26 ms·

Banking in uncertain times

386 points by tiniuclx 4y ago

A4ET8a8uTh0 4y ago
"This is a temporary program; banks can only tap this liquidity for about a year. In the ordinary course, bank runs don’t last for a year; they either cause an institution to fail very quickly or peter out. But the other reason this is time-bounded is to defang the moral hazard, on behalf of both banks and their customers. (Moral hazard in insurance is when the existence of insurance makes it incentive-compatible for you to be imprudent in your own risk taking, expecting someone else to bear the consequences.)" This is likely the most important part. FED, Treasury and administration bought some time, but what happens after one year is anyone's guess.
- deleted 4y ago
  [deleted]
- zie 4y ago
  That was the Fed and treasuries way of telling all the owners of banks across the US, take the beating or else. If the banks listen and take the beating, invest more equity and re-adjust their banking practices to handle interest rate risk, nothing exciting happens. If the banks don't heed the klaxon call, they will likely get wiped to zero and cease to be owners of banks anymore(because the FDIC will take the bank over and say enough). Depositors/customers of the banks will probably be just fine though. The FDIC will either find a new set of owners or dissolve it and move customers to new banks that did take the beating. I imagine some idiots will try and call the bluff, get wiped to zero and hopefully learn something in the process, if only to not be a bank owner anymore.
  - A4ET8a8uTh0 4y ago
    I will admit that I did not think about it in those terms, but that is why I like to come here ; you are exposed to different perspectives. Do you think this is a way for FED to raise the rates further despite the interest risk you mentioned since failure of SVB put next interest hike into question[1]? edited for clarity [1]https://www.marketwatch.com/story/bank-fallout-undermines-fed-rate-hike-expectations-with-full-percentage-point-of-cuts-seen-by-year-end-8422db60?mod=home-page https://www.marketwatch.com/story/bank-fallout-undermines-fe...
    - zie 4y ago
      I think the Feds are going to keep fighting inflation. Will they rate hike or not I have no idea, but I'd be very surprised if they lowered rates right away. Unless the economy really goes bonkers stupid and crashes hard, I really don't see them lowering rates anytime this year and maybe not next. A few banks that were arguably stupid crashing and burning? Well that's part of the expected cost of fighting inflation.
echion 4y ago
First, the article is a great explanation of what's going on. "Maturity Transformation" explains the cause. "Trying to forestall a banking crisis" is a great discussion of the important next stage of the non-headline-grabbing solution. Just wondering about this "desert" word, in context: > I am very frustrated by political arguments about desert, which start with an enemies list and celebrate when the enemies suffer misfortune for their sins like using the banking system. Anyone know what "desert" refers to?
- progrus 4y ago
  I believe this is a British person saying “during dessert”?
  - progrus 4y ago
    Nope, guess not.
- tetrep 4y ago
  A deserving; that which makes one deserving of reward or punishment; merit or demerit; good conferred, or evil inflicted, which merits an equivalent return: as, to reward or punish men according to their deserts. "Just deserts" is a common phrase that uses it in the same way.
  - ascotan 4y ago
    desert i don't think means deserving. It comes from the latin desertus which means to "make barren or empty/forsake". I think in this context it means to have something fail or be abandoned at a critical moment.
    - 542458 4y ago
      The person you’re replying to is correct - “desert” is in some contexts an old word that’s pronounced like “dessert” but spelled with one “s” that means “the punishment that one deserves”. https://www.merriam-webster.com/words-at-play/just-deserts-or-just-desserts https://www.merriam-webster.com/words-at-play/just-deserts-o...
pearjuice 4y ago
What I still do not understand is why the whole SVB episode isn't a bailout and didn't just introduce much more risk into the system. Yes, the stock went to 0 and investors did not get compensated (if they didn't already cash out when they saw it coming due to inside information) but the gaping hole in the books was filled due to government intervention and explicitly lifting the 250K FDIC limit. Why would any bank look at SVB and NOT think "oh, time to take more risk for more profit; the government will prop up the FDIC limit if we fail anyway". Saying that taxpayers won't pay for this is a joke too. The burden of filling the insurance gap won't come out of the pocket of other banks or their shareholders. Even though the FDIC receives no federal funding on paper, they seem to be fully invested in treasury securities and can borrow directly from the treasury, against rates not available to the common Joe. It's a perverse relation which the taxpayer contributes to.
- duxup 4y ago
  > Why would any bank look at SVB and NOT think "oh, time to take more risk for more profit; the government will prop up the FDIC limit if we fail anyway". Because they don’t want the stock to go to 0? I think most businesses and investors would not want that. We’ve seen bank stocks drop, it is in those banks interest to show they’re not taking chances like SBV.
  - Gys 4y ago
    Then why is (was?) there a limit of 250k anyway?
    - duxup 4y ago
      Does it matter in regards to what I said?
    - skwirl 4y ago
      To prevent bank runs.
    - patio11 4y ago
      There has been, over the nearly century we’ve had the institution, many many waves of feelings regarding it. That said, three prominent ones: the amount one needs to reserve, and therefore the rates one needs to charge banks to build the reserve, are sensitive to what portion of the sector is actually insured. There exists a sense that rich, sophisticated people and entities can arrange for their own risk management at their own expense rather than a society-wide program with implicit government backstopping. Finally, there is frequently strong disinterest in either the reality or the appearance of public funds being used to backstop the banking industry. And so that is the reason for the limit. It gets bumped up every few years, partially due to inflation and partially due to the increasing wealth of the upper middle class and retirees, who the insurance fund is primarily aimed at motivating. It would not be effective in its aims if “local elites” at the typical community bank felt like they still shouldered run risk, and local elites in 2023 are substantially wealthier than they were in 1945.
medo-bear 4y ago
people should divest from crypto and invest into the good old banking system
mooreds 4y ago
Read this all the way to the disclaimers at the bottom. It's just a fantastic piece of writing, digging deep into some of the unseen structures that underlie our society. I'm not close enough to the banking system to judge the truth of it, but it was beautiful. PS If you are on email lists, make sure to respond occasionally to the author. It's hard out there and they are shouting into the void. If a piece makes you smile/think/learn, tell them!
- photochemsyn 4y ago
  It seems to avoid discussing a rather basic issue, which is that as Fed interest rates rose, the interest rates on deposits (i.e. individual savings accounts) did not increase at all due to bank executives wanting to harvest more of that pie for themselves. Hence people seem to have an incentive to move money out of banks and into money market accounts that were giving much higher returns on those deposits. The history here is illuminating: (Jan 1 2023) > "During the 1980s, savings rates climbed as high as 8%. Deregulation caused deposit interest rates to stay higher than financial institutions could sustainably support, which contributed to banking failures during that decade. In the 1990s, savings account rates decreased significantly, typically sitting between 4% and 5%. The 2000s kicked off with a recession, and savings rates fell to between 1% and 2%. Following the financial crisis of 2008, savings account interest rates fell to historic lows—below 0.25%." https://www.forbes.com/advisor/banking/savings/history-of-savings-account-interest-rates/ https://www.forbes.com/advisor/banking/savings/history-of-sa... See also: https://twitter.com/biancoresearch https://twitter.com/biancoresearch
  - vkou 4y ago
    It avoids discussing it because neither SVB nor most other banks offered their customers interest rate increases.
  - makomk 4y ago
    It's not discussed here, but banks probably couldn't increase their interest rates to be competitive with money market accounts etc because the whole root cause of the problem is that their deposits were backed up with long-term fixed interest rate bonds that paid substantially below the rate that someone could get by buying a bond now, and therefore below the return on money market accounts etc. How bad of a problem this is depends on how sensitive to interest rates the banks' customers actually are.
alecco 4y ago
Just use a MM account at a bank/institution using Federal Reserve deposits. It sucks to concentrate on the large big institutions but it's the only safe move right now. Note, the Federal reserve has now insane liabilities. But they can print money so they will never default. If your payroll and expenses are in USD nominal you are covered. If you go, aha! but how do you safely protect your funds from inflation and Fed's money printer? Good luck with that. The system is rigged. "It's a big club and you ain't in it".
- ragnot 4y ago
  The answer to the inflation question traditionally has been to short the US dollar via investing in real estate with loans.
  - airstrike 4y ago
    it feels a bit too late to do that, though
lifty 4y ago
I have been seeing conflicting opinions from people in the financial know-how. On one hand, patio11 says that you can ignore this and that the banking system is very resilient. On the other hand, him and others mentions that you need to use 3rd party providers in order to distribute your deposits in order to have full insurance coverage. Is there any way for a non sophisticated person to avoid these headaches? Otherwise why is this so different than the knowledge required to self custody crypto-assets?
- dsr_ 4y ago
  If you are storing more than $250K (the standard insurance limit), then you need to distribute your deposits. It is as simple as opening accounts in N/250000 banks, although if you are close to an integer or expect the cash to increase substantially, you might want more than that. So for individual people, this affects... maybe 5%. It certainly affects small companies, but those are entities that we, as a society, expect to have good financial advisors. (It turns out that many of them do not.) Every bank and credit union I've ever dealt with has prominently placed the FDIC or NCUA insurance terms on their paperwork, website and physical doors. When you sign up for an account with a brokerage/bank, they are always explicit about what accounts, if any, are protected savings and which are unprotected investment accounts.
  - mikeyouse 4y ago
    It's just not remotely practical to keep dozens of banks accounts with $250k in them for most companies. Many payrolls are larger than that, if you're renting a venue for an event, it'll be larger than that. Obviously well-staffed finance teams could shuffle funds endlessly, but there's just no economic value to creating treasury jobs for the sake of it. We'd be much better off just upping the FDIC limit to something like $5M and mandating better quality assets for the insured portion of bank deposits.
    - forsakenTadpole 4y ago
      recently had a call with Fidelity about this. many places including Fidelity will automatically split your cash between many banks on the bank end. for Fidelity the money in my Cash Management account will be split into up to 20 different banks which means that up to $5 million is FDIC insured. https://www.fidelity.com/why-fidelity/safeguarding-your-accounts https://www.fidelity.com/why-fidelity/safeguarding-your-acco...
kasey_junk 4y ago
I like this and it rings true for the most part to my experience. But I find 2 parts of it troubling. First ‘patio11 seems to have bought into the goalpost movement around depositor obligations in the banking regime. It maybe that as a society we don’t want any depositors, no matter how big, to have no concern about counterparty risk (or maybe move the bar higher) but that’s not the assumption built into the system now and it’s not obvious on its face or in the essay that it should change. Second, the appeal to FBO operators falls flat. Large custodial firms have existed for decades and being able to provide a beneficiary list on the weekend is something they build and staffed for. That it is difficult for other technology firms to do so says more about the choices those firms are making than an intrinsic problem with the existing system.
