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At first glance, bank balance sheets are unintuitive and feel 'the wrong way round'. When someone deposits $1m at a bank, the bank doesn't have $1m more assets,

• missedthecue 4y ago
  And to make matters more confusing, deposits are called assets on the balance sheet!
  • kgwgk 4y ago
    You may feel relieved - and less confused - if I tell you that deposits are liabilities in the balance sheet.
  • nulbyte 4y ago
    That's not confusing, it's just wrong. On my balance sheet, money I deposit is an asset: The bank owes me. On the bank's balance sheet, money I deposit is a liability: The bank owes me.
    • patmorgan23 4y ago
      Your deposit creates an equal asset and liability on the bank's balance sheet remember assets = liability + equity must balance.
      • nulbyte 4y ago
        Deposits are liabilities to the bank's customers. The cash the bank has, regardless of how it got it, is an asset. The cash may result from a customer making a deposit, but its still just cash. Deposits and cash are separate items on the balance sheet. Here is an example from the Fed: https://www.federalreserve.gov/releases/h8/current/ https://www.federalreserve.gov/releases/h8/current/ Note that cash is a single line item. The banks could get that from other sources, such as loan repayments.
• occamrazor 4y ago
  They have both 1m of assets more than before, _and_ 1m of liabilities.
• pishpash 4y ago
  Too much money is only a problem if you are greedy for returns, like all the investors who lost money when yields were unsustainably low the last few years. They could have deposited it with the Fed and have been totally fine. Individual investors don't even have that option and also have inflation to deal with. Banks don't.
  • duxup 4y ago
    I think there is a limit. The bank costs money to run, customers expect interest (even if little). That money isn’t doing anything to cover those expenses if some of it isn’t “working” to produce returns.
    • pishpash 4y ago
      Banks don't pay the Fed rate on deposits so they already have that to pay expenses. In fact more deposits = more money on the interest differential but expenses don't scale with money.
  • coredog64 4y ago
    6 month T-bills were yielding 0.7% last year at this time. Inflation for 2022 was over 6%. It’s not that people are greedily chasing returns, it’s that they don’t want to lose significant chunks of their capital due to loss of value.
    • pishpash 4y ago
      No, they were greedy. They were going to lose it one way or another, either through inflation or through asset depreciation. There was no way around it. Going to a riskier asset doesn't help because all assets have the same interest-rate risk embedded. They just took on more risk in addition to that. Real rates were negative for 10+ years (and still are on the short end!). That's everyone paying for trillions of dollars of wars, speculation and bad investments. The bill has to be paid. But as mentioned, none of this applies to intermediaries like banks. They aren't forced to take on any risk.
• acchow 4y ago
  A $1M deposit adds to both assets and liabilities. In double entry accounting, you mark any changes with both a debit and a credit. This allows you to see not only why one account changes (a single entry), but also the cause of that change (the second entry).
  • jfengel 4y ago
    I think programmers find double-entry bookkeeping counterintuitive. It feels error-prone. In programming, you keep a single source of truth. Any time you copy the same data to two different places, one of them is always wrong. Double-entry bookkeeping makes sense once you understand the the invariants you have to keep, and why you need to track 5 different types of books. Some of those accounts work in opposite ways, such that credit to one is a debit to another. It all works out and is essential for "debugging" problems (when money appears to go missing -- or worse, materializes and you don't know why). But there's some counterintuitive language and it'll mess you up until you accept it.
    • ghaff 4y ago
      The other thing you get into as scenarios get complex is that there's a tendency to ask questions like "Why are you recording it this way rather than that way? The second way seems more logical to me." The answer usually being some variation of "Because that's the way the Financial Accounting Standards Board says to do it."
    • btilly 4y ago
      Double entry bookkeeping IS error prone - you have 2 opportunities to make each mistake. However single entry bookkeeping is FRAUD prone. Just change one number and your theft is hard to track down! That is why the adoption of double entry bookkeeping was critical for allowing commercial institutions to outgrow a size where owners could individually trust all who were working for them with access to money.
