3 ms·

No banking investment is safe if there is a run on the bank. It's not like this result was inevitable. If the bonds didn't need to be sold, they would have paid

• gruez 4y ago
  >If the bonds didn't need to be sold, they would have paid out. Yeah, but only several years later, and all the while earning a low interest rate. In other words, the net present value of the security still dropped. Sure, if the bank holds to maturity it'll get its principal back, but it would have lost out on a lot of interest. Why would you want to hold your money at a bank that's lending out at 2% (made up number) when the fed is paying 4.5%? The bank will either have to offer lower interest on deposit to compensate, or take a loss. The former case basically creates a bank run dynamic. You want to get your cash out while you still can, otherwise your money will be stuck earning low interest rates for the next half decade. In the latter case, it leads to bankruptcy of the bank as the loss eats into capital reserves.
• __blockcipher__ 4y ago
  > No banking investment is safe if there is a run on the bank This isn't true. Runs can only happen when a bank has insufficient liquidity. Such as when it holds long-dated bonds that it purchased at historical rock-bottom low interest rates. > If the bonds didn't need to be sold, they would have paid out. This is the "you don't lose money unless you sell" fallacy. Which yes, is actually a fallacy. (Note the fallacy is useful to use, psychologically speaking, to try to manipulate panic-susceptible individuals into doing the sane thing and not panic selling every dip; that doesn't make it less of a fallacy though)