O__________O 4y ago
Mentioned in the article, Chart 7 from an FDIC report [1] is concerning, specifically that currently there are “unrealized losses on available–for–sale and held–to–maturity securities totaled $620 billion” — which appears to be not only a recent trend, but roughly 10x more than any point in recent history, including during 2008. Is anyone able to provide more context and clarify how significant these losses are to the US banking system beyond what’s covered in the article? [1] https://www.fdic.gov/news/speeches/2023/spfeb2823.html?ref=bits-about-money https://www.fdic.gov/news/speeches/2023/spfeb2823.html?ref=b... _________________ EDIT: For the unfamiliar, OP article’s author is a notable user on HN: https://news.ycombinator.com/user?id=patio11 https://news.ycombinator.com/user?id=patio11
- airstrike 4y ago
  these are unrealized losses so not necessarily significant if just held to maturity or sold when prices are less punishing they can be an issue if, say, all your depositors decide to make huge withdrawals and the bank's immediate cash needs balloon, or if they have specific payments they need to make in the near term which would force those "available for sale" securities to be actually sold none of this is an inevitable risk. there are ways to hedge against rising rates. the current rate hikes, although historic in their pace, have also long been anticipated by the market and telegraphed by the Fed. that bank administrators failed to plan accordingly is honestly baffling
  - O__________O 4y ago
    Possible I am missing something, but your response appears to assume the securities will recover their loses prior to being sold and/or that these unrealized losses do become actual losses, should banks need to sell securities to meet liquidity needs. Without additional context, seems like wishful thinking to believe such losses will ever be recovered. In fact, while I might be wrong, those unrealized losses assume current market conditions; meaning they do not represent the actual total assets at potentially at risk; might be wrong about this. Am I missing something?
    - 4y ago
Pet_Ant 4y ago
I mean maybe we should require large companies to split their accounts across several banks, I mean what is the real overhead here?
- czbond 4y ago
  That really is a CFO's job. To assess risk, and distribute it. Larger amounts in larger banks are swept across multiple branches transparently to reduce the account holders risks for individual branch failures. However, the FDIC limit is REALLY low in today's terms. $250k limit was set in 2010. The money stock has been printed 143% more since 2010. To me that is about $607k in today's dollars.
  - kortilla 4y ago
    > 250k limit was set in 2010. The money stock has been printed 143% more since 2010. To me that is about $607k in today's dollars. That’s not how inflation works.
spir 4y ago
Stablecoins are conspicuous in their absence in patio11's post. Personally, I believe that patio11's loathing of crypto has made him incurious about its potential. But that's not the point here. The point is that stablecoins are about to become a Very Good Deal for ordinary people: In the near future, stablecoins like USDC will become immune to bank runs because the US Dollar reserves backing them will be held in vehicles that don't loan out the reserves and hold short-duration treasuries directly with the Treasury Department. At the same time, any person or entity with USDC in their wallet has instant, 24/7 access to global markets at their sole discretion, without intermediaries. On Ethereum today, anyone can buy Coinbase stock, treasuries, an S&P 500 index, and real estate. In short, the UX of stablecoins is becoming vastly superior to bank deposits because you'll be immune to bank runs, control your own money, and have instant access to global markets, including for low-risk yield on your stablecoins, such as in treasuries or over-collateralized lending.
- pjc50 4y ago
  This is essentially fanfiction, as stablecoins so far have been very opaque about what they do with their reserves. Especially Tether. (largely because the mechanics of holding $60bn in treasuries would attract some questions about KYC which stablecoins are unable to answer)
  - spir 4y ago
    You're right that internationally-run Tether (USDT) is the largest stablecoin and has opaque reserves. However, American-run USDC is growing faster and has excellent transparency: https://www.circle.com/en/transparency https://www.circle.com/en/transparency
    - overthrow 4y ago
      It's also worth noting that the US government itself sometimes uses USDC when there is no better option. If there were any doubts of USDC's legitimacy, the government would be trying to shut it down (see: USDT), not using it for transfers. https://www.nasdaq.com/articles/us-government-enlists-usdc-for-global-foreign-policy-objective-in-venezuela%3A-circle-ceo https://www.nasdaq.com/articles/us-government-enlists-usdc-f... https://www.circle.com/blog/circle-partners-with-bolivarian-republic-of-venezuela-and-airtm-to-deliver-aid-to-venezuelans-using-usdc https://www.circle.com/blog/circle-partners-with-bolivarian-...
floathub 4y ago
The claim that, "when interest rates rise, all asset prices must fall" seems, uhm, somewhat off. If this were true, it would be trivial to stop and reverse inflation (i.e. deflate) with any increase in interest rates (?). While it's certainly useful to think about prices as signals that, "embed an interest rate derivative", it seems a stretch to claim every single one of those derivatives is perfectly negatively correlated with interest rate changes. [EDIT: change "interest price" to "interest rate"]
- peripitea 4y ago
  Yes, but you don't want to deflate for other (often worse) reasons. So could they raise interest rates to 10% and kill inflation? Easily. The trick is in raising them to the appropriate level to curb inflation without suffocating the economy.
  - jessaustin 4y ago
    They have already raised rates enough to suffocate the economy; this episode is just one example. They have not raised rates enough to kill inflation, because the inflation we're seeing today is due to input costs and monopoly rents. The interest rate could be 15% and it wouldn't change those facts. The real reason interest rates are rising is to kill the infant unionization trend in its crib. SVB is just collateral damage.
- Camus134 4y ago
  "If this were true, it would be trivial to stop and reverse inflation (i.e. deflate) with any increase in interest rates" Well, that is the strategy of the Fed. Raise interest rates when we experience too much inflation.
  - floathub 4y ago
    The Fed strategy is to reduce the rate of growth (1st derivative) or prices, not reduce the actual price level (which would be deflationary). And that's non-trivial for many reasons, including the fact that not every price signal responds the same to short term interest rate movements.
brvsft 4y ago
> We recently went through that cycle faster than we thought possible with regards to a bank which responsible people considered very safe. According to the official record, one of the institutions went from being financially healthy one day to insolvent the next. I believe that narrative to be face-saving, but it is what The System currently is messaging as the truth, so let’s accept it for now. If this is the truth, what unfortunate truths might we learn in the near future? Yeah, this is a good quote, and I find it unbelievable that a bank goes from financially healthy one day to insolvent the next. I also find it far more discomforting than the alternative (that it was financially unhealthy for a while, and many other banks are as well). Is this really the 'official' record?
- ru552 4y ago
  Not even the Big 4 of banks could handle 20% of their deposits leaving in a matter of hours. No bank can survive a run. Now, in the case of the Big 4 being run on, they are too big to fail so the Fed would just extend them unlimited funds (probably).
  - Kye 4y ago
    They would with a 20% reserve requirement. Since that's probably not viable, maybe some changes to the interbank loan system to make emergency loans for this purpose a thing. The FDIC already has wide authority once they're called in, but a system like this could have prevented the need for it. Bigger banks could provide the money to prevent failure of an otherwise solid bank rather than be expected to help clean up the mess later.
    - jnwatson 4y ago
      The FDIC literally just created an emergency loan facility. I don’t see why a 20% reserve requirement isn’t viable.
- Laremere 4y ago
  Bank runs killing healthy banks hadn't happened in nearly living memory, but it used to be a thing. Before 1933, if you heard your bank was unhealthy, you'd run to the bank to take out all your money before it vanished. So even a bank with a positive net assets and large liquidity could fail. All it took was a rumor causing a bank run that exceeded the liquidity. This is why the FDIC was formed: to stop rumors causing bank runs. Since the average person knows their deposits are insured, your money isn't going anywhere, so theirs no need to do a bank run. What failed here is that a group of uninsured depositors did an old fashion bank run. That's why the FDIC announced early that everything was covered: to very clearly telegraph that the bank run was unnecessary, and you shouldn't be doing them.
JumpinJack_Cash 4y ago
There need to be a separation between funds transaction and investing. Just like the separation between Church and State or Investment Banking and Commercial Banking. Currently there isn't because you are forced to invest if you want to be able to transact. As a matter of fact the figure you see in your checking account is expressed in dollars but that is false because those are IOUs from the bank exressed in dollars. You are defacto investing in the loan portfolio of your commercial bank. It's a very different thing. Maybe CBDC will allow all of us to 'bank with the Fed' so we will know for sure that those dollars are real and not being put to work in any way , shape or form.
konne88 4y ago
He seems to say that the fractional reserve system is the only way society can work. But is that actually true? Quite a few banks (e.g. Brex) now allow you to keep your money in a money market fund, which invests in short term US treasuries that are protected by the full faith and credit of the US government. Importantly, in this setup, you own all the assets and the bank just acts as a custodian. And you tend to get better interest. That just seems so much saner than the bank being allowed to invest your money in risky and illiquid assets, and then we just hope that those investments don't lose too much money, or that a lot of people don't want to withdraw their money all at once.
- KaiserPro 4y ago
  A traditional bank used to take people's deposits and loan them to other for a fee. the fee would then be returned on aggregate to depositors less the cost of business and profit. this is so called fractional reserve banking. But that doesn't really provide that much interest to depositors, in this age of loose money supply. So there are more exotic functions that "investment" banks fiddle with. Ie trading on the stock market (regulated betting) buying companies, and trading on futures and other pure bets. The problem is that banks are bigger, and have more depositors. So when one pops, other go because they are all doing the same shady shit to make profit. In the UK there are still a few building societies that offer traditional, boring, consumer banking and mortgages. But they are now large national behemoths. But to your point, Brex is a payment manager/facilitator. Its not really offering banking, its more a service to manage expenditure. This might seem like pedantry, but its different enough to make the point.
  - konne88 4y ago
    I would disagree that Brex (and many others in the space) aren't offering banking. I can deposit money, I can withdraw it, I have a credit card, I earn interest, etc, they seem to offer everything a traditional bank would. To your point about risky investments, like stocks, I agree that that's very sketchy. But I think even very prudent banks that don't invest in stocks etc still take on a lot of risk, like we see with the bank collapses caused by the high interest rates these days.
bubbleRefuge 4y ago
There is allot of financial illiteracy regarding the banking system. For example, heard an NPR reporter this morning talking about a bank not having money to loan because of depositors fleeing. These are vestiges of the Gold standard. There is no loanable funds market. That is, the funding for loans does not come from deposits. It comes from thin air. Banks create loans which then become deposits. So called "Bank Money" . In order to create loans and stay in the lending business, banks are required to have certain levels of capital. * The Fed has control of quantity of money . No. The Fed controls the direction of interest rates via interest rate policy or simply put the Fed determines the price of money.
