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Those 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

by makomk 4y ago

Those 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 ago
respectfully, 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 ago
  Inflation 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 ago
    Yeah that's true, it matter more for net-interest-margin / interest income generation in a rising-rate environment. Good point
  - zamnos 4y ago
    a 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 ago
  Could they instead hold short-term treasuries (as short as 4 weeks, I believe) and refuse to honor large withdraws until they mature?
  - ttt333 4y ago
    Short term treasuries are definitely pretty common on the asset side, but if you refuse to honor withdrawals on demand deposits you won't have a bank anymore and the FDIC will step in to wind things down
Retric 4y ago
Interest on loans should by increase a banks reserves every year barring massive defaults. The ROI for the actual reserves aren’t particularly relevant by comparison. Similarly from a reserve standpoint they don’t need to worry about inflation as they need to pay back deposits in nominal terms not what the money is worth when withdrawn.
- makomk 4y ago
  Higher interest rates decrease the value of long-duration bonds even in nominal terms. Think of it this way: because the interest rate on a bond is fixed at issue, and because newer bonds now have higher interest rates, your existing bonds have to be sold for less in order for someone to buy them over a newer higher-interest bond. This means that the banks' reserves have actually shrunk in value. This is made worse by the fact that the combination of low interest rates and requirements to choose safe investments means that the only way for banks to meet their cost of operations is by picking longer-duration bonds which have higher drops in value, and that they haven't been earning enough interest to really grow their reserves either.
  - Retric 4y ago
    That’s only relevant if you need to sell it or use mark to market accounting. The US banking system has been given a great deal of regulatory leeway due to recent economic turbulence, including setting reserve requirements to 0%. So market value is only relevant if they need to sell before maturity.
    - asimpletune 4y ago
      > So market value is only relevant if they need to sell before maturity. Which is exactly what needs to happen when depositors ask for their money back.
      - Retric 4y ago
        Not typically. Banks generally have liquid reserves to handle significant fluctuations in deposits. If that’s insufficient they have incoming cash flow and the option to borrow money to make up the difference rather than instantly selling assets. Thus in practice extracting 5% over a week is fine but there’s a threshold that will kill any bank.

by makomk 4y ago

ttt333 4y ago

respectfully, 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 ago
Inflation 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 ago
  Yeah that's true, it matter more for net-interest-margin / interest income generation in a rising-rate environment. Good point
- zamnos 4y ago
  a 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 ago
Could they instead hold short-term treasuries (as short as 4 weeks, I believe) and refuse to honor large withdraws until they mature?
- ttt333 4y ago
  Short term treasuries are definitely pretty common on the asset side, but if you refuse to honor withdrawals on demand deposits you won't have a bank anymore and the FDIC will step in to wind things down

Retric 4y ago

Interest on loans should by increase a banks reserves every year barring massive defaults. The ROI for the actual reserves aren’t particularly relevant by comparison. Similarly from a reserve standpoint they don’t need to worry about inflation as they need to pay back deposits in nominal terms not what the money is worth when withdrawn.

makomk 4y ago
Higher interest rates decrease the value of long-duration bonds even in nominal terms. Think of it this way: because the interest rate on a bond is fixed at issue, and because newer bonds now have higher interest rates, your existing bonds have to be sold for less in order for someone to buy them over a newer higher-interest bond. This means that the banks' reserves have actually shrunk in value. This is made worse by the fact that the combination of low interest rates and requirements to choose safe investments means that the only way for banks to meet their cost of operations is by picking longer-duration bonds which have higher drops in value, and that they haven't been earning enough interest to really grow their reserves either.
- Retric 4y ago
  That’s only relevant if you need to sell it or use mark to market accounting. The US banking system has been given a great deal of regulatory leeway due to recent economic turbulence, including setting reserve requirements to 0%. So market value is only relevant if they need to sell before maturity.
  - asimpletune 4y ago
    > So market value is only relevant if they need to sell before maturity. Which is exactly what needs to happen when depositors ask for their money back.
    - Retric 4y ago
      Not typically. Banks generally have liquid reserves to handle significant fluctuations in deposits. If that’s insufficient they have incoming cash flow and the option to borrow money to make up the difference rather than instantly selling assets. Thus in practice extracting 5% over a week is fine but there’s a threshold that will kill any bank.