3 ms·

Is this normal? I would assume that no bank has 100% liquid assets against liabilities (same as stuffing all your money under your mattress.) So what is the "ri

Is this normal? I would assume that no bank has 100% liquid assets against liabilities (same as stuffing all your money under your mattress.) So what is the "right" ratio for an exchange? Close to 100% since you are not supposed to invest an exchange's money?

ottumm 4y ago
Matt Levine has an excellent overview of the liquidity / solvency question: https://www.bloomberg.com/opinion/articles/2022-11-10/ftx-is-still-looking-for-money https://www.bloomberg.com/opinion/articles/2022-11-10/ftx-is...
- greenyoda 4y ago
  Archived copy of Levine's article, with full text: https://archive.ph/q4Z1L https://archive.ph/q4Z1L
conorcleary 4y ago
I think with cryptocurrencies we need to consider the sheer speed at which mass transactions can occur, and 24/7 to boot.
- salawat 4y ago
  Technically, the problem you're restricting to cryptocurrencies is actually something finance as a whole just deal with. Everyone could withdraw all their money at the same time. What happens then? The answer is bank run. There will literally not be enough cash to do it. The entire system is running on the fact that everyone has not done that yet. Personally, I want to have it happen, just to force the system to come to terms with the fact that it isn't all just about numbers, and so that people can actually materially witness the sheer magnitude of monetary centralization created by our system. Fuck the inconvenience. If Mammon is going to fucking rule, let everyone see it's rictus. Let everyone take in what it looks like.
  - danans 4y ago
    > Personally, I want to have it happen, just to force the system to come to terms with the fact that it isn't all just about numbers, and so that people can actually materially witness the sheer magnitude of monetary centralization created by our system. The question is are you also willing to give up the easily ignored benefits of monetary centralization, which are significant and foundational to the trust that underpins technological and social progress.
    - conorcleary 4y ago
      We can have both.
VagueMag 4y ago
Yes, exactly. The liabilities number includes all on-exchange customer deposits and funds, which it should be theoretically possible to redeem in full at any time.
nonstopdev 4y ago
Fractional reserves exist in finance and are held in various assets that can be hedged and also redeemed. Based on the liabilities that FTX revealed like funding Alameda for their investments in un-hegable bets like “Donald Trump losing” is not normal where they could never get those funds back if there was a bank run.
- VagueMag 4y ago
  Setting aside arguments about whether it actually fixes the moral hazard issues with fractional reserve banking, banks also have FDIC deposit insurance and there is an understanding of the possibility of loss of funds which exceed the insurance limit.
mrkramer 4y ago
>Is this normal? I would assume that no bank has 100% liquid assets against liabilities Banks are required by law to have regulatory capital[1] and reserves[2] in order to stay liquid and solvent. Longer explanation: "The reserves only provide liquidity to cover withdrawals within the normal pattern. Banks and the central bank expect that in normal circumstances only a proportion of deposits will be withdrawn at the same time, and that the reserves will be sufficient to meet the demand for cash. However, banks routinely find themselves in a shortfall situation or may experience an unexpected bank run, when depositors wish to withdraw more funds than the reserves held by the bank. In that event, the bank experiencing the liquidity shortfall may routinely borrow short-term funds in the interbank lending market from banks with a surplus. In exceptional situations, the central bank may provide funds to cover the short-term shortfall as lender of last resort. When the bank liquidity problem exceeds the central bank’s lender of last resort resources, as happened during the global financial crisis of 2007-2008, the government may try to restore confidence in the banking system, for example, by providing government guarantees[2]." If commercial bank is in trouble other commercial banks will try to help but if they can not help, central bank will try to help and if that is not possible government will step in. All in all, banking industry is tightly regulated and somewhat safe especially after 2007 fiasco. In the case of FTX, Binance said they would step in but they gave up. If FTX is profitable they can gradually loan money from private sector(banks, investment funds etc.) then start to repay their liabilities and eventually return loans. [1] https://en.wikipedia.org/wiki/Capital_requirement https://en.wikipedia.org/wiki/Capital_requirement [2] https://en.wikipedia.org/wiki/Reserve_requirement https://en.wikipedia.org/wiki/Reserve_requirement

ottumm 4y ago

Matt Levine has an excellent overview of the liquidity / solvency question: https://www.bloomberg.com/opinion/articles/2022-11-10/ftx-is-still-looking-for-money https://www.bloomberg.com/opinion/articles/2022-11-10/ftx-is...

