4 ms·

Why isn't the assumption basically that all banks are insolvent right now? Moreover, why is everyone phrasing SVB's insolvency as illiquidity? If you have you

by ouid 4y ago

Why isn't the assumption basically that all banks are insolvent right now? Moreover, why is everyone phrasing SVB's insolvency as illiquidity? If you have your money in a Ponzi scheme (an example of insolvency), then you aren't "making a run on the Ponzi scheme" when you withdraw your money.

gizmo686 4y ago
> Why isn't the assumption basically that all banks are insolvent right now? Because the FDIC decided to make all depositors immediately whole. Looking at their FAQ [0], depositors can even continue using their money directly from their existing accounts as they have been before the collapse. This is a pivot from their original position of providing more limited support [1]. The same is being done for Signature bank [2] This is a strong signal, that they will do the same if other banks fail. Additionally, the larger banks, such as Bank of America, are simply not allowed to be insolvent. If they are insolvent, the government will go to extraordinary measures to make them solvent, as a large bank failure is simply not acceptable Also, most people have less than $250,000, so their bank failing is little more than an inconvenience, as they will be made whole by the FDIC as a matter of law. The inconvenience of a "normal" switching over to a new bank is only a bit greater than the inconvenience of switching over from a failed bank with FDIC insurance, so for most people it simply isn't worth worrying about. If you are the FDIC/Federal Reserve/Treasury Department/President/etc, then the belief seems to be that there is significant risk of additional bank failures and steps need to be taken to prevent those. In addition to the additional FDIC support mentioned above, these steps include projecting confidence in the banking system (earned or not). Further, the Federal reserve has expanding its backstop programs, making additional liquidity available to other banks. > Moreover, why is everyone phrasing SVB's insolvency as illiquidity? Because it was a liquidity problem. Of course, there assets were not completely illiquid, as they could sell them at a discount relative to their face value. Doing this can turn a liquidity problem into a solvency problem, but the core issue was still one of liquidity. Had the depositors waited to withdraw their money, the bonds would have reached maturity and all depositors would be able to withdraw their full balance without any issue. The official position of the FDIC is that the assets from the failed banks are still enough to cover all depositors, so even with the discounted selling they already did, they have still not been pushed into insolvency (to the extent that you believe the FDIC's accounting, and possibly ignoring creditors who are not considered depositors). Frankly, if you asked me to come up with a scenario that demonstrates a bank failure due to a liquidity crunch, I doubt I could come up with something clearer than what saw last week. Having said that, a bank's core business is arbitraging the difference between long and short duration loans, so avoid liquidity problems is pretty central to what they are supposed to do > If you have your money in a Ponzi scheme (an example of insolvency), then you aren't "making a run on the Ponzi scheme" when you withdraw your money. In a Ponzi scheme, there is no way to make everyone whole. The money simply is not there. In the recent bank failures, there is an clear path to make everyone whole. If the banks had been allowed to limit withdrawals for long enough that their bonds would reach maturity, then they would have had the money to make everyone whole. This is, in effect, what the original FDIC process [1] would have been. Everyone gets their insured deposits almost imminently. Uninsured funds would be partially paid out quickly, and the remainder would have been paid out as the FDIC liquidates assets in a more controlled manner (they would only be repaid fully if the FDIC recovers sufficient money from the liquidation, which the current indications are that they expect to). [0] https://www.fdic.gov/resources/resolutions/bank-failures/failed-bank-list/silicon-valley-faq.html https://www.fdic.gov/resources/resolutions/bank-failures/fai... [1] https://www.fdic.gov/news/press-releases/2023/pr23016.html https://www.fdic.gov/news/press-releases/2023/pr23016.html [2] https://www.fdic.gov/news/press-releases/2023/pr23018.html https://www.fdic.gov/news/press-releases/2023/pr23018.html https://www.fdic.gov/news/press-releases/2023/pr23019.html https://www.fdic.gov/news/press-releases/2023/pr23019.html
- neilwilson 4y ago
  " Had the depositors waited to withdraw their money, the bonds would have reached maturity and all depositors would be able to withdraw their full balance without any issue." If that was the case the Fed 'lender of last resort' function would have allowed that to happen - by taking over the SVB deposits that were just moving to another bank. In effect lending back JP Morgan, et al's increase in reserves. In reality the problem was that the income from the assets SVB had was insufficient to pay the Fed's penalty rate. Therefore SVB couldn't meet the Fed's cash letter - which is the stated reason for the bank's insolvency. Essentially SVB lent out money too cheaply by inexplicably swapping its floating rate reserves for fixed rate mortgage bonds that it overpaid for. SVB was relying upon keeping non-interest bearing deposits for the duration. Without those it was insolvent. Perhaps we need a new term: "insolvent at the Fed rate".
- ouid 4y ago
  if you deposit 100 dollars with me, and I spend 40 of that on myself, I am INSOLVENT. If I then go buy a 10 year bond with the rest, that will mature to 100 dollars, this DOES NOT CHANGE THAT SITUATION.