- dancingvoid 4y ago
  I’ll add that the reserve requirement is currently zero. https://www.federalreserve.gov/monetarypolicy/reservereq.htm https://www.federalreserve.gov/monetarypolicy/reservereq.htm
  - zhte415 4y ago
    It might be worth adding that regulatory capital requirements are not zero: https://www.federalreserve.gov/publications/large-bank-capital-requirements-20210805.htm https://www.federalreserve.gov/publications/large-bank-capit...
- vishnugupta 4y ago
  +1. To add, the vast amount of money that's circulating is created by banks. As I keep harping, refer to this article by BoE for details. https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/money-creation-in-the-modern-economy https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/m...
- anononaut 4y ago
  I'll add that approximately 97% of US dollars are created in this way. https://positivemoney.org/how-money-%20works/how-banks-%20create-money/ https://positivemoney.org/how-money-%20works/how-banks-%20cr...
- 4y ago
zhte415 4y ago
The article does something it shouldn't do: Conflate short term interest rates with holding 10 year treasuries. At least compare like for like. The yield curve has moved up, but not by the 4% in the article, and 'up' compared to.. quantitative easing time. From https://home.treasury.gov/resource-center/data-chart-center/interest-rates/TextView?type=daily_treasury_yield_curve&field_tdr_date_value=2019 https://home.treasury.gov/resource-center/data-chart-center/... 2023-03-14: 10Y: 3.64 2021-03-12: 10Y: 1.64 2019-03-14: 10Y: 2.63 2017-03-14: 10Y: 2.60 2015-03-13: 10Y: 2.13 2013-03-14: 10Y: 2.04 2011-03-14: 10Y: 3.36 2009-03-14: 10Y: 2.89 2007-03-14: 10Y: 4.53 2005-03-14: 10Y: 4.52 2003-03-14: 10Y: 3.72 2001-03-14: 10Y: 4.84 > We went multiple years without a bank failure, of any size, in the United States. Because short term funding has been next to free. > The losses banks have taken on their assets are real. They're not real. That's entirely the point. They're financial assets that are locked in to fixed rate returns. If the assets were real, they'd be variable rate. Like the chicken feed that the author points out is an input to the cost of an egg. The variable chicken feed costs feed into the variable price of an egg. When chicken feed costs increase but you're stuck selling the eggs at a fixed price, you have a problem. Risk doesn't disappear, at best it gets mitigated or bought for the value it provides. When mortgages have fixed interest rates, the interest rate risk needs to go somewhere.
- vishnugupta 4y ago
  > We went multiple years without a bank failure, of any size, in the United States. This is objectively false, unless by "multiple years" he means 2 years. The data is out in the public[1] so why not do some basic research before putting out claims like that? Basic mistakes like this makes me question rest of the article and the author's grip on the subject. https://www.fdic.gov/bank/historical/bank/ https://www.fdic.gov/bank/historical/bank/
  - zhte415 4y ago
    Indeed.
  - swores 4y ago
    To be pedantic, calling two years "multiple years" may be a bit misleading, but it's not a mistake considering multiple years literally means "two or more years".
lordnacho 4y ago
As a former trading desk guy I struggle to see how the system allows things to be marked-to-cost. Or rather, why is it that we allow a bank to not mark-to-market a security for which there is a liquid market? Allowing the bank to pretend it has more assets than it actually has seems to be an invitation to hide risk. If they had to MTM their underwater bonds, they would would have been pushed to raise capital earlier, or they would have cut their losses earlier. It should be straight up "I have these deposit liabilities, I have this book of assets, oops, my assets are down a bit, lets do something about it". Instead of "I'm gonna run the gauntlet and hope the business survives until these bonds come in".
- echion 4y ago
  > why is it that we allow a bank to not mark-to-market a security for which there is a liquid market? Because at maturity, the bank gets back its money. So it is perfectly valid to say "in ten years, this $100m bond is worth $100m...and I intend to hold it for ten years, so it's worth $100m [equivalent] today". The "I intend to hold it" is the relevant part of the valuation, though.
  - SilasX 4y ago
    The problem, though, is that it's not necessarily 100% up to them whether they'll hold it to maturity, since withdrawals can force them to liquidate it. It seems like they should have a ruling forcing the use of some formula that factors in this possibility.
  - tnel77 4y ago
    Maybe both metrics would be useful. “If we had to sell today, this is our situation. If these bonds are held to maturity, this will be our situation.” Seems like that would allow an investor to see the state of the bank more clearly.
    - echion 4y ago
      Definitely. And SVB's financial reporting / balance sheet showed this problem beforehand, AIUI.
daydream 4y ago
> The losses banks have taken on their assets are real. They already happened. They are survivable if banks remain liquid. But… they aren’t real yet? They haven’t been realized. If held to maturity they will be paid back in full. Which I know the author is fully aware of. So I don’t understand this point. > I would suggest one has at least one backup financial institution. If one hypothetically does not, I would observe that opening bank accounts rounds to free. Thousands of perfectly good financial institutions exist. Some people have investment accounts with brokerages like Fidelity or Schwab. Many brokerages (including the two mentioned) offer cash management accounts. They offer deposit insurance similar to FDIC and will give you tools similar to checking accounts. Debit cards, checks, bill pay, etc. They can be excellent backup accounts that don’t add the additional overhead (however small) of yet another company to deal with.
- echion 4y ago
  > > The losses banks have taken on their assets are real. They already happened. They are survivable if banks remain liquid. > But… they aren’t real yet? [...] So I don’t understand this point. If people withdraw their deposits, the bank will have to deliver the money somehow...by selling the assets that have lost money. So the point is that although, if nobody withdraws, the losses are survivable, if enough people withdraw, the losses are not survivable. As soon as depositors realise this situation, they will withdraw their money. So that's the problem.
  - daydream 4y ago
    Yes, if the bonds must be sold to cover withdrawals then the losses become realized (real) at that point. But not before.
    - bostik 4y ago
      From all the information I've gathered, there is an unstated aspect to this. If any number of HTM bonds are sold to cover withdrawals, then all of them must be revalued and losses realised on the whole lot.
ajb 4y ago
On the recommendation of maintaining accounts with multiple banks, readers at least in the UK should be aware that for the purpose of compensation, the important part is not the brand name, but whether the banks are part of the same group. This isn't so obvious so you need to check the FCSS website if they do.
benevol 4y ago
Basically, we "simply" need the "Next-gen Bitcoin" - userfriendly, fast, lean in resources.
127 4y ago
Liquidity coverage ratios EU vs. US: US has been stagnant for a decade, while EU has almost doubled. (Lobbyist casts money against government. It's very effective.)
WorkerBee28474 4y ago
"This was complicated by some banks finding it surprisingly difficult to add numbers quickly… We have a report of Friday outflows, but it gets crunched by an ETL job which only finishes halfway through Saturday, and Cindy who understands all of this is on vacation, and… and eventually very serious people said Figure Addition The #*(%#( Out And Call Me Back Soonest" As someone who has written ETL jobs for banks, this hits home.
- SilasX 4y ago
  I thought financial companies had regulations against bottlenecks like that? Something like, every employee has to have their access turned off for one uninterrupted week, to ensure they didn't leave something in that depends on them or they're controlling a (fraudulent) process no one else knows about?
  - WorkerBee28474 4y ago
    Yes, the week (two weeks, IME) is a thing. As are contractor term limits. They reduce key man risk and keep knowledge internal. Still, it's possible to write a script to do something and then just not touch it for years. It keeps chugging away, and the mental model of how it works is lost to time or employee churn, and nothing goes wrong enough that anyone has to dig in and really understand it again.
    - Scoundreller 4y ago
      Also doesn’t help when they never documented a thing and nobody cracked down on that because “it would slow down their unit’s productivity”.
IntFee588 4y ago
Not to be conspiratorial, but the situation is much worse than the fed is letting on. "Trying to forestall" might be optimistic. https://www.bloomberg.com/news/articles/2023-03-12/us-moves-to-help-depositors-offer-bank-backstop-in-wake-of-svb#xj4y7vzkg https://www.bloomberg.com/news/articles/2023-03-12/us-moves-... https://archive.is/FMuYW https://archive.is/FMuYW (archive) Think of what this means, and how precarious a position the nation's banks must be in for the fed to take actions like this. We needed to reimplement Glass-Steagall yesterday.
jijji 4y ago
banks investing in bonds that then get reduced in value, turning into losses, as the fed increases its rates seems like a bad investment from the very beginning... every month there are property tax auctions for property that happens every where in every state in different ways, and I remember when I used to go there in person before they moved to the online method in my state, I would meet with people who worked at specific retail banks and they would invest cash into property as long as the bidding met a margin of 33% of whatever the value of the property might have been worth at that time... That's a pretty safe bet, as property doesn't degrade the same way that a bond, stock or investment loan might degrade if someone defaults on it... I'm not sure why people like SVB would be not doing the same thing maybe it's too tricky for them to figure out or they're happy investing most of their money into wineries which apparently is what has happened.... not sure but it seems like when you're sitting on a pile of cash there's better ways to invest your money with a lot better returns....
Redoubts 4y ago
Not gonna lie, I feel like I've been reading this like a Rudin book, going back and over each paragraph again. This is probably the companion report to have on hand while reading: https://www.fdic.gov/analysis/quarterly-banking-profile/index.html https://www.fdic.gov/analysis/quarterly-banking-profile/inde... In particular * Chart 8. Number and Assets of Banks on the "Problem Bank List" * (Chart 13.) Unrealized Gains (Losses) on Investment Securities Sadly, "Results are published approximately 55 days after the end of each quarter (i.e., 55 days after March 31, June 30, September 30, and December 31)." So there's nothing super new. Bit it strikes me that Chart 13 is going bonkers on unrealized losses, but Chart 8 isn't quite matching the same (assets in problem banks, and # of problem banks is going down since rate hikes??). Really wanna see that number for 2023Q1. But the quote > about a quarter of all equity in the banking sector has been vaporized by one line item. Struck me as pretty wild.
dorianG4 4y ago
Time to disrupt banking by making it go the way of rotary phones. Foisting belief someone like paulg is worth billions given cherry picked math that makes it so does not make paulg special. It’s traditional political corruption embedded in the minds of inept and infirm, shell shocked by war, made paranoid by cold wars, that makes the rich rich. It’s policing society to make us all believe Elon or Billy G are wealthy. Propaganda and information shaping from war era government research was gifted to university and converted into behavioral economics, advertising, and marketing programs. Americans are oblivious they’re just eating their own farts and BS.
Redoubts 4y ago
> This realization creeped in around the edges with e.g. Byrne Hobart on February 23rd noting that one of the U.S.’s largest banks was recently technically insolvent but almost certainly in a survivable way. If you’re wondering what this was, presumably this is the moneyshot of the paywall blog https://twitter.com/byrnehobart/status/1628779894183272452 https://twitter.com/byrnehobart/status/1628779894183272452
tln 4y ago
"Over the last week, three U.S. banks have failed." Wait, 3? I thought it was only 2 (SVB and Signature Bank).
- bo1024 4y ago
  Silvergate, I assume
ouid 4y ago
