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Why do we let banks play these sorts of shell games? If they are holding an asset worth $0.80, I don't see why we allow them to claim it is worth $1.00 because
by pseudo0 4y ago
Why do we let banks play these sorts of shell games? If they are holding an asset worth $0.80, I don't see why we allow them to claim it is worth $1.00 because that is what they paid for it.
- anonymouskimmer 4y agoI would guess that this incentivizes retail and commercial banks to invest in less volatile investments with guaranteed returns, and not the stock market or other more volatile markets. And it's not based on what they paid for it from what I gather, it's based on what the total payout will be when it matures.
- NovemberWhiskey 4y agoLet me give you a simple example. Imagine a bank takes demand deposits and pays a variable rate of the base rate minus 1%. The bank then makes fixed rate, 30 year mortgage loans that it intends to service itself at the base rate plus 2% (portfolio loans). Interest rates then go up. Bang: that bank just became insolvent. Is this actually the model of the world you want?
- hnfong 4y ago> Bang: that bank just became insolvent. Is this actually the model of the world you want? I'm not sure what the problem is, this model to me actually seems reasonable. The alternative is to claim that "We are solvent as long as our clients keep deposits in our bank and are happy with an interest rate lower than our competitors for 30 years". In fact the scenario you're describing is basically what happened to SVB except the interest rates increased more. I guess the main issue is that generally banks do take a risk by borrowing short and lending long, and hope that things work out in the end.