by ouid 4y ago

gizmo686 4y ago

> Why isn't the assumption basically that all banks are insolvent right now? Because the FDIC decided to make all depositors immediately whole. Looking at their FAQ [0], depositors can even continue using their money directly from their existing accounts as they have been before the collapse. This is a pivot from their original position of providing more limited support [1]. The same is being done for Signature bank [2] This is a strong signal, that they will do the same if other banks fail. Additionally, the larger banks, such as Bank of America, are simply not allowed to be insolvent. If they are insolvent, the government will go to extraordinary measures to make them solvent, as a large bank failure is simply not acceptable Also, most people have less than $250,000, so their bank failing is little more than an inconvenience, as they will be made whole by the FDIC as a matter of law. The inconvenience of a "normal" switching over to a new bank is only a bit greater than the inconvenience of switching over from a failed bank with FDIC insurance, so for most people it simply isn't worth worrying about. If you are the FDIC/Federal Reserve/Treasury Department/President/etc, then the belief seems to be that there is significant risk of additional bank failures and steps need to be taken to prevent those. In addition to the additional FDIC support mentioned above, these steps include projecting confidence in the banking system (earned or not). Further, the Federal reserve has expanding its backstop programs, making additional liquidity available to other banks. > Moreover, why is everyone phrasing SVB's insolvency as illiquidity? Because it was a liquidity problem. Of course, there assets were not completely illiquid, as they could sell them at a discount relative to their face value. Doing this can turn a liquidity problem into a solvency problem, but the core issue was still one of liquidity. Had the depositors waited to withdraw their money, the bonds would have reached maturity and all depositors would be able to withdraw their full balance without any issue. The official position of the FDIC is that the assets from the failed banks are still enough to cover all depositors, so even with the discounted selling they already did, they have still not been pushed into insolvency (to the extent that you believe the FDIC's accounting, and possibly ignoring creditors who are not considered depositors). Frankly, if you asked me to come up with a scenario that demonstrates a bank failure due to a liquidity crunch, I doubt I could come up with something clearer than what saw last week. Having said that, a bank's core business is arbitraging the difference between long and short duration loans, so avoid liquidity problems is pretty central to what they are supposed to do > If you have your money in a Ponzi scheme (an example of insolvency), then you aren't "making a run on the Ponzi scheme" when you withdraw your money. In a Ponzi scheme, there is no way to make everyone whole. The money simply is not there. In the recent bank failures, there is an clear path to make everyone whole. If the banks had been allowed to limit withdrawals for long enough that their bonds would reach maturity, then they would have had the money to make everyone whole. This is, in effect, what the original FDIC process [1] would have been. Everyone gets their insured deposits almost imminently. Uninsured funds would be partially paid out quickly, and the remainder would have been paid out as the FDIC liquidates assets in a more controlled manner (they would only be repaid fully if the FDIC recovers sufficient money from the liquidation, which the current indications are that they expect to). [0] https://www.fdic.gov/resources/resolutions/bank-failures/failed-bank-list/silicon-valley-faq.html https://www.fdic.gov/resources/resolutions/bank-failures/fai... [1] https://www.fdic.gov/news/press-releases/2023/pr23016.html https://www.fdic.gov/news/press-releases/2023/pr23016.html [2] https://www.fdic.gov/news/press-releases/2023/pr23018.html https://www.fdic.gov/news/press-releases/2023/pr23018.html https://www.fdic.gov/news/press-releases/2023/pr23019.html https://www.fdic.gov/news/press-releases/2023/pr23019.html

neilwilson 4y ago
" Had the depositors waited to withdraw their money, the bonds would have reached maturity and all depositors would be able to withdraw their full balance without any issue." If that was the case the Fed 'lender of last resort' function would have allowed that to happen - by taking over the SVB deposits that were just moving to another bank. In effect lending back JP Morgan, et al's increase in reserves. In reality the problem was that the income from the assets SVB had was insufficient to pay the Fed's penalty rate. Therefore SVB couldn't meet the Fed's cash letter - which is the stated reason for the bank's insolvency. Essentially SVB lent out money too cheaply by inexplicably swapping its floating rate reserves for fixed rate mortgage bonds that it overpaid for. SVB was relying upon keeping non-interest bearing deposits for the duration. Without those it was insolvent. Perhaps we need a new term: "insolvent at the Fed rate".
ouid 4y ago
if you deposit 100 dollars with me, and I spend 40 of that on myself, I am INSOLVENT. If I then go buy a 10 year bond with the rest, that will mature to 100 dollars, this DOES NOT CHANGE THAT SITUATION.