      • crdrost 4y ago
        Yes, and once you get the programmer to realize this, it all makes sense. The ledgers are not the source of truth. No: this is a journaled filesystem; the transaction log is the ultimate source of truth. When you detect faults you recover from the journal, if something isn't completely written into the journal then it does not exist. The zero-sum property exists on every individual transaction and each transaction has an ID and the ledgers point at these IDs for auditing purposes. So why have the zero sum property? Well, for one thing, it creates a uniform access model, I can't just credit my account, I have to debit someone else's account and they can have rules that might prohibit me from doing so. By carefully setting up these accounts you can also do what's sometimes called "behavior anomaly detection." So for instance normal financial cards kind of work by opening up your entire wallet to a cash register and asking the cash register to pull out exactly the amount that you owe, understandably this might not be desirable if you are tracking some in-game-gold transactions in an internet game. You can get as elaborate as you want but think for example of a quick-consistency-check rule saying that “accounts starting 4xxx (player balances) never transfer directly to each other, instead users are expected to put the exact sum of money plus a little 5% padding into one of their 5xxx accounts and then give someone else a token permitting them to withdraw from that account." Stuff like that. A developer tries to code something up that doesn't go through this process and runs into errors in testing and has to conform their code’s behavior to the less risky process so that nobody is ever opening their entire wallet to a griefer.
• im3w1l 4y ago
  I think it should be both: The $1m that was deposited is an asset, the customer's ability to withdraw $1m is a liability.
• wdb 4y ago
  One way to control it is by lowering interests on accounts to make it less attractive deposit money
  • StillBored 4y ago
    Which is why there is a ~4% spread on savings/CD interest rates at banks right now. Edit: maybe I wasn't clear and should have said "between" banks. Synchrony bank will give you 4% in a _savings_ account (https://www.synchronybank.com/banking/high-yield-savings/?UISCode=0000000 https://www.synchronybank.com/banking/high-yield-savings/?UI...) while my local credit union and many big banks (ex: bank of America are at 0.01%) are still effectively 0% In the past (<2008), cash accounts (savings/cds/etc) I remember there being a %1 or so between banks, but these days its huge.
    • kgwgk 4y ago
      Not exactly. The banks do not want less deposits (ask SVB how bad that can be!) but they try to get away with paying as little as possible and keep the spread. (You wouldn't say that the main objective of companies when they raise prices is to have less customers, would you?)
      • nickff 4y ago
        If they wanted more deposits, why would they pay as little as possible to 'keep the spread'? No bank is anywhere near monopoly; there are tons more deposits to get (if you want them, and can make money safely on a spread).
        • kgwgk 4y ago
          For the same reason that many businesses do not want "more customers" above anything else - to the point of selling at cost or at a loss - and if they increase prices is not necessarily because they want "less customers".
      • acjohnson55 4y ago
• mytailorisrich 4y ago
  They have both $1m more assets and $1m liabilities. But that does not reflect risk. For instance, now they take those $1m in cash and use them to make risky loans or investments. At face value the balance sheet is the same because they still have $1m in asset... except that the risk that this asset turns into eff all has significantly increased.
  • disgruntledphd2 4y ago
    yeah, like SBF's "balance sheet". https://www.ft.com/content/0c2a55b6-d34c-4685-8a8d-3c9628f1f185 https://www.ft.com/content/0c2a55b6-d34c-4685-8a8d-3c9628f1f... Theoretically they had assets, but most of them were just internal magic beans.
• avidphantasm 4y ago
  Running a bank sounds like a huge PITA.
  • WJW 4y ago
    This is correct. The only reason people still do it is because it makes them boatloads of money, not because it is fun in any way.
    • lottin 4y ago
      I work in a bank and it's kind of fun.
      • somehnguy 4y ago
        Working in a bank and running a bank are slightly different I would assume
        • zamnos 4y ago
          Totally. Working in a bank exposes you to the fun parts of running a bank, without the stress of it being your bank.
      • webXL 4y ago
        Let's hope (for all our sake) your work continues for a loooong time, fun and not-so-fun. Until we all can self-bank!
  • joyfylbanana 4y ago
    That's why it pays.
• nabla9 4y ago
  So true. Money for banks is what raw material is for manufacturing. What they are doing is risk management (analyzing risk, packaging risk, selling it, buying it).
