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This is how every bank has always worked since banks were invented
by FormerBandmate 4y ago
This is how every bank has always worked since banks were invented
- ncallaway 4y agoYes, but it’s pretty much always been problematic when a bank leader has had to make a statement akin to “We’re fine as long as there’s not a run”. That’s the kind of thing that only gets said when there’s some concern that there will be a run.
- deleted 4y ago[deleted]
- dylan604 4y agoexcept when all of banks failed their stress tests, a) who remembers, b) who cared when it was announced?
- FormerBandmate 4y agoAll the banks passed their stress test this year https://www.federalreserve.gov/newsevents/pressreleases/bcreg20220623a.htm https://www.federalreserve.gov/newsevents/pressreleases/bcre...
- orangepurple 4y agoRegulators have been putting immense pressure on big banks to hold adequate capital reserves since 2008 and they have been especially turning up the heat for the last 5 years. Moreover, it is clear that regulators will never allow a US bank to hold more than 3% of assets as crypto ever again.
- makomk 4y agoThose government-mandated, ultra-safe capital reserves look like they're actually the big problem that's going to bring down banks right now. Banks have stuck a bunch of their reserves in really safe, predictable, high quality long-term bonds (particularly government issued ones). Because interest rates have gone up, those bonds are now worth substantially less than they were a year or so ago, meaning that the banks' ability to cope with people and businesses withdrawing their deposits has gone down substantially.
- ttt333 4y agorespectfully, I'm not so sure. The decline in bonds applies to all fixed-rate securities. The only alternatives would have been just straight up cash (bad with inflation) or riskier, less-liquid assets (non-tradable loans with floating rates, for example). They are limited on the latter by risk weighting, and I'm not sure having looser risk controls on the asset side would really help confidence in the banking sector. please feel free to disagree!
- Retric 4y agoInflation isn’t a concern here. Depositors hand a bank 1 billion and X% inflation hits, well the bank still only owes them 1 billion.
- ttt333 4y agoYeah that's true, it matter more for net-interest-margin / interest income generation in a rising-rate environment. Good point
- zamnos 4y agoa depositor isn't going to deposit 1 billion and only expect 1 billion back out months later. that's some poor people shit. Large sums of money like that, banks pay you for the pleasure of holding it. So a bank offering 4.5% APY like SVB offers would owe an extra 3.2 million to the billionaire if they look at their account a month later. The problem is, the underlying assets that SVB owns will only pay them back at 1% APY, and only in 20 years or whatever, and the billionaire has been promised 4.5%APY and is expecting to have access to one months worth of interest next month. that 3.5 difference is thus a huge problem for SVB.
- aftbit 4y agoCould they instead hold short-term treasuries (as short as 4 weeks, I believe) and refuse to honor large withdraws until they mature?
- 4y ago
- eshack94 4y agoPardon my ignorance (not a crypto guy) — what is it that you're referencing when you mention a bank holding 3% of assets as crypto? My uninformed assumption is that this is either about Silvergate, or something related to SBF's debacle. Just curious. As mentioned, I'm pretty ignorant about this and would like to educate myself.
- orangepurple 4y agoAs part of a general crackdown happening right now regulators put any crypto plans US banks may have had on ice.
- FormerBandmate 4y agoThey’re selling equity to get capital. That’s pretty dire straits, FTX was doing that before they went under (I’m not saying this is FTX, I’m just saying it can be akin to the nuclear option)
- axlee 4y agoFTX's actions have nothing to do with what is happening with SVB, it's not even close. Why make a bad parallel?
- Narkov 4y agoThe parallel is selling equity when you are in trouble is not ideal. Different reasons or sectors or whatever...but the principal is the same.
- hd95489 4y agoI mean it’s just as bad as buying it at the peak.
- FormerBandmate 4y agoTheir emergency stock sale was a key sign of their implosion. Healthy financial institutions never do this
- hollerith 4y agoFor what reason besides raising cash does a company ever sell shares in itself? How does your statement make any sense? (I am assuming that by "capital" you mean cash.)
- tyre 4y agoBecause in this case it’s a bank and they aren’t selling equity to invest in new business/products. SVB had to liquidate good assets quickly, so it sold them at a loss. That means its capitalization compared to liabilities (deposits) could be in “uh oh” territory. So it sells capital on the open market to shore up its liquid capital. Yes, most every capital raise works mostly like this. But it’s notable here because of what it portends.
- JKCalhoun 4y agoWe're fine as long as we don't hit an iceberg.
- jojobas 4y agoThe first banks just stored your money and charge you for it, until somebody had a brilliant idea.
- freddie_mercury 4y agoThe very earliest banks didn't do fractional reserve banking so it isn't true to say it is how every bank worked since banks were invented. The first known instance of fractional reserve lending was with an medieval Italy but banks have been around since 2000BCE. You are right that it definitely explains 99.99% of banks in history. But there are a handful of historical examples -- even after "modern banking" began in medieval Italy -- that don't fit. A recent example is The Narrow Bank which was shutdown by the Federal Reserve. But in the past you had things like the Bank of England in 1844 which went to 100% reserves for a period. Or banks under the Louisiana Banking Act of 1842 -- which was why banks in Louisiana were unaffected by the financial crisis of 1857.
- wbl 4y agoSo did Louisiana banks issue loans?
- regpertom 4y agoHow could they issue loans? 10 x 10$ deposits means you can loan 100$? Where as the modern way is more like 100$ in deposits means you can lend out 1000$ because chances are everyone won’t not pay it back? And then can’t you say that since you’ve lent out 1000$ and chances are you’ll get paid back, you’ve basically got 1104.56$ and so can lend out 10k$? And then you bundle those together and sell them to each other depending on what ratio of income to cash you want? Apologies if no one was meant to answer that.
- ta1243 4y agoDoesn't stop a run 10 people put $10 in your bank. You give someone a loan for $50 and leave $50 in the vault. 7 of your customers take $10 out, you are screwed.
- notch898a 4y agoDepends. If they take it out electrically, send it to another bank then it just shows up as debt in a database from bank A to bank B. Cash is dirty and boring nowadays.
- Proven 4y ago[dead]