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Silvergate’s assets are real boring normal stuff Their safe, boring assets weren't safe and boring enough. Why can't there be a bank like this that just keeps

Silvergate’s assets are real boring normal stuff Their safe, boring assets weren't safe and boring enough. Why can't there be a bank like this that just keeps your cash as cash?

Temporary_31337 4y ago
Because customers expect low or no fees for just holding cash.
ivalm 4y ago
Presumably because then they would have to charge you a percentage of your money for storage and people don’t want to pay the bank.
- eyelidlessness 4y ago
  And for pretty good reason, at least it seems to me. Doing business with physical currency is not just objectively worse than digital transactions under most circumstances, it’s also increasingly untenable for more and more of life. Banking services basically are so successful they became a necessity for the vast majority of people who can access them—you have to have money storage, as a prerequisite to moving money you can’t or don’t wish to store. I can’t think of a reason I should pay a bank for the privilege of access to paying some of my own money to another party. On the other hand, I think this is just as good an argument that the kind of banking I’m describing should be a public good rather than a part of the services provided by investment firms. I even think there’s fairly good precedent for that argument, albeit at a drastically larger scale and with an unfortunately storied history of fraud and abuse.
  - ivalm 4y ago
    As a public good you want all money to be invested. Money that is under lock and key is dead money. So having the bank lend your money IS a societal good. That it generates cash flow is just a bonus.
adam_arthur 4y ago
Not sure why people are upset with this comment. Many banks do put customer funds into T-Bills, or park it with the Fed at the fed funds rate. Both of which are 0 risk and effectively instantly redeemable. And this is still highly profitable right now, if you offer customers yields below fed funds rate (~5%), the money on the spread is risk free. Pretty much every crypto adjacent firm has decided to take excessive risk with customer deposits to skim some off the top instead
- Blackthorn 4y ago
  > if you offer customers yields below fed funds rate (~5%), the money on the spread is risk free. Absolutely insane how my local bank's money market account interest rate is something like 1.4%. Their CDs only hit 3%. Like come the fuck on. Ended up moving most of my money out of there.
- panarky 4y ago
  Some are probably upset with it because they want Silvergate's liqudiation to be caused by crypto, and not super-safe US Treasurys. Turns out Silvergate's bitcoin loans are just fine, and it was the Treasurys that fucked them up. Others are probably upset with it because Silvergate had the option to hold cash as cash, or cash as one-month T-bills, and if they had done that, they wouldn't have had to liquidate. But instead they locked it up in much longer dated bonds to grab a little extra yield, and got burned when interest rates increased.
  - nly 4y ago
    Its presumably not that market rates increased that fucked them up, it's that they couldn't hold to maturity due to short term redemptions?
    - adam_arthur 4y ago
      Yes, despite these being "safe" they effectively took on duration risk, and their bonds were "callable" by their customers. Not safe at all despite credit-risk being low
johntb86 4y ago
It would be impractical to keep the cash in the form of 100 dollar bills. Given that, they need to be database entries in the Fed's system, and the Fed has discouraged banks from trying to keep large balances long-term: https://www.chicagobooth.edu/review/safest-bank-fed-wont-sanction https://www.chicagobooth.edu/review/safest-bank-fed-wont-san...
- rkagerer 4y ago
  Interesting. That article from 2018 speculates on the Fed's motivation, but seems upfront that nobody is certain why they gave TNB such a hard time. Has the story developed since then? Did the suit go to trial? EDIT: In 2020 the Southern District of New York court dismissed TNB's complaint[1], finding the 18 month wait did not construe a denial (despite the application form saying a decision "may take 5-7 days"). I guess there was no appeal? [1] https://justmoney.org/the-narrow-bank/ https://justmoney.org/the-narrow-bank/
JumpCrisscross 4y ago
> safe, boring assets weren't safe and boring enough No, they weren't. Duration is a measured risk [1]. Silvergate chose a flighty, risky set of clients. Their portfolio should have been optimized for liquidity, not yield. They got greedy and are paying the price. [1] https://en.wikipedia.org/wiki/Bond_duration https://en.wikipedia.org/wiki/Bond_duration

Silvergate’s assets are real boring normal stuff Their safe, boring assets weren't safe and boring enough. Why can't there be a bank like this that just keeps your cash as cash?