• NovemberWhiskey 4y ago
  To my mind, although it's in-principle equivalent, the clearer way to think about this is that banks borrow money from depositors and lend that money via loans or investments. The primary business of a bank is borrowing short and lending long - where short and long refer to the holding time: i.e. taking demand or short-duration term deposits and making mortgage, car and other types of loans. If you do this badly, you can lose money due to duration risk (you might end up paying more on your demand deposits than your mortgage book is bringing in), but you also have liquidity risks because your depositors can ask for those deposits back faster than you unwind your lending. If you have both of these occurring at the same time, you're then in severe difficulty, because the only way to repay your depositors is by borrowing money ... which is going to be harder if you look unprofitable ... and that very borrowing can exacerbate the perception of a bank in trouble. That's basically what happened here.
  • andrepd 4y ago
    > banks borrow money from depositors and lend that money via loans or investments. Do they? Reserve requirements are almost non-existent. A better way to put it is that banks pretty much have a state-granted privilege for creating money and in the form of loans.
    • blackoil 4y ago
      Can you elaborate this. Is it possible for a regular bank to lend money it does not have?
      • whatshisface 4y ago
        They're allowed to borrow from the federal reserve which is allowed to lend an infinite amount.
        • acjohnson55 4y ago
          Banks aren't allowed to borrow infinite amounts of money from the Fed. If they could SVB would still be ticking.
• dragonwriter 4y ago
  A deposit of $x adds both $x in assets (cash) and $x in liabilities (account balances).
• treis 4y ago
  This isn't an over simplification it's just wrong. The bank does have more assets (the 1 million in cash) that balances the liability (the 1 million they owe to their customer).
  • eftychis 4y ago
    Yes, but the problem is the 1 million is unlikely to be in cash. Here, it is in MBS issued at low interest rates and thus practically ~$500k if the security is sold right now. Banks have a serious problem in their hands as they have to figure out a way to keep buying assets that they have to buy by law, while the Fed is going to keep increasing the interest rates via selling their MBS portfolio at a rate that makes "yesterday's treasury or MBS" the loser. If action is not taken we haven't heard the end of this.
    • KirillPanov 4y ago
      What? No, it's cash. If I deposit $1m in cash at the bank, the bank suddenly has an extra $1m liability and an extra $1m cash asset.
      • mbreese 4y ago
        It’s cash, until the bank converts it to something else. For example a loan. Yes, it is initially cash. But if the bank wants to make any money, it needs to convert that cash into some other vehicle for generating interest.
        • rkagerer 4y ago
          One way to generate interest is to simply park it at the Fed. Check out The Narrow Bank for the story of an upstart that wanted to make that their whole business model. https://johnhcochrane.blogspot.com/2018/09/fed-nixes-narrow-bank.html https://johnhcochrane.blogspot.com/2018/09/fed-nixes-narrow-...
          • prottog 4y ago
• skybrian 4y ago
  Yes, bank deposits are a liability for the bank, which is why a bank won’t increase the amount you have in your account if you ask nicely. You have to pay them. If someone’s bank account went up by $1 million, the bank better have gotten $1 million more in assets from them somehow, or something weird is going on. (Often, the asset comes from the bank making a loan. You can pay later.)
• javajosh 4y ago
  Not an expert, but was having some thoughts. Let debt be a graph where the nodes are people (with ledgers) and the edges are all of the form "alice rents $x from bob for y% APR". Actions that resolve/relax graph are payments of the form "alice pays bob $z", that lead to all balances being 0. Let the edges decay to null when balance is 0, such that a 'resolved graph' is simply a list of nodes with no edges, meaning 'no one is in debt to anyone'. From this we can infer: 1. There is only one logical 'debt graph' in the world since they can (and do) all join. 2. The people running the graph do not want the graph to die, ever. 3. The profit of the debt business is proportional to transactions over time, which is proportional to edges of the debt graph. 4. They want to (add, prevent from decay) as many edges as possible. I somehow feel like I've caught my first, hazy glimpse of something important.
  • 1attice 4y ago
    This is actually a nascent PhD-level thesis. Follow this thread.
    • nightmarish 4y ago
      What makes you say that? It seems to be a restructuring of a supply/demand curve along a lattice. (Ironic, given your name lol?) https://en.m.wikipedia.org/wiki/Total_order https://en.m.wikipedia.org/wiki/Total_order
  • fecaldog 4y ago
    2. The people running the graph do not want the graph to die but want the edges to decay. Thanks for this, I am now also having some thoughts.