If you have over 250k in a bank, you might as well withdraw it and buy treasury bonds yourself. You'll get a better return, and you'll have essentially the same risk profile.
meghan_rain 4y ago
In defense of bailouts, we need to acknowledge the systemic risks that a failing bank can pose to the broader economy. If we let a major bank collapse without intervention, the consequences could be far-reaching and have negative ripple effects throughout the financial system. By stepping in and providing a bailout, the government helps to maintain confidence and stability, ensuring that the entire system doesn't collapse under the weight of panic and mistrust.
- GrinningFool 4y ago
  Was this ChatGPT?
  - meghan_rain 4y ago
    No, why? Or how even? Is there an Hackernews API for it?
    - GrinningFool 4y ago
      Thanks - I was curious because the 'feel' of it was very similar that what ChatGPT generates for argumentative writing.
4gotunameagain 4y ago
Given the fact that the losses will not be realised unless depositors massively withdraw (i.e bank run), what is the role of media (including youtube, blogs etc) in this ? If we didn't have a system which deliberately amplifies catchy headlines such as "banks are failing" wouldn't that bank run be avoided ?
tfehring 4y ago
> Banks engage in maturity transformation, in “borrowing short and lending long.” Deposits are short-term liabilities of the bank; while time-locked deposits exist, broadly users can ask for them back on demand. Most assets of a bank, the loans or securities portfolio, have a much longer duration. > Society depends on this mismatch existing. It must exist somewhere. The alternative is a much poorer and riskier world, which includes dystopian instruments that are so obviously bad you’d have to invent names for them. I guess I'll dispute this. It is useful that this mismatch exists, since it (1) lowers the cost of long-term borrowing for mortgagors, businesses, and governments and (2) lowers the (direct and/or opportunity) cost of holding cash. But I don't think society is dependent on this mismatch, and I don't think the alternative would be anywhere near as bleak as Patrick suggests. If bank regulators changed capital requirements to require banks to fully back deposits with cash equivalents, long-term borrowing would be a lot more expensive, but the market would still clear. There's already plenty of demand for safe long-term debt, and that demand would only increase as long-term interest rates went up. E.g., if checking accounts paid -2% interest and CDs paid 10%, lenders would put less money in checking and more in CDs, even if it meant they would have to sell the CD at a discount if they needed liquidity. Of course, the US government will take any and every opportunity it can get to indirectly subsidize mortgages, so this is pretty moot in practice.
- Raidion 4y ago
  If I have a CD, that CD is often not time locked, it just has a penalty for early withdrawal (X months of interest or whatever). If I don't trust that the bank can give me the money, it doesn't matter if it's in a CD or checking account, I'm going to pull it out (screw the gains) and the liquidity problem still exists. The extra months/year of interest don't stop a bank run. This is why I think this can really only be solved by government and regulation. Government regulation on the quality of investments to make sure that they're really worth X% long term. If there is a bank run, government needs to step in with the government liquidity, and say "customer gets their money, we get your assets". Of course, brokering an auction for these amongst other banks is the preferred approach. There should be a fairly free market around what leverage banks are willing to take on as long as the investments that back it are regulated and solid. If a company wants to expose their shareholders to risk by keeping high levels of leverage, that's their problem, but you can't punish depositors for the mistakes of the bank. Not saying we shouldn't have any regulations in this space, but as long as mistakes impact shareholders and not depositors or taxpayers, I think everyone is happy.
gumby 4y ago
As an account holder I don't even care about the safety of my bank, and never have (I have never kept anything like $250K, much less more, in a current account for more than a day or two either for personal or business accounts). So it makes no difference to me if the bank sector crashes or not. To the degree I care about sectors at all, I'm more likely to be concerned about railroad stocks (would interfere with goods) or automobiles, even though I don't own any any more (employ a lot of people).
- jnwatson 4y ago
  So you’re making the argument that because you don’t personally care, it doesn’t matter?
  - gumby 4y ago
    Good question. My example of a car factory closing is also one where I don't personally care but do care about the jobs loss and (less so but for that matter) the size of its impact on the economy. There are many such. But banks specifically are no longer that important. The US federal government now backstops all deposits, as they have (for almost a century) underwritten all residential mortgages. I don't think that's a bad thing at all; overwhelmingly most people's interaction with the bank is a current account (checking/savings); and overwhelmingly most peoples' liquidity is less than the FDIC limit, not that that limit may be meaningful any more. The development of the FDIC was a crucial and early product of the New Deal and stabilized the system significantly. Thus, for this crucial function, I couldn't care less if banks themselves succeed or fail. Like food safety, judging the risk profile of a deposit taking institution is beyond the capability of most people to evaluate. But what about the residual functions of banks? They are mostly unbundled at this point. You don't need to get a credit card from your bank and most people carry such cards that don't come from their bank. In consumer loans (mortgages and small business loans) a local bank arguably knows the local market better than a megabank, and credit unions demonstrate this. But these days banks operate more like mortgage origination companies since the mortgages are bundled into MBSs. That's a function that need not be provided by banks at all! Instead have them be sold by brokerages the way insurance is sold. Safe deposit boxes, to the point they still exist, are outside banks these days. And so on. Of course there are jobs, but retail banks only employ a couple of million in the US (about 20% of the whole financial sector, which is smaller than manufacturing, constuction, and other fields). An unbundling as I'm talking about would probably not affect employment much. So yes, I don't care much about the banking sector at all.
coryfklein 4y ago
Money quote: > Regulators then heard the numbers, did a bit of modeling in Excel, and then went into wartime execution mode. Regulators have, of course, not declared this war, because it is a war on the public’s perception of reality, and to declare war is to surrender. SO MUCH of this drama is really a war on perception more than anything else. Banks being "underwater" on 10 year treasuries is only a problem *if everyone thinks its a problem* and if everyone just goes about their daily business ignoring this story, then after 10 years all the bonds mature and nobody is the wiser.
every 4y ago
Long, entertaining and informative...
NovemberWhiskey 4y ago
>The U.S. banking system lost $620 billion. Six hundred twenty billion dollars. That is a loss no less real than if money had been loaned out to borrowers who defaulted Uh, no. That's just nonsense. If you lend money to a borrower who defaults, you immediately lose your principal and future interest, subject to whatever recovery rate you achieve. It's an actual, realized loss. Banks have masses of unrealized losses on their long-dated Treasury holdings, but if you hold those bonds to maturity, you're going to get your principal and your interest. It should be pretty clear those are Not The Same. The clue is in the word "realized", right?
- peripitea 4y ago
  The term "real" is overloaded. The author is clearly using a meaning here that is different from the one you are using, but that is intentional. His usage makes sense in the context of that particular segment of his writing. From an equity perspective, those losses are very real whether they are realized or not.
  - chordalkeyboard 4y ago
    As Schumpeter predicted, the complexity of our economy is has outstripped our language and consequently our ability to understand it.
- colinsane 4y ago
  now we’re getting into weird philosophical questions: if every bank had sold these treasuries (realizing the loss) and used the proceeds to buy similar treasuries, their portfolio would be basically the same: same present value (obviously), and same to within a few percent future cashflows. at any layer above the balance sheet, these two worlds are difficult to distinguish. so what makes one “real” and the other not?
lliamander 4y ago
So, I'm a layman here, but I feel like he makes narrow banking (i.e. full-reserve or maturity-matched banking) sound more dangerous than it probably is, for instance: > Take an exploding mortgage, the only way to finance homes in a dystopian alternate universe. It’s like the mortgages you are familiar with, except it is callable on demand by the bank. If you get the call and can’t repay the mortgage by the close of the day, you lose your house. What did you do wrong to make the mortgage explode? Literally nothing; exploding mortgages just explode sometimes. Keeps you on your toes. It sounds to me like this could simply be solved with mortgage insurance. Granted, that insurance might be more expensive than it is now, but when a mortgage explodes you end up owning your house outright. Seems like not a bad deal. To reduce their risk (and consequently the cost of the insurance) the insurer would probably take on responsibility for finding alternate lending in the case of the loan being called, and the home owner would never hear about it until after the new lending was secured. I'm sure there would be other problems, but it is not at all clear to me that those problems are worse than the ones we have now.
- fwlr 4y ago
  An exploding mortgage wrapped in mortgage insurance has exactly the same shape as a conventional mortgage from a fractional reserve bank. The insurer would be doing something like “fractional reserve insurance”, i.e. only holding some fraction of the total insurance payout it’s liable for, and you’d have the same problems. If you legislate that insurers can’t do fractional reserve insuring, the cost of insurance would go up so high that the only people who could afford insurance are people who could plausibly afford to buy the house outright. The reason “fractional reserves” keep creeping back in whenever you try to offer mortgages to more than just rich people is because fractional reserves are a way to invent money out of thin air, and you have to invent money out of thin air because the not-rich people buying the houses do not have the money to afford the house (but they can make that money if they focus on it for 10 or 20 or 30 years). You often see people demand to know why banks are allowed to do fractional reserve banking. And this is the reason: it lets banks offer mortgages and credit cards to most of the public. Most people don’t have much money, but do have a lot of future earnings. Giving people access today to large chunks of their future earnings is a big social good but it fundamentally requires money to be invented from thin air, and that invented money is then gradually filled in with real money over time as the earnings come in. So somebody somewhere has to be inventing trillions of dollars. This is risky. The capitalist way is to have private entities who profit when they manage their risk well, since that provides the strongest incentives for competency. And the democratic-capitalist way is to heavily regulate those private entities, eating some portion of their profit to provide some extra value to the public.
jscipione 4y ago
The Federal Funds Target Range chart shows how President Trump was targeted by partisan forces at the fed. Interest rates went up to slow the economy just as soon as Trump was inaugurated in 2016 so that it would appear that President Trump's economic plan was failing. Yet after suffering through two consecutive years of the destruction of the US economy under Joe Biden it is clear that President Trump's economic plan was working well, and that he was railroaded by the Fed that has been weaponized against the American people.
stevedekorte 4y ago
"Society depends on this mismatch existing. It must exist somewhere." I see no reason why bank deposits can be fully backed, and ppl who choose to can buy into bonds funds separately. For example, only ~6% of gov bonds are held by banks: https://www.statista.com/statistics/201881/holders-of-the-us-public-debt/ https://www.statista.com/statistics/201881/holders-of-the-us...

