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They relaxed the need for a capital conservation buffer, too. These actions were part of the Fed's response to the market panic at the onset of the pandemic, an

• Jensson 4y ago
  Funny that they didn't deem T-Bonds to be high risk given that it was they who crashed the value of those T-Bond by increasing interest rates.
  • panarky 4y ago
    You identified the root cause of this whole thing. Long-term bonds get preferential treatment in the risk-based capital calculation because they have low default risk, which allows banks to run with thinner equity capital, even though they're exposed to high interest rate risk and have a portfolio highly concentrated in one high-risk industry. Capital ratios don't adequately account for actual risk.
    • eru 4y ago
      Yes. That's (part of) why FDIC is a bad idea: it partially insulates depositors from the need to monitor what their bank is doing. In banking, we want a flight to quality.
      • CHY872 4y ago
        And the FAA is a bad idea because it insulates travelers from the need to monitor what their plane is doing?
        • eru 4y ago
          Maybe? You could replace the FAA with voluntary certification. People could demand the same standards as the FAA enforces. Let me bite the bullet: Flying is arguably way too safe. In the sense that flying could compromise a bit on safety, and still be much safer than cars. If that compromise would lead to lower costs and thus prices, perhaps more people would fly and fewer would drive; leading to better safety on average. Despite flying becoming less safe.
          • jdiez17 4y ago
            Never thought I would hear someone making that argument. You think we should let more people die in plane crashes so that flying is cheaper? We already know cheap flying with current safety standards is economically viable, with costs approaching the cost of fuel; see low cost airlines like Ryanair. So the most effective way to lower prices is for airlines to downgrade amenities and services onboard.
            • vlack-vingaard 4y ago
              Let me bite here. I think flying could be made cheaper and massively more convenient by getting rid of airport security the way it is done right now. Imagine planes being boarded like trains: there might be a security tradeoff but it would be offset by the massive time benefit for everyone involved. I know I would take that risk, I consider my own time to be more worthy than TSA considers it to be
              • xeromal 4y ago
                I don't think anyone is arguing about security to board a plane. They're talking about maintenance requirements and safety requires for when a plane is in flight. Things like airplane inspections.
                • eru 4y ago
                  I'm talking about all aspects. As an example: planes almost never crash. Which is great! So you could drop the requirement to carry life-vests, without compromising safety numbers. (If you want, you can invest 50% of the cost savings into eg anti-malaria nets, and you'd come out way ahead in terms of lives saved.) Similarly, airplane seats are massively over-engineered. You could loosen restrictions there, and save weight and thus costs. I think Japan might already have different domestic regulations there. I remember being on a domestic flight between Kobe and Tokyo, and the seats in economy class used a lot of mesh over aluminium frame or so. They looked a lot lighter (and also more breathable) than your typical airplane seats. See https://photos.app.goo.gl/ZDWQTNMB93mQs5Yz5 https://photos.app.goo.gl/ZDWQTNMB93mQs5Yz5 for a picture that I took. I also agree with vlack-vingaard, but they already gave some good examples.
      • calgarymicro 4y ago
        FDIC insulates customers, but it does not at all insulate the banks; if a bank fails, it fails, FDIC or no. So it doesn't at all remove the incentive for banks to avoid failure by not making poor investments in the same way that, say, a bailout might.
        • panarky 4y ago
          It doesn't have to be all or nothing, and the current cap on insured deposits is a nice balance. Small depositors aren't finance pros, they don't have the training or network to monitor bank management, so we protect them from rogue management. Large depositors can and should worry about their bank's solvency, so we focus their minds by leaving their deposits uninsured. Unfortunately, when large depositors catch a whiff of insolvency, they don't help fix the problem, they're first to pull their deposits and leave everyone else to pay the bill. So we should treat them as we treat creditors in a bankruptcy, and claw back the cash they were able to withdraw in the days leading up to the bank's closure.
      • KptMarchewa 4y ago
        It's a good idea: it does not protect shareholders at all.
        • eru 4y ago
          We want more people in the financial system to be aware of risks and pro-actively deal with them. That includes depositors. (And really skittish depositors could switch to banks that only invest their deposits in eg government bonds. Which are probably about as safe as FDIC insurance.)
      • asimpletune 4y ago
        Idk I think retail depositors should be comfortable leaving their money anywhere that’s fdic insured and it’s the bank shareholders that should have to monitor what they’re doing.
        • eru 4y ago
          We want more monitoring in the financial system, not less. Otherwise you could make the same argument you just made, and expand it to: shareholders should be comfortable, it should be regulators (or someone else) that should be monitoring, etc.
  • eru 4y ago
    Well, it was their interest risk, not their credit risk, that caused the problem here. But it's an interesting thought.