greenyoda 4y ago
Archived copy of Levine's article, with full text: https://archive.ph/q4Z1L https://archive.ph/q4Z1L

conorcleary 4y ago

I think with cryptocurrencies we need to consider the sheer speed at which mass transactions can occur, and 24/7 to boot.

salawat 4y ago
Technically, the problem you're restricting to cryptocurrencies is actually something finance as a whole just deal with. Everyone could withdraw all their money at the same time. What happens then? The answer is bank run. There will literally not be enough cash to do it. The entire system is running on the fact that everyone has not done that yet. Personally, I want to have it happen, just to force the system to come to terms with the fact that it isn't all just about numbers, and so that people can actually materially witness the sheer magnitude of monetary centralization created by our system. Fuck the inconvenience. If Mammon is going to fucking rule, let everyone see it's rictus. Let everyone take in what it looks like.
- danans 4y ago
  > Personally, I want to have it happen, just to force the system to come to terms with the fact that it isn't all just about numbers, and so that people can actually materially witness the sheer magnitude of monetary centralization created by our system. The question is are you also willing to give up the easily ignored benefits of monetary centralization, which are significant and foundational to the trust that underpins technological and social progress.
  - conorcleary 4y ago
    We can have both.

VagueMag 4y ago

Yes, exactly. The liabilities number includes all on-exchange customer deposits and funds, which it should be theoretically possible to redeem in full at any time.

nonstopdev 4y ago

Fractional reserves exist in finance and are held in various assets that can be hedged and also redeemed. Based on the liabilities that FTX revealed like funding Alameda for their investments in un-hegable bets like “Donald Trump losing” is not normal where they could never get those funds back if there was a bank run.

VagueMag 4y ago
Setting aside arguments about whether it actually fixes the moral hazard issues with fractional reserve banking, banks also have FDIC deposit insurance and there is an understanding of the possibility of loss of funds which exceed the insurance limit.

mrkramer 4y ago

>Is this normal? I would assume that no bank has 100% liquid assets against liabilities Banks are required by law to have regulatory capital[1] and reserves[2] in order to stay liquid and solvent. Longer explanation: "The reserves only provide liquidity to cover withdrawals within the normal pattern. Banks and the central bank expect that in normal circumstances only a proportion of deposits will be withdrawn at the same time, and that the reserves will be sufficient to meet the demand for cash. However, banks routinely find themselves in a shortfall situation or may experience an unexpected bank run, when depositors wish to withdraw more funds than the reserves held by the bank. In that event, the bank experiencing the liquidity shortfall may routinely borrow short-term funds in the interbank lending market from banks with a surplus. In exceptional situations, the central bank may provide funds to cover the short-term shortfall as lender of last resort. When the bank liquidity problem exceeds the central bank’s lender of last resort resources, as happened during the global financial crisis of 2007-2008, the government may try to restore confidence in the banking system, for example, by providing government guarantees[2]." If commercial bank is in trouble other commercial banks will try to help but if they can not help, central bank will try to help and if that is not possible government will step in. All in all, banking industry is tightly regulated and somewhat safe especially after 2007 fiasco. In the case of FTX, Binance said they would step in but they gave up. If FTX is profitable they can gradually loan money from private sector(banks, investment funds etc.) then start to repay their liabilities and eventually return loans. [1] https://en.wikipedia.org/wiki/Capital_requirement https://en.wikipedia.org/wiki/Capital_requirement [2] https://en.wikipedia.org/wiki/Reserve_requirement https://en.wikipedia.org/wiki/Reserve_requirement