Temporary_31337 4y ago

Because customers expect low or no fees for just holding cash.

ivalm 4y ago

Presumably because then they would have to charge you a percentage of your money for storage and people don’t want to pay the bank.

eyelidlessness 4y ago
And for pretty good reason, at least it seems to me. Doing business with physical currency is not just objectively worse than digital transactions under most circumstances, it’s also increasingly untenable for more and more of life. Banking services basically are so successful they became a necessity for the vast majority of people who can access them—you have to have money storage, as a prerequisite to moving money you can’t or don’t wish to store. I can’t think of a reason I should pay a bank for the privilege of access to paying some of my own money to another party. On the other hand, I think this is just as good an argument that the kind of banking I’m describing should be a public good rather than a part of the services provided by investment firms. I even think there’s fairly good precedent for that argument, albeit at a drastically larger scale and with an unfortunately storied history of fraud and abuse.
- ivalm 4y ago
  As a public good you want all money to be invested. Money that is under lock and key is dead money. So having the bank lend your money IS a societal good. That it generates cash flow is just a bonus.

adam_arthur 4y ago

Not sure why people are upset with this comment. Many banks do put customer funds into T-Bills, or park it with the Fed at the fed funds rate. Both of which are 0 risk and effectively instantly redeemable. And this is still highly profitable right now, if you offer customers yields below fed funds rate (~5%), the money on the spread is risk free. Pretty much every crypto adjacent firm has decided to take excessive risk with customer deposits to skim some off the top instead

Blackthorn 4y ago
> if you offer customers yields below fed funds rate (~5%), the money on the spread is risk free. Absolutely insane how my local bank's money market account interest rate is something like 1.4%. Their CDs only hit 3%. Like come the fuck on. Ended up moving most of my money out of there.
panarky 4y ago
Some are probably upset with it because they want Silvergate's liqudiation to be caused by crypto, and not super-safe US Treasurys. Turns out Silvergate's bitcoin loans are just fine, and it was the Treasurys that fucked them up. Others are probably upset with it because Silvergate had the option to hold cash as cash, or cash as one-month T-bills, and if they had done that, they wouldn't have had to liquidate. But instead they locked it up in much longer dated bonds to grab a little extra yield, and got burned when interest rates increased.
- nly 4y ago
  Its presumably not that market rates increased that fucked them up, it's that they couldn't hold to maturity due to short term redemptions?
  - adam_arthur 4y ago
    Yes, despite these being "safe" they effectively took on duration risk, and their bonds were "callable" by their customers. Not safe at all despite credit-risk being low

johntb86 4y ago

It would be impractical to keep the cash in the form of 100 dollar bills. Given that, they need to be database entries in the Fed's system, and the Fed has discouraged banks from trying to keep large balances long-term: https://www.chicagobooth.edu/review/safest-bank-fed-wont-sanction https://www.chicagobooth.edu/review/safest-bank-fed-wont-san...

rkagerer 4y ago
Interesting. That article from 2018 speculates on the Fed's motivation, but seems upfront that nobody is certain why they gave TNB such a hard time. Has the story developed since then? Did the suit go to trial? EDIT: In 2020 the Southern District of New York court dismissed TNB's complaint[1], finding the 18 month wait did not construe a denial (despite the application form saying a decision "may take 5-7 days"). I guess there was no appeal? [1] https://justmoney.org/the-narrow-bank/ https://justmoney.org/the-narrow-bank/

JumpCrisscross 4y ago

> safe, boring assets weren't safe and boring enough No, they weren't. Duration is a measured risk [1]. Silvergate chose a flighty, risky set of clients. Their portfolio should have been optimized for liquidity, not yield. They got greedy and are paying the price. [1] https://en.wikipedia.org/wiki/Bond_duration https://en.wikipedia.org/wiki/Bond_duration