386 points by tiniuclx 4y ago

"This is a temporary program; banks can only tap this liquidity for about a year. In the ordinary course, bank runs don’t last for a year; they either cause an institution to fail very quickly or peter out. But the other reason this is time-bounded is to defang the moral hazard, on behalf of both banks and their customers. (Moral hazard in insurance is when the existence of insurance makes it incentive-compatible for you to be imprudent in your own risk taking, expecting someone else to bear the consequences.)" This is likely the most important part. FED, Treasury and administration bought some time, but what happens after one year is anyone's guess.

deleted 4y ago
[deleted]
zie 4y ago
That was the Fed and treasuries way of telling all the owners of banks across the US, take the beating or else. If the banks listen and take the beating, invest more equity and re-adjust their banking practices to handle interest rate risk, nothing exciting happens. If the banks don't heed the klaxon call, they will likely get wiped to zero and cease to be owners of banks anymore(because the FDIC will take the bank over and say enough). Depositors/customers of the banks will probably be just fine though. The FDIC will either find a new set of owners or dissolve it and move customers to new banks that did take the beating. I imagine some idiots will try and call the bluff, get wiped to zero and hopefully learn something in the process, if only to not be a bank owner anymore.
- A4ET8a8uTh0 4y ago
  I will admit that I did not think about it in those terms, but that is why I like to come here ; you are exposed to different perspectives. Do you think this is a way for FED to raise the rates further despite the interest risk you mentioned since failure of SVB put next interest hike into question[1]? edited for clarity [1]https://www.marketwatch.com/story/bank-fallout-undermines-fed-rate-hike-expectations-with-full-percentage-point-of-cuts-seen-by-year-end-8422db60?mod=home-page https://www.marketwatch.com/story/bank-fallout-undermines-fe...
  - zie 4y ago
    I think the Feds are going to keep fighting inflation. Will they rate hike or not I have no idea, but I'd be very surprised if they lowered rates right away. Unless the economy really goes bonkers stupid and crashes hard, I really don't see them lowering rates anytime this year and maybe not next. A few banks that were arguably stupid crashing and burning? Well that's part of the expected cost of fighting inflation.

echion 4y ago

First, the article is a great explanation of what's going on. "Maturity Transformation" explains the cause. "Trying to forestall a banking crisis" is a great discussion of the important next stage of the non-headline-grabbing solution. Just wondering about this "desert" word, in context: > I am very frustrated by political arguments about desert, which start with an enemies list and celebrate when the enemies suffer misfortune for their sins like using the banking system. Anyone know what "desert" refers to?

progrus 4y ago
I believe this is a British person saying “during dessert”?
- progrus 4y ago
  Nope, guess not.
tetrep 4y ago
A deserving; that which makes one deserving of reward or punishment; merit or demerit; good conferred, or evil inflicted, which merits an equivalent return: as, to reward or punish men according to their deserts. "Just deserts" is a common phrase that uses it in the same way.
- ascotan 4y ago
  desert i don't think means deserving. It comes from the latin desertus which means to "make barren or empty/forsake". I think in this context it means to have something fail or be abandoned at a critical moment.
  - 542458 4y ago
    The person you’re replying to is correct - “desert” is in some contexts an old word that’s pronounced like “dessert” but spelled with one “s” that means “the punishment that one deserves”. https://www.merriam-webster.com/words-at-play/just-deserts-or-just-desserts https://www.merriam-webster.com/words-at-play/just-deserts-o...

pearjuice 4y ago

What I still do not understand is why the whole SVB episode isn't a bailout and didn't just introduce much more risk into the system. Yes, the stock went to 0 and investors did not get compensated (if they didn't already cash out when they saw it coming due to inside information) but the gaping hole in the books was filled due to government intervention and explicitly lifting the 250K FDIC limit. Why would any bank look at SVB and NOT think "oh, time to take more risk for more profit; the government will prop up the FDIC limit if we fail anyway". Saying that taxpayers won't pay for this is a joke too. The burden of filling the insurance gap won't come out of the pocket of other banks or their shareholders. Even though the FDIC receives no federal funding on paper, they seem to be fully invested in treasury securities and can borrow directly from the treasury, against rates not available to the common Joe. It's a perverse relation which the taxpayer contributes to.

duxup 4y ago
> Why would any bank look at SVB and NOT think "oh, time to take more risk for more profit; the government will prop up the FDIC limit if we fail anyway". Because they don’t want the stock to go to 0? I think most businesses and investors would not want that. We’ve seen bank stocks drop, it is in those banks interest to show they’re not taking chances like SBV.
- Gys 4y ago
  Then why is (was?) there a limit of 250k anyway?
  - duxup 4y ago
    Does it matter in regards to what I said?
  - skwirl 4y ago
    To prevent bank runs.
  - patio11 4y ago
    There has been, over the nearly century we’ve had the institution, many many waves of feelings regarding it. That said, three prominent ones: the amount one needs to reserve, and therefore the rates one needs to charge banks to build the reserve, are sensitive to what portion of the sector is actually insured. There exists a sense that rich, sophisticated people and entities can arrange for their own risk management at their own expense rather than a society-wide program with implicit government backstopping. Finally, there is frequently strong disinterest in either the reality or the appearance of public funds being used to backstop the banking industry. And so that is the reason for the limit. It gets bumped up every few years, partially due to inflation and partially due to the increasing wealth of the upper middle class and retirees, who the insurance fund is primarily aimed at motivating. It would not be effective in its aims if “local elites” at the typical community bank felt like they still shouldered run risk, and local elites in 2023 are substantially wealthier than they were in 1945.

medo-bear 4y ago

people should divest from crypto and invest into the good old banking system

mooreds 4y ago

Read this all the way to the disclaimers at the bottom. It's just a fantastic piece of writing, digging deep into some of the unseen structures that underlie our society. I'm not close enough to the banking system to judge the truth of it, but it was beautiful. PS If you are on email lists, make sure to respond occasionally to the author. It's hard out there and they are shouting into the void. If a piece makes you smile/think/learn, tell them!

photochemsyn 4y ago
It seems to avoid discussing a rather basic issue, which is that as Fed interest rates rose, the interest rates on deposits (i.e. individual savings accounts) did not increase at all due to bank executives wanting to harvest more of that pie for themselves. Hence people seem to have an incentive to move money out of banks and into money market accounts that were giving much higher returns on those deposits. The history here is illuminating: (Jan 1 2023) > "During the 1980s, savings rates climbed as high as 8%. Deregulation caused deposit interest rates to stay higher than financial institutions could sustainably support, which contributed to banking failures during that decade. In the 1990s, savings account rates decreased significantly, typically sitting between 4% and 5%. The 2000s kicked off with a recession, and savings rates fell to between 1% and 2%. Following the financial crisis of 2008, savings account interest rates fell to historic lows—below 0.25%." https://www.forbes.com/advisor/banking/savings/history-of-savings-account-interest-rates/ https://www.forbes.com/advisor/banking/savings/history-of-sa... See also: https://twitter.com/biancoresearch https://twitter.com/biancoresearch
- vkou 4y ago
  It avoids discussing it because neither SVB nor most other banks offered their customers interest rate increases.
- makomk 4y ago
  It's not discussed here, but banks probably couldn't increase their interest rates to be competitive with money market accounts etc because the whole root cause of the problem is that their deposits were backed up with long-term fixed interest rate bonds that paid substantially below the rate that someone could get by buying a bond now, and therefore below the return on money market accounts etc. How bad of a problem this is depends on how sensitive to interest rates the banks' customers actually are.

alecco 4y ago

Just use a MM account at a bank/institution using Federal Reserve deposits. It sucks to concentrate on the large big institutions but it's the only safe move right now. Note, the Federal reserve has now insane liabilities. But they can print money so they will never default. If your payroll and expenses are in USD nominal you are covered. If you go, aha! but how do you safely protect your funds from inflation and Fed's money printer? Good luck with that. The system is rigged. "It's a big club and you ain't in it".