  • zomglings 4y ago
    I also feel like having caught a hazy glimpse of something monumental. Thank you. A few thoughts to add: 1. Should individuals inherit edge weight from their employers/governments? What should this inheritance be like? If I have no debt but have very little in savings, and if my company has debt to some other company which they have to default on, leading to my getting laid off, I can still be affected by debt. 2. I do not think it is accurate to think if "the people running the graph". I think it's more accurate to state local laws such as: any node which has more outgoing weight than incoming weight (i.e. net lenders) wants to prevent edges from decaying as much as possible while simultaneously making their borrowers more financially stable. 3. Would it be possible to quantify each vertex's credit-worthiness from just the labels you mentioned on edges? Would we need to add any other weights to the edges? e.g. the lender's estimate of the borrower's credit-worthiness?
• diogenescynic 4y ago
  No, the $1M deposit is an asset and liability (which offset each other). SVB then invested those assets in bonds/securities/T-bills but then had to sell them at a 20% loss because they needed funds for liquidity—-so now they don’t have as many assets as they do liabilities and hence are taken over by FDIC.
• markmaglana 4y ago
  I think the additional liability from that event would be much less because it would be computed from the interest payments that the bank eventually owes the depositors. So given an interest per annum of 1% (for example), a $1m deposit would add $1m liquid, non-earning assets while also adding $1.01m to their liabilities. So, effectively, they’d have $10,000 in unsecured liabilities. To counter that imbalance (as well as protect the cash from the effects of inflation), they’d have to put some of that cash to work via various investments.
• tomhallett 4y ago
  If a bank is noticing they are getting more deposits then they can safely make returns for (like SVB in 2020), can banks "simply" return deposits to customers and/or decline new customers/deposits? Is there a precedent to doing this? Or does everyone decide it's better to take risky bets to grow with the increasing deposits and we'll keep seeing runs when those bets go south?
• arbuge 4y ago
  > When someone deposits $1m at a bank, the bank doesn't have $1m more assets, it has $1m more liabilities. Not quite. It actually has both. Yes, it owes $1m to the depositor, but it also has $1m in cash now, at least for a while. Until it does something with it, like loaning it out or investing it in some debt instrument. The cash is an asset, as is the loan or debt instrument it exchanges the cash for.
• stephen_g 4y ago
  The transfers are settled in central bank reserves, so the net change of assets and liabilities should actually be zero for deposits coming in.
• elgertam 4y ago
  > (Yes, this is a gross over-simplification) This isn't really an over-simplification as it is wrong. When someone deposits $1m in the bank, the bank's assets increase by $1m in cash, while liabilities also increase by $1m and owners' equity is unaffected. The problem is that for interest-bearing deposit accounts, those liabilities increase over time, which decreases owners' equity in the absence of a sufficiently appreciating asset (such as a good loan or cash flow-generating security). Further, the bank has certain operational costs that must be paid, and investors must make some return or they'll pull capital from the bank (that's a simplification for publicly traded banks like SVB). In practice, it seems that banks need about 3 percentage points above the interest rate they pay on deposits to cover these costs, based on the typical spread between the Prime rate and the Federal Funds rate, though I imagine this necessary yield has a much higher variance for smaller banks. When interest rates were effectively zero and their deposits increased by a huge amount, SVB decided to buy long-term bonds w/ 1.5% interest to cover the extra liability over time so that assets would grow with liabilities. Then interest rates went up. Cash assets stopped growing, but liabilities remained the same, so they started selling their bonds. Bonds lose value when interest rates increase, so their bonds sold for a loss, decreasing asset values. In the last 48 hours, depositors got spooked. SVB's equity effectively went negative, since asset values decreased below outstanding liabilities. That's typically when the FDIC steps in to liquidate a bank. For banks, assets must in general be growing faster than liabilities. If the bank experiences a situation where assets are not growing relative to liabilities, they need to have sufficient capitalization (i.e. owners' equity) to weather the storm.
  • hgomersall 4y ago
    Just to add to this excellent answer, because I don't think it's clear to most people: if the deposit is not created by that bank, the assets the bank takes on are the balancing side of the original deposit (so a loan at another correspondent bank or, if the spending was from the government, an asset at the central bank). Clearing might simplify the net situation, but fundamentally the asset the bank takes on matches the original asset that created the money.
• m101 4y ago
  It has +1mm cash (asset) and +1mm liability to depositor