4 ms·

Why would they sell the mortgages now? Why not just hold them. When they originated and funded the loan they did it with deposits or fed funds, why not just hol

Why would they sell the mortgages now? Why not just hold them. When they originated and funded the loan they did it with deposits or fed funds, why not just hold and collect the payments? If there is a run, then selling is actually the worst thing to do because theoretical losses become irreversible actually losses. It’s highly likely interest rates will go down in a year or two but.

xeromal 4y ago
I assume they sell these loans if the amount withdrawn outpaces what they have cash on hand. Since their mortgages are mostly mortages from the low interest era, they're less valuable to buyers.
prottog 4y ago
> Why not just hold them > If there is a run If there is a run, they become forced sellers, because they don't have enough cash on hand to meet withdrawals. That's the whole story. They must prevent a bank run.
- eastbound 4y ago
  Can’t they just not honor the run, so that they can honor it in the long term, rather than selling at a loss and not being able to honor 20% of them?
  - salawat 4y ago
    No. That's theft. That's not how deposits work. You lend out on shorter terms than you figure your depositor will need and pray they don't need it back. If they all do though, you're screwed. It's statistical multiplexing as applied to piles of other people's money.
    - tome 4y ago
      Are there some legal terms preventing limiting withdrawls? If not it seems like there should be, exactly to cope with the risk of runs! [EDIT: corrected "limiting withdrawls" to "preventing limiting withdrawls"]
      - alistairSH 4y ago
        [simplified explanationfollows] No, the inverse. Banks are required to keep a % of deposits available in cash, another % in easily sellable assets, etc (lots of regulations here, esp post 2008 crisis, though the US exempted community banks from the new rules, which contributes to the current crisis) in order to reduce the risk that a bank run puts them out of business. But a big run can exceed those safeguards, as appears to be the case here. The bank can’t offload enough investments to meet withdrawal demands.
        tome 4y ago
        Sorry, I meant is there a law preventing limiting withdrawls. If not, I don't see why banks don't just do that, when subject to a run, so I guess there must be. In other words, the government says that deposits must be always withdrawlable immediately on request, which seems like a surefire recipe for runs.
        akiselev 4y ago
        IANAL but my layman’s understanding is no, there is no law preventing them from halting withdrawals and a temporary suspension can on rare occasions stop a bank run. Problem is, clients can sue to get their withdrawals and the judge in charge of the case can force the business into involuntary bankruptcy proceedings (without the protection of voluntary bankruptcy) if they think the bank can’t meet the withdrawals in full, to get a valuation of its assets so that the plaintiffs can be made whole. This won’t happen over the weekend because courts aren’t in session but can happen on a week or two timescale, in which case the business is basically frozen for months while everyone fights over a half dead carcass. It’s a relatively catastrophic outcome for everyone involved.
        4y ago
sjburt 4y ago
If there is a run, it's a question of whether they have enough liquid cash. If they run out they have to start selling things unless they can somehow get some other kind of cash injection.
cortesoft 4y ago
As rates go up, those mortgages will become less valuable (because they pay a lower interest rate than new loans will). At the same time, rates going up means the bank is going to have to pay more in interest to depositors, meaning they will need to offload assets to maintain their margin requirements. This is why commercial banks tend to not hold on to the loans they originate any more, and instead sell them to funds. There is correlated risks for the banks, where their assets become less valuable at the exact time they need to sell them. Banks don’t like to hold mortgages for this reason.
dragonwriter 4y ago
> If there is a run, then selling is actually the worst thing to do The “demand” in “demand deposit” accounts means that selling isn't optional as the cash runs out in a run. A bank is not an unregulated crypto exhange that can just impose arbitrary withdrawal limits to protect the absence of liquidity.

xeromal 4y ago

I assume they sell these loans if the amount withdrawn outpaces what they have cash on hand. Since their mortgages are mostly mortages from the low interest era, they're less valuable to buyers.

prottog 4y ago

> Why not just hold them > If there is a run If there is a run, they become forced sellers, because they don't have enough cash on hand to meet withdrawals. That's the whole story. They must prevent a bank run.

eastbound 4y ago
Can’t they just not honor the run, so that they can honor it in the long term, rather than selling at a loss and not being able to honor 20% of them?
- salawat 4y ago
  No. That's theft. That's not how deposits work. You lend out on shorter terms than you figure your depositor will need and pray they don't need it back. If they all do though, you're screwed. It's statistical multiplexing as applied to piles of other people's money.
  - tome 4y ago
    Are there some legal terms preventing limiting withdrawls? If not it seems like there should be, exactly to cope with the risk of runs! [EDIT: corrected "limiting withdrawls" to "preventing limiting withdrawls"]
    - alistairSH 4y ago
      [simplified explanationfollows] No, the inverse. Banks are required to keep a % of deposits available in cash, another % in easily sellable assets, etc (lots of regulations here, esp post 2008 crisis, though the US exempted community banks from the new rules, which contributes to the current crisis) in order to reduce the risk that a bank run puts them out of business. But a big run can exceed those safeguards, as appears to be the case here. The bank can’t offload enough investments to meet withdrawal demands.
      - tome 4y ago
        Sorry, I meant is there a law preventing limiting withdrawls. If not, I don't see why banks don't just do that, when subject to a run, so I guess there must be. In other words, the government says that deposits must be always withdrawlable immediately on request, which seems like a surefire recipe for runs.
        akiselev 4y ago
        IANAL but my layman’s understanding is no, there is no law preventing them from halting withdrawals and a temporary suspension can on rare occasions stop a bank run. Problem is, clients can sue to get their withdrawals and the judge in charge of the case can force the business into involuntary bankruptcy proceedings (without the protection of voluntary bankruptcy) if they think the bank can’t meet the withdrawals in full, to get a valuation of its assets so that the plaintiffs can be made whole. This won’t happen over the weekend because courts aren’t in session but can happen on a week or two timescale, in which case the business is basically frozen for months while everyone fights over a half dead carcass. It’s a relatively catastrophic outcome for everyone involved.
        4y ago

sjburt 4y ago

If there is a run, it's a question of whether they have enough liquid cash. If they run out they have to start selling things unless they can somehow get some other kind of cash injection.

cortesoft 4y ago

As rates go up, those mortgages will become less valuable (because they pay a lower interest rate than new loans will). At the same time, rates going up means the bank is going to have to pay more in interest to depositors, meaning they will need to offload assets to maintain their margin requirements. This is why commercial banks tend to not hold on to the loans they originate any more, and instead sell them to funds. There is correlated risks for the banks, where their assets become less valuable at the exact time they need to sell them. Banks don’t like to hold mortgages for this reason.

dragonwriter 4y ago

> If there is a run, then selling is actually the worst thing to do The “demand” in “demand deposit” accounts means that selling isn't optional as the cash runs out in a run. A bank is not an unregulated crypto exhange that can just impose arbitrary withdrawal limits to protect the absence of liquidity.