ragnot 4y ago
The answer to the inflation question traditionally has been to short the US dollar via investing in real estate with loans.
- airstrike 4y ago
  it feels a bit too late to do that, though

lifty 4y ago

I have been seeing conflicting opinions from people in the financial know-how. On one hand, patio11 says that you can ignore this and that the banking system is very resilient. On the other hand, him and others mentions that you need to use 3rd party providers in order to distribute your deposits in order to have full insurance coverage. Is there any way for a non sophisticated person to avoid these headaches? Otherwise why is this so different than the knowledge required to self custody crypto-assets?

dsr_ 4y ago
If you are storing more than $250K (the standard insurance limit), then you need to distribute your deposits. It is as simple as opening accounts in N/250000 banks, although if you are close to an integer or expect the cash to increase substantially, you might want more than that. So for individual people, this affects... maybe 5%. It certainly affects small companies, but those are entities that we, as a society, expect to have good financial advisors. (It turns out that many of them do not.) Every bank and credit union I've ever dealt with has prominently placed the FDIC or NCUA insurance terms on their paperwork, website and physical doors. When you sign up for an account with a brokerage/bank, they are always explicit about what accounts, if any, are protected savings and which are unprotected investment accounts.
- mikeyouse 4y ago
  It's just not remotely practical to keep dozens of banks accounts with $250k in them for most companies. Many payrolls are larger than that, if you're renting a venue for an event, it'll be larger than that. Obviously well-staffed finance teams could shuffle funds endlessly, but there's just no economic value to creating treasury jobs for the sake of it. We'd be much better off just upping the FDIC limit to something like $5M and mandating better quality assets for the insured portion of bank deposits.
  - forsakenTadpole 4y ago
    recently had a call with Fidelity about this. many places including Fidelity will automatically split your cash between many banks on the bank end. for Fidelity the money in my Cash Management account will be split into up to 20 different banks which means that up to $5 million is FDIC insured. https://www.fidelity.com/why-fidelity/safeguarding-your-accounts https://www.fidelity.com/why-fidelity/safeguarding-your-acco...

kasey_junk 4y ago

I like this and it rings true for the most part to my experience. But I find 2 parts of it troubling. First ‘patio11 seems to have bought into the goalpost movement around depositor obligations in the banking regime. It maybe that as a society we don’t want any depositors, no matter how big, to have no concern about counterparty risk (or maybe move the bar higher) but that’s not the assumption built into the system now and it’s not obvious on its face or in the essay that it should change. Second, the appeal to FBO operators falls flat. Large custodial firms have existed for decades and being able to provide a beneficiary list on the weekend is something they build and staffed for. That it is difficult for other technology firms to do so says more about the choices those firms are making than an intrinsic problem with the existing system.

O__________O 4y ago

Mentioned in the article, Chart 7 from an FDIC report [1] is concerning, specifically that currently there are “unrealized losses on available–for–sale and held–to–maturity securities totaled $620 billion” — which appears to be not only a recent trend, but roughly 10x more than any point in recent history, including during 2008. Is anyone able to provide more context and clarify how significant these losses are to the US banking system beyond what’s covered in the article? [1] https://www.fdic.gov/news/speeches/2023/spfeb2823.html?ref=bits-about-money https://www.fdic.gov/news/speeches/2023/spfeb2823.html?ref=b... _________________ EDIT: For the unfamiliar, OP article’s author is a notable user on HN: https://news.ycombinator.com/user?id=patio11 https://news.ycombinator.com/user?id=patio11

airstrike 4y ago
these are unrealized losses so not necessarily significant if just held to maturity or sold when prices are less punishing they can be an issue if, say, all your depositors decide to make huge withdrawals and the bank's immediate cash needs balloon, or if they have specific payments they need to make in the near term which would force those "available for sale" securities to be actually sold none of this is an inevitable risk. there are ways to hedge against rising rates. the current rate hikes, although historic in their pace, have also long been anticipated by the market and telegraphed by the Fed. that bank administrators failed to plan accordingly is honestly baffling
- O__________O 4y ago
  Possible I am missing something, but your response appears to assume the securities will recover their loses prior to being sold and/or that these unrealized losses do become actual losses, should banks need to sell securities to meet liquidity needs. Without additional context, seems like wishful thinking to believe such losses will ever be recovered. In fact, while I might be wrong, those unrealized losses assume current market conditions; meaning they do not represent the actual total assets at potentially at risk; might be wrong about this. Am I missing something?
  - 4y ago

Pet_Ant 4y ago

I mean maybe we should require large companies to split their accounts across several banks, I mean what is the real overhead here?

czbond 4y ago
That really is a CFO's job. To assess risk, and distribute it. Larger amounts in larger banks are swept across multiple branches transparently to reduce the account holders risks for individual branch failures. However, the FDIC limit is REALLY low in today's terms. $250k limit was set in 2010. The money stock has been printed 143% more since 2010. To me that is about $607k in today's dollars.
- kortilla 4y ago
  > 250k limit was set in 2010. The money stock has been printed 143% more since 2010. To me that is about $607k in today's dollars. That’s not how inflation works.

spir 4y ago

Stablecoins are conspicuous in their absence in patio11's post. Personally, I believe that patio11's loathing of crypto has made him incurious about its potential. But that's not the point here. The point is that stablecoins are about to become a Very Good Deal for ordinary people: In the near future, stablecoins like USDC will become immune to bank runs because the US Dollar reserves backing them will be held in vehicles that don't loan out the reserves and hold short-duration treasuries directly with the Treasury Department. At the same time, any person or entity with USDC in their wallet has instant, 24/7 access to global markets at their sole discretion, without intermediaries. On Ethereum today, anyone can buy Coinbase stock, treasuries, an S&P 500 index, and real estate. In short, the UX of stablecoins is becoming vastly superior to bank deposits because you'll be immune to bank runs, control your own money, and have instant access to global markets, including for low-risk yield on your stablecoins, such as in treasuries or over-collateralized lending.

pjc50 4y ago
This is essentially fanfiction, as stablecoins so far have been very opaque about what they do with their reserves. Especially Tether. (largely because the mechanics of holding $60bn in treasuries would attract some questions about KYC which stablecoins are unable to answer)
- spir 4y ago
  You're right that internationally-run Tether (USDT) is the largest stablecoin and has opaque reserves. However, American-run USDC is growing faster and has excellent transparency: https://www.circle.com/en/transparency https://www.circle.com/en/transparency
  - overthrow 4y ago
    It's also worth noting that the US government itself sometimes uses USDC when there is no better option. If there were any doubts of USDC's legitimacy, the government would be trying to shut it down (see: USDT), not using it for transfers. https://www.nasdaq.com/articles/us-government-enlists-usdc-for-global-foreign-policy-objective-in-venezuela%3A-circle-ceo https://www.nasdaq.com/articles/us-government-enlists-usdc-f... https://www.circle.com/blog/circle-partners-with-bolivarian-republic-of-venezuela-and-airtm-to-deliver-aid-to-venezuelans-using-usdc https://www.circle.com/blog/circle-partners-with-bolivarian-...

floathub 4y ago

The claim that, "when interest rates rise, all asset prices must fall" seems, uhm, somewhat off. If this were true, it would be trivial to stop and reverse inflation (i.e. deflate) with any increase in interest rates (?). While it's certainly useful to think about prices as signals that, "embed an interest rate derivative", it seems a stretch to claim every single one of those derivatives is perfectly negatively correlated with interest rate changes. [EDIT: change "interest price" to "interest rate"]

peripitea 4y ago
Yes, but you don't want to deflate for other (often worse) reasons. So could they raise interest rates to 10% and kill inflation? Easily. The trick is in raising them to the appropriate level to curb inflation without suffocating the economy.
- jessaustin 4y ago
  They have already raised rates enough to suffocate the economy; this episode is just one example. They have not raised rates enough to kill inflation, because the inflation we're seeing today is due to input costs and monopoly rents. The interest rate could be 15% and it wouldn't change those facts. The real reason interest rates are rising is to kill the infant unionization trend in its crib. SVB is just collateral damage.
Camus134 4y ago
"If this were true, it would be trivial to stop and reverse inflation (i.e. deflate) with any increase in interest rates" Well, that is the strategy of the Fed. Raise interest rates when we experience too much inflation.
- floathub 4y ago
  The Fed strategy is to reduce the rate of growth (1st derivative) or prices, not reduce the actual price level (which would be deflationary). And that's non-trivial for many reasons, including the fact that not every price signal responds the same to short term interest rate movements.

brvsft 4y ago

> We recently went through that cycle faster than we thought possible with regards to a bank which responsible people considered very safe. According to the official record, one of the institutions went from being financially healthy one day to insolvent the next. I believe that narrative to be face-saving, but it is what The System currently is messaging as the truth, so let’s accept it for now. If this is the truth, what unfortunate truths might we learn in the near future? Yeah, this is a good quote, and I find it unbelievable that a bank goes from financially healthy one day to insolvent the next. I also find it far more discomforting than the alternative (that it was financially unhealthy for a while, and many other banks are as well). Is this really the 'official' record?

ru552 4y ago
Not even the Big 4 of banks could handle 20% of their deposits leaving in a matter of hours. No bank can survive a run. Now, in the case of the Big 4 being run on, they are too big to fail so the Fed would just extend them unlimited funds (probably).
- Kye 4y ago
  They would with a 20% reserve requirement. Since that's probably not viable, maybe some changes to the interbank loan system to make emergency loans for this purpose a thing. The FDIC already has wide authority once they're called in, but a system like this could have prevented the need for it. Bigger banks could provide the money to prevent failure of an otherwise solid bank rather than be expected to help clean up the mess later.
  - jnwatson 4y ago
    The FDIC literally just created an emergency loan facility. I don’t see why a 20% reserve requirement isn’t viable.
Laremere 4y ago
Bank runs killing healthy banks hadn't happened in nearly living memory, but it used to be a thing. Before 1933, if you heard your bank was unhealthy, you'd run to the bank to take out all your money before it vanished. So even a bank with a positive net assets and large liquidity could fail. All it took was a rumor causing a bank run that exceeded the liquidity. This is why the FDIC was formed: to stop rumors causing bank runs. Since the average person knows their deposits are insured, your money isn't going anywhere, so theirs no need to do a bank run. What failed here is that a group of uninsured depositors did an old fashion bank run. That's why the FDIC announced early that everything was covered: to very clearly telegraph that the bank run was unnecessary, and you shouldn't be doing them.

