banking is a banking system in which only a fraction of bank deposits are backed by actual cash on hand and are available for withdrawal. This is done to expand the economy by freeing up capital that can be loaned out to other parties. Meaning, rather than let the cash sit in a vault, the bank is allowed to loan that money out to other people. If everyone wanted their money back, the bank would not be able to fulfill the request until they have recalled all those loans or perhaps sold the loans to other banks.

tacostakohashi 10y ago
In general, loans are not able to be "recalled".
branchless 10y ago
Nope. You could have a full reserve banking system and lend out all deposits. BoE has some news for you: https://bankunderground.co.uk/2015/06/30/banks-are-not-intermediaries-of-loanable-funds-and-why-this-matters/ https://bankunderground.co.uk/2015/06/30/banks-are-not-inter...
- eru 10y ago
  In a similar vein: the generally awesome Matt Levine has an article about how a bank with perfectly matched assets and liabilities would look like. http://www.bloomberg.com/view/articles/2014-08-27/lending-club-can-be-a-better-bank-than-the-banks http://www.bloomberg.com/view/articles/2014-08-27/lending-cl...
  - roymurdock 10y ago
    Here's the 30 second summary: Lending club is an entity that bears no risk because it simply matches capitalized lenders with borrowers in the present. It matches supply and demand right now. A bank is an entity that bears risk because it matches borrowers with lenders in the future - meaning that the borrower might simply be lending to his or her future self. The bank is willing to spread that risk among all of its shareholders, and is usually backed up by a government agency to provide that service.
    - abcampbell 10y ago
      Maybe in theory. But in practice they have 1) operational risk - insofar as they are the middle-man and so are exposed to investors suing them when the loans go south 2) Implicit credit risk - in that if their loans blow up the losses suffered by their levered investors will likely prevent them from coming back to the market place to 'roll the loans' 3) Explicit credit risk - in that they have invested capital in a subsidiary HF (Cirrix) which buys their loans and is on the hook for the losses (which could flow up to the parent) http://www.inc.com/business-insider/inside-lending-club-scandal.html http://www.inc.com/business-insider/inside-lending-club-scan... https://personalmoneyservice.com/lending-club-fraud/ https://personalmoneyservice.com/lending-club-fraud/ Key passage: "As a result, the company may need to use its own funds to purchase these loans in the coming months." In other words, LendingClub is going to fundamentally shift its business model from taking no risk to taking on the risk of borrowers defaulting. The startup sold itself as simply a marketplace, connecting borrowers with investors, but now it is buying its own product. The equivalent would be Airbnb buying up loads of houses to list on its own platform, to keep it growing."

Myrth 10y ago

I still don't understand what makes banks special from any other institution that practices leveraging and fractional storage of their clients' assets? Like Comex or LBMA vaults.

twblalock 10y ago
FDIC insurance, the Federal Reserve, a whole bunch of other banking-specific laws...
- eru 10y ago
  That being said, there are good arguments for doing away with these, and regulating banks just like any other business. Historically, eg Canada and Australia had good experiences with that setup. They had a more stable and advanced banking system in the relevant times (around 19th century-ish, I think), than the much more invasively regulated US at the time.

eru 10y ago

It's pretty similar. The bank has some cash on hand, and the rest sits in less liquid assets (like loans). The fund has some cash around, and the rest sits in less liquid assets, too.

toomuchtodo 10y ago
Does SPIC insurance cover losses from gated funds the same way FDIC insurance protects depositors?
- eru 10y ago
  Don't think so. Though they did have bank runs before government backed deposit insurance was a thing. (And I think not all countries do deposit insurance. But most major rich economies do.) As an aside: there's strong pressure to cover losses from money market funds. (Usually on the sponsors of the fund, but I think there was a government bailout recently?) Even though those funds don't have a formal guarantee. But they are supposed to be liquid.
  - toomuchtodo 10y ago
    http://www.finra.org/investors/alerts/treasurys-guarantee-program-money-market-mutual-funds-what-you-should-know http://www.finra.org/investors/alerts/treasurys-guarantee-pr... goes into depth about money market account versus money market fund insurance. "A money market fund is said to "break the buck" when its NAV falls below $1.00 per share. In the nearly 40-year history of money market mutual funds, this has happened on only two occasions—in 1994, when a fund lost approximately four cents on the dollar, and in September 2008, when the NAVs of money market funds issued by The Reserve Fund fell below $1.00. Typically, there has been an expectation that when a money market fund reaches a point where it might break the buck, the investment management firm that sponsors the fund will take action to infuse the fund with cash so that the fund can maintain a stable NAV of $1.00 per share. Most money market funds in the U.S. are sponsored by large financial institutions that may provide assistance in the case of instability."
robzyb 10y ago