4 ms·

Regarding lack of margin calls, is there truly no way for the lender to renegotiate or get out of the contract if the market value of the collateral depreciates

Regarding lack of margin calls, is there truly no way for the lender to renegotiate or get out of the contract if the market value of the collateral depreciates too much? And well before the borrower fails to meet interest payments?

jmyeet 4y ago
The first thing to know is that there really is no "lender" in the traditional sense. The first form of banks we had we had had depositors deposit money for safekeeping. Banks would then lend that money out to earn interest. We then basically decided this was too conservative a strategy so we have fractional reserves, meaning if you have $100,000 in deposits you might be able to lend out $1 million. A lot of Crypto Andys see this as a problem. It's not, particularly because depositor funds are guaranteed by the government (up to a limit) in the US at least. But in recent decades we say the rise of mortgage-backed securities ("MBS"). Banks will take those mortgages and package them into what are effective bonds and then sell them to the market. This is now completely off the bank's balance sheet so they're not even really the lender anymore. They're basically just the agent who collects the repayments that get packaged up and go to the MBS holder. Non-payment of a mortgage will give the bank some options depending on your state but there are a lot of varying consumer protections here too (eg non-recourse states mean the bank can typically seize the property being the collateral for the loan or go after you for any outstanding debt but they can't do both). But if the loan is underwater (meaning the loan value exceeds the asset value) the bank can only really do something if you stop making payments. There is meant to be due diligence here done by the banks to make sure the entire package of property being an MBS isn't underwater. Obviously this failed spectacularly in the subprime era. But one house being underwater isn't generally a problem.
- qeternity 4y ago
  > Banks would then lend that money out to earn interest. We then basically decided this was too conservative a strategy so we have fractional reserves, meaning if you have $100,000 in deposits you might be able to lend out $1 million. This is entirely wrong. Fractional reserve banking is what allows lending. How do you envision a bank with $100k lends out $1m? What fractional reserves mean is the opposite: if you have $1m of deposits you can lend out $900k and only be required to keep $100k of reserves to meet withdrawal demands. This is the “fractional” bit of fractional reserves. Honestly HN please, go and learn the basics before penning comments that lack basic understanding.
  - mprime1 4y ago
    Is it possible both things are true? From https://en.m.wikipedia.org/wiki/Fractional-reserve_banking https://en.m.wikipedia.org/wiki/Fractional-reserve_banking Fractional-reserve banking is the system of banking operating in almost all countries worldwide,[1][2] under which banks may hold liquid assets representing only a portion of the deposits that they are liable to pay.[3] These liquid assets, known as reserves, may include cash in the bank or balances in the bank's account at the central bank. The country's central bank determines the minimum amount that banks must hold in liquid assets, called the "reserve requirement" or "reserve ratio". Most commercial banks hold more than this minimum amount as excess reserves. The page does mention something similar to what the parent comment was saying: When a loan is made by the commercial bank, the bank is keeping only a fraction of central bank money as reserves and the money supply expands by the size of the loan.[5] This process is called "deposit multiplication".
    - qeternity 4y ago
      No, if I borrow money from the Fed to lend out, it’s the same as taking in deposits. Banks borrow money from their depositors, and lend to their borrowers. What OP said is completely wrong.
deleted 4y ago
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jmyeet 4y ago

The first thing to know is that there really is no "lender" in the traditional sense. The first form of banks we had we had had depositors deposit money for safekeeping. Banks would then lend that money out to earn interest. We then basically decided this was too conservative a strategy so we have fractional reserves, meaning if you have $100,000 in deposits you might be able to lend out $1 million. A lot of Crypto Andys see this as a problem. It's not, particularly because depositor funds are guaranteed by the government (up to a limit) in the US at least. But in recent decades we say the rise of mortgage-backed securities ("MBS"). Banks will take those mortgages and package them into what are effective bonds and then sell them to the market. This is now completely off the bank's balance sheet so they're not even really the lender anymore. They're basically just the agent who collects the repayments that get packaged up and go to the MBS holder. Non-payment of a mortgage will give the bank some options depending on your state but there are a lot of varying consumer protections here too (eg non-recourse states mean the bank can typically seize the property being the collateral for the loan or go after you for any outstanding debt but they can't do both). But if the loan is underwater (meaning the loan value exceeds the asset value) the bank can only really do something if you stop making payments. There is meant to be due diligence here done by the banks to make sure the entire package of property being an MBS isn't underwater. Obviously this failed spectacularly in the subprime era. But one house being underwater isn't generally a problem.

qeternity 4y ago
> Banks would then lend that money out to earn interest. We then basically decided this was too conservative a strategy so we have fractional reserves, meaning if you have $100,000 in deposits you might be able to lend out $1 million. This is entirely wrong. Fractional reserve banking is what allows lending. How do you envision a bank with $100k lends out $1m? What fractional reserves mean is the opposite: if you have $1m of deposits you can lend out $900k and only be required to keep $100k of reserves to meet withdrawal demands. This is the “fractional” bit of fractional reserves. Honestly HN please, go and learn the basics before penning comments that lack basic understanding.
- mprime1 4y ago
  Is it possible both things are true? From https://en.m.wikipedia.org/wiki/Fractional-reserve_banking https://en.m.wikipedia.org/wiki/Fractional-reserve_banking Fractional-reserve banking is the system of banking operating in almost all countries worldwide,[1][2] under which banks may hold liquid assets representing only a portion of the deposits that they are liable to pay.[3] These liquid assets, known as reserves, may include cash in the bank or balances in the bank's account at the central bank. The country's central bank determines the minimum amount that banks must hold in liquid assets, called the "reserve requirement" or "reserve ratio". Most commercial banks hold more than this minimum amount as excess reserves. The page does mention something similar to what the parent comment was saying: When a loan is made by the commercial bank, the bank is keeping only a fraction of central bank money as reserves and the money supply expands by the size of the loan.[5] This process is called "deposit multiplication".
  - qeternity 4y ago
    No, if I borrow money from the Fed to lend out, it’s the same as taking in deposits. Banks borrow money from their depositors, and lend to their borrowers. What OP said is completely wrong.

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