JumpinJack_Cash 4y ago

There need to be a separation between funds transaction and investing. Just like the separation between Church and State or Investment Banking and Commercial Banking. Currently there isn't because you are forced to invest if you want to be able to transact. As a matter of fact the figure you see in your checking account is expressed in dollars but that is false because those are IOUs from the bank exressed in dollars. You are defacto investing in the loan portfolio of your commercial bank. It's a very different thing. Maybe CBDC will allow all of us to 'bank with the Fed' so we will know for sure that those dollars are real and not being put to work in any way , shape or form.

konne88 4y ago

He seems to say that the fractional reserve system is the only way society can work. But is that actually true? Quite a few banks (e.g. Brex) now allow you to keep your money in a money market fund, which invests in short term US treasuries that are protected by the full faith and credit of the US government. Importantly, in this setup, you own all the assets and the bank just acts as a custodian. And you tend to get better interest. That just seems so much saner than the bank being allowed to invest your money in risky and illiquid assets, and then we just hope that those investments don't lose too much money, or that a lot of people don't want to withdraw their money all at once.

KaiserPro 4y ago
A traditional bank used to take people's deposits and loan them to other for a fee. the fee would then be returned on aggregate to depositors less the cost of business and profit. this is so called fractional reserve banking. But that doesn't really provide that much interest to depositors, in this age of loose money supply. So there are more exotic functions that "investment" banks fiddle with. Ie trading on the stock market (regulated betting) buying companies, and trading on futures and other pure bets. The problem is that banks are bigger, and have more depositors. So when one pops, other go because they are all doing the same shady shit to make profit. In the UK there are still a few building societies that offer traditional, boring, consumer banking and mortgages. But they are now large national behemoths. But to your point, Brex is a payment manager/facilitator. Its not really offering banking, its more a service to manage expenditure. This might seem like pedantry, but its different enough to make the point.
- konne88 4y ago
  I would disagree that Brex (and many others in the space) aren't offering banking. I can deposit money, I can withdraw it, I have a credit card, I earn interest, etc, they seem to offer everything a traditional bank would. To your point about risky investments, like stocks, I agree that that's very sketchy. But I think even very prudent banks that don't invest in stocks etc still take on a lot of risk, like we see with the bank collapses caused by the high interest rates these days.

bubbleRefuge 4y ago

There is allot of financial illiteracy regarding the banking system. For example, heard an NPR reporter this morning talking about a bank not having money to loan because of depositors fleeing. These are vestiges of the Gold standard. There is no loanable funds market. That is, the funding for loans does not come from deposits. It comes from thin air. Banks create loans which then become deposits. So called "Bank Money" . In order to create loans and stay in the lending business, banks are required to have certain levels of capital. * The Fed has control of quantity of money . No. The Fed controls the direction of interest rates via interest rate policy or simply put the Fed determines the price of money.

dancingvoid 4y ago
I’ll add that the reserve requirement is currently zero. https://www.federalreserve.gov/monetarypolicy/reservereq.htm https://www.federalreserve.gov/monetarypolicy/reservereq.htm
- zhte415 4y ago
  It might be worth adding that regulatory capital requirements are not zero: https://www.federalreserve.gov/publications/large-bank-capital-requirements-20210805.htm https://www.federalreserve.gov/publications/large-bank-capit...
vishnugupta 4y ago
+1. To add, the vast amount of money that's circulating is created by banks. As I keep harping, refer to this article by BoE for details. https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/money-creation-in-the-modern-economy https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/m...
anononaut 4y ago
I'll add that approximately 97% of US dollars are created in this way. https://positivemoney.org/how-money-%20works/how-banks-%20create-money/ https://positivemoney.org/how-money-%20works/how-banks-%20cr...
4y ago

zhte415 4y ago

The article does something it shouldn't do: Conflate short term interest rates with holding 10 year treasuries. At least compare like for like. The yield curve has moved up, but not by the 4% in the article, and 'up' compared to.. quantitative easing time. From https://home.treasury.gov/resource-center/data-chart-center/interest-rates/TextView?type=daily_treasury_yield_curve&field_tdr_date_value=2019 https://home.treasury.gov/resource-center/data-chart-center/... 2023-03-14: 10Y: 3.64 2021-03-12: 10Y: 1.64 2019-03-14: 10Y: 2.63 2017-03-14: 10Y: 2.60 2015-03-13: 10Y: 2.13 2013-03-14: 10Y: 2.04 2011-03-14: 10Y: 3.36 2009-03-14: 10Y: 2.89 2007-03-14: 10Y: 4.53 2005-03-14: 10Y: 4.52 2003-03-14: 10Y: 3.72 2001-03-14: 10Y: 4.84 > We went multiple years without a bank failure, of any size, in the United States. Because short term funding has been next to free. > The losses banks have taken on their assets are real. They're not real. That's entirely the point. They're financial assets that are locked in to fixed rate returns. If the assets were real, they'd be variable rate. Like the chicken feed that the author points out is an input to the cost of an egg. The variable chicken feed costs feed into the variable price of an egg. When chicken feed costs increase but you're stuck selling the eggs at a fixed price, you have a problem. Risk doesn't disappear, at best it gets mitigated or bought for the value it provides. When mortgages have fixed interest rates, the interest rate risk needs to go somewhere.

vishnugupta 4y ago
> We went multiple years without a bank failure, of any size, in the United States. This is objectively false, unless by "multiple years" he means 2 years. The data is out in the public[1] so why not do some basic research before putting out claims like that? Basic mistakes like this makes me question rest of the article and the author's grip on the subject. https://www.fdic.gov/bank/historical/bank/ https://www.fdic.gov/bank/historical/bank/
- zhte415 4y ago
  Indeed.
- swores 4y ago
  To be pedantic, calling two years "multiple years" may be a bit misleading, but it's not a mistake considering multiple years literally means "two or more years".

lordnacho 4y ago

As a former trading desk guy I struggle to see how the system allows things to be marked-to-cost. Or rather, why is it that we allow a bank to not mark-to-market a security for which there is a liquid market? Allowing the bank to pretend it has more assets than it actually has seems to be an invitation to hide risk. If they had to MTM their underwater bonds, they would would have been pushed to raise capital earlier, or they would have cut their losses earlier. It should be straight up "I have these deposit liabilities, I have this book of assets, oops, my assets are down a bit, lets do something about it". Instead of "I'm gonna run the gauntlet and hope the business survives until these bonds come in".

echion 4y ago
> why is it that we allow a bank to not mark-to-market a security for which there is a liquid market? Because at maturity, the bank gets back its money. So it is perfectly valid to say "in ten years, this $100m bond is worth $100m...and I intend to hold it for ten years, so it's worth $100m [equivalent] today". The "I intend to hold it" is the relevant part of the valuation, though.
- SilasX 4y ago
  The problem, though, is that it's not necessarily 100% up to them whether they'll hold it to maturity, since withdrawals can force them to liquidate it. It seems like they should have a ruling forcing the use of some formula that factors in this possibility.
- tnel77 4y ago
  Maybe both metrics would be useful. “If we had to sell today, this is our situation. If these bonds are held to maturity, this will be our situation.” Seems like that would allow an investor to see the state of the bank more clearly.
  - echion 4y ago
    Definitely. And SVB's financial reporting / balance sheet showed this problem beforehand, AIUI.

daydream 4y ago

> The losses banks have taken on their assets are real. They already happened. They are survivable if banks remain liquid. But… they aren’t real yet? They haven’t been realized. If held to maturity they will be paid back in full. Which I know the author is fully aware of. So I don’t understand this point. > I would suggest one has at least one backup financial institution. If one hypothetically does not, I would observe that opening bank accounts rounds to free. Thousands of perfectly good financial institutions exist. Some people have investment accounts with brokerages like Fidelity or Schwab. Many brokerages (including the two mentioned) offer cash management accounts. They offer deposit insurance similar to FDIC and will give you tools similar to checking accounts. Debit cards, checks, bill pay, etc. They can be excellent backup accounts that don’t add the additional overhead (however small) of yet another company to deal with.

echion 4y ago
> > The losses banks have taken on their assets are real. They already happened. They are survivable if banks remain liquid. > But… they aren’t real yet? [...] So I don’t understand this point. If people withdraw their deposits, the bank will have to deliver the money somehow...by selling the assets that have lost money. So the point is that although, if nobody withdraws, the losses are survivable, if enough people withdraw, the losses are not survivable. As soon as depositors realise this situation, they will withdraw their money. So that's the problem.
- daydream 4y ago
  Yes, if the bonds must be sold to cover withdrawals then the losses become realized (real) at that point. But not before.
  - bostik 4y ago
    From all the information I've gathered, there is an unstated aspect to this. If any number of HTM bonds are sold to cover withdrawals, then all of them must be revalued and losses realised on the whole lot.

ajb 4y ago

On the recommendation of maintaining accounts with multiple banks, readers at least in the UK should be aware that for the purpose of compensation, the important part is not the brand name, but whether the banks are part of the same group. This isn't so obvious so you need to check the FCSS website if they do.

benevol 4y ago

Basically, we "simply" need the "Next-gen Bitcoin" - userfriendly, fast, lean in resources.

127 4y ago

Liquidity coverage ratios EU vs. US: US has been stagnant for a decade, while EU has almost doubled. (Lobbyist casts money against government. It's very effective.)

WorkerBee28474 4y ago

"This was complicated by some banks finding it surprisingly difficult to add numbers quickly… We have a report of Friday outflows, but it gets crunched by an ETL job which only finishes halfway through Saturday, and Cindy who understands all of this is on vacation, and… and eventually very serious people said Figure Addition The #*(%#( Out And Call Me Back Soonest" As someone who has written ETL jobs for banks, this hits home.

SilasX 4y ago
I thought financial companies had regulations against bottlenecks like that? Something like, every employee has to have their access turned off for one uninterrupted week, to ensure they didn't leave something in that depends on them or they're controlling a (fraudulent) process no one else knows about?
- WorkerBee28474 4y ago
  Yes, the week (two weeks, IME) is a thing. As are contractor term limits. They reduce key man risk and keep knowledge internal. Still, it's possible to write a script to do something and then just not touch it for years. It keeps chugging away, and the mental model of how it works is lost to time or employee churn, and nothing goes wrong enough that anyone has to dig in and really understand it again.
  - Scoundreller 4y ago
    Also doesn’t help when they never documented a thing and nobody cracked down on that because “it would slow down their unit’s productivity”.

