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Could you make a perfectly safe bank if it ONLY wrote mortgages and only loaned the first 60% of the 5-year moving average of a house's price? If it require 20
by stretchwithme 7y ago
Could you make a perfectly safe bank if it ONLY wrote mortgages and only loaned the first 60% of the 5-year moving average of a house's price? If it require 20% down and let higher risk lender's lend the rest. Arrange it so your bank always gets paid back first.
Don't allow reselling mortgages and managers never earn bonuses for a higher rate of return. Don't even offer checking accounts, just savings accounts. Don't have branches.
Would we even need deposit insurance for such a bank?
- deleted 7y ago[deleted]
- esoterica 7y agoYou are wildly confused about the purpose of deposit insurance and how bank runs happens. Banks are in the business of maturity transformation, ie accepting deposits from people who can withdraw them at any time and lending them out to people who will only repay it in a fixed schedule. It doesn’t matter how high quality and safe your loans are, if too many people start pulling money out of your bank you have a bank run on your hands because you have mostly illiquid loans on your books, not hard cash with which to pay out your depositors. PS: Banning companies from raising cash by selling off assets makes them LESS safe and robust to failure, not more. Do I really need to spell out why?
- stretchwithme 7y agoWho is suggesting companies should be prevented from selling assets to raise cash?
- JamesBarney 7y agoIlliquid means the assets are to hard to sell. And if there is a bank run who is buying billions of dollars of mortgages except for at a steep discount?
- esoterica 7y agoYou did. > if it ONLY wrote mortgages > Don't allow reselling mortgages If a bank only write mortgages and can't sell them what else do you expect them to sell? The office chairs?
- stretchwithme 7y agoI see what you're saying. My purpose there was to keep government or off budget government entity or corporation from buying any mortgages. I have no problem with selling an asset, as long as government is not subsidizing bad practices by assigning an unrealistic value to something that is fraught with risk. Selling a mortgage to private investors is not a problem.
- patio11 7y agoAs described it is an inferior product on both sides of the transaction to ones which are extremely available in the status quo, unless you propose simultaneously making the interest rate the best one in the country, and so you wouldn’t be able to get it off the ground. If you did make the interest rate attractive enough to get folks whose job is shopping for the best interest rate, you’re in for serious bad news any time the bank falls behind competitively risked interest rates. It will see massive outflow of deposits, be unable to pay them, and have to liquidate its mortgages, potentially at a severe discount (they’re illiquid by nature, right, and may have declined in fundamental value due to e.g. interest rate changes in the interim). Now your bank is failing and, as soon as you do the responsible think and report insolvency or inability to satisfy withdraws, instant bank run.
- stretchwithme 7y agoWell, you could change how banks fail too. When a bank fails, the owners would lose their investment. But the assets of the bank, its loans, could be put into a public corporation and shares distributed to the depositors in proportion to their deposit. Then depositors could sell and get 80 cents on the dollar or whatever. Or the depositors can wait awhile and sell when the markets recover. They might even make more than the interest they were promised. Such mortgages are fundamentally sound, so for most people the sensible thing is to wait. They can also sell some and keep most to get through their own short term cash flow needs.
- stretchwithme 7y ago