IntFee588 4y ago

Not to be conspiratorial, but the situation is much worse than the fed is letting on. "Trying to forestall" might be optimistic. https://www.bloomberg.com/news/articles/2023-03-12/us-moves-to-help-depositors-offer-bank-backstop-in-wake-of-svb#xj4y7vzkg https://www.bloomberg.com/news/articles/2023-03-12/us-moves-... https://archive.is/FMuYW https://archive.is/FMuYW (archive) Think of what this means, and how precarious a position the nation's banks must be in for the fed to take actions like this. We needed to reimplement Glass-Steagall yesterday.

jijji 4y ago

banks investing in bonds that then get reduced in value, turning into losses, as the fed increases its rates seems like a bad investment from the very beginning... every month there are property tax auctions for property that happens every where in every state in different ways, and I remember when I used to go there in person before they moved to the online method in my state, I would meet with people who worked at specific retail banks and they would invest cash into property as long as the bidding met a margin of 33% of whatever the value of the property might have been worth at that time... That's a pretty safe bet, as property doesn't degrade the same way that a bond, stock or investment loan might degrade if someone defaults on it... I'm not sure why people like SVB would be not doing the same thing maybe it's too tricky for them to figure out or they're happy investing most of their money into wineries which apparently is what has happened.... not sure but it seems like when you're sitting on a pile of cash there's better ways to invest your money with a lot better returns....

Redoubts 4y ago

Not gonna lie, I feel like I've been reading this like a Rudin book, going back and over each paragraph again. This is probably the companion report to have on hand while reading: https://www.fdic.gov/analysis/quarterly-banking-profile/index.html https://www.fdic.gov/analysis/quarterly-banking-profile/inde... In particular * Chart 8. Number and Assets of Banks on the "Problem Bank List" * (Chart 13.) Unrealized Gains (Losses) on Investment Securities Sadly, "Results are published approximately 55 days after the end of each quarter (i.e., 55 days after March 31, June 30, September 30, and December 31)." So there's nothing super new. Bit it strikes me that Chart 13 is going bonkers on unrealized losses, but Chart 8 isn't quite matching the same (assets in problem banks, and # of problem banks is going down since rate hikes??). Really wanna see that number for 2023Q1. But the quote > about a quarter of all equity in the banking sector has been vaporized by one line item. Struck me as pretty wild.

dorianG4 4y ago

Time to disrupt banking by making it go the way of rotary phones. Foisting belief someone like paulg is worth billions given cherry picked math that makes it so does not make paulg special. It’s traditional political corruption embedded in the minds of inept and infirm, shell shocked by war, made paranoid by cold wars, that makes the rich rich. It’s policing society to make us all believe Elon or Billy G are wealthy. Propaganda and information shaping from war era government research was gifted to university and converted into behavioral economics, advertising, and marketing programs. Americans are oblivious they’re just eating their own farts and BS.

Redoubts 4y ago

> This realization creeped in around the edges with e.g. Byrne Hobart on February 23rd noting that one of the U.S.’s largest banks was recently technically insolvent but almost certainly in a survivable way. If you’re wondering what this was, presumably this is the moneyshot of the paywall blog https://twitter.com/byrnehobart/status/1628779894183272452 https://twitter.com/byrnehobart/status/1628779894183272452

tln 4y ago

"Over the last week, three U.S. banks have failed." Wait, 3? I thought it was only 2 (SVB and Signature Bank).

bo1024 4y ago
Silvergate, I assume

ouid 4y ago

If you have over 250k in a bank, you might as well withdraw it and buy treasury bonds yourself. You'll get a better return, and you'll have essentially the same risk profile.

meghan_rain 4y ago

In defense of bailouts, we need to acknowledge the systemic risks that a failing bank can pose to the broader economy. If we let a major bank collapse without intervention, the consequences could be far-reaching and have negative ripple effects throughout the financial system. By stepping in and providing a bailout, the government helps to maintain confidence and stability, ensuring that the entire system doesn't collapse under the weight of panic and mistrust.

GrinningFool 4y ago
Was this ChatGPT?
- meghan_rain 4y ago
  No, why? Or how even? Is there an Hackernews API for it?
  - GrinningFool 4y ago
    Thanks - I was curious because the 'feel' of it was very similar that what ChatGPT generates for argumentative writing.

4gotunameagain 4y ago

Given the fact that the losses will not be realised unless depositors massively withdraw (i.e bank run), what is the role of media (including youtube, blogs etc) in this ? If we didn't have a system which deliberately amplifies catchy headlines such as "banks are failing" wouldn't that bank run be avoided ?

tfehring 4y ago

> Banks engage in maturity transformation, in “borrowing short and lending long.” Deposits are short-term liabilities of the bank; while time-locked deposits exist, broadly users can ask for them back on demand. Most assets of a bank, the loans or securities portfolio, have a much longer duration. > Society depends on this mismatch existing. It must exist somewhere. The alternative is a much poorer and riskier world, which includes dystopian instruments that are so obviously bad you’d have to invent names for them. I guess I'll dispute this. It is useful that this mismatch exists, since it (1) lowers the cost of long-term borrowing for mortgagors, businesses, and governments and (2) lowers the (direct and/or opportunity) cost of holding cash. But I don't think society is dependent on this mismatch, and I don't think the alternative would be anywhere near as bleak as Patrick suggests. If bank regulators changed capital requirements to require banks to fully back deposits with cash equivalents, long-term borrowing would be a lot more expensive, but the market would still clear. There's already plenty of demand for safe long-term debt, and that demand would only increase as long-term interest rates went up. E.g., if checking accounts paid -2% interest and CDs paid 10%, lenders would put less money in checking and more in CDs, even if it meant they would have to sell the CD at a discount if they needed liquidity. Of course, the US government will take any and every opportunity it can get to indirectly subsidize mortgages, so this is pretty moot in practice.

Raidion 4y ago
If I have a CD, that CD is often not time locked, it just has a penalty for early withdrawal (X months of interest or whatever). If I don't trust that the bank can give me the money, it doesn't matter if it's in a CD or checking account, I'm going to pull it out (screw the gains) and the liquidity problem still exists. The extra months/year of interest don't stop a bank run. This is why I think this can really only be solved by government and regulation. Government regulation on the quality of investments to make sure that they're really worth X% long term. If there is a bank run, government needs to step in with the government liquidity, and say "customer gets their money, we get your assets". Of course, brokering an auction for these amongst other banks is the preferred approach. There should be a fairly free market around what leverage banks are willing to take on as long as the investments that back it are regulated and solid. If a company wants to expose their shareholders to risk by keeping high levels of leverage, that's their problem, but you can't punish depositors for the mistakes of the bank. Not saying we shouldn't have any regulations in this space, but as long as mistakes impact shareholders and not depositors or taxpayers, I think everyone is happy.

gumby 4y ago

As an account holder I don't even care about the safety of my bank, and never have (I have never kept anything like $250K, much less more, in a current account for more than a day or two either for personal or business accounts). So it makes no difference to me if the bank sector crashes or not. To the degree I care about sectors at all, I'm more likely to be concerned about railroad stocks (would interfere with goods) or automobiles, even though I don't own any any more (employ a lot of people).

jnwatson 4y ago
So you’re making the argument that because you don’t personally care, it doesn’t matter?
- gumby 4y ago
  Good question. My example of a car factory closing is also one where I don't personally care but do care about the jobs loss and (less so but for that matter) the size of its impact on the economy. There are many such. But banks specifically are no longer that important. The US federal government now backstops all deposits, as they have (for almost a century) underwritten all residential mortgages. I don't think that's a bad thing at all; overwhelmingly most people's interaction with the bank is a current account (checking/savings); and overwhelmingly most peoples' liquidity is less than the FDIC limit, not that that limit may be meaningful any more. The development of the FDIC was a crucial and early product of the New Deal and stabilized the system significantly. Thus, for this crucial function, I couldn't care less if banks themselves succeed or fail. Like food safety, judging the risk profile of a deposit taking institution is beyond the capability of most people to evaluate. But what about the residual functions of banks? They are mostly unbundled at this point. You don't need to get a credit card from your bank and most people carry such cards that don't come from their bank. In consumer loans (mortgages and small business loans) a local bank arguably knows the local market better than a megabank, and credit unions demonstrate this. But these days banks operate more like mortgage origination companies since the mortgages are bundled into MBSs. That's a function that need not be provided by banks at all! Instead have them be sold by brokerages the way insurance is sold. Safe deposit boxes, to the point they still exist, are outside banks these days. And so on. Of course there are jobs, but retail banks only employ a couple of million in the US (about 20% of the whole financial sector, which is smaller than manufacturing, constuction, and other fields). An unbundling as I'm talking about would probably not affect employment much. So yes, I don't care much about the banking sector at all.

coryfklein 4y ago

Money quote: > Regulators then heard the numbers, did a bit of modeling in Excel, and then went into wartime execution mode. Regulators have, of course, not declared this war, because it is a war on the public’s perception of reality, and to declare war is to surrender. SO MUCH of this drama is really a war on perception more than anything else. Banks being "underwater" on 10 year treasuries is only a problem *if everyone thinks its a problem* and if everyone just goes about their daily business ignoring this story, then after 10 years all the bonds mature and nobody is the wiser.

every 4y ago

Long, entertaining and informative...

NovemberWhiskey 4y ago

>The U.S. banking system lost $620 billion. Six hundred twenty billion dollars. That is a loss no less real than if money had been loaned out to borrowers who defaulted Uh, no. That's just nonsense. If you lend money to a borrower who defaults, you immediately lose your principal and future interest, subject to whatever recovery rate you achieve. It's an actual, realized loss. Banks have masses of unrealized losses on their long-dated Treasury holdings, but if you hold those bonds to maturity, you're going to get your principal and your interest. It should be pretty clear those are Not The Same. The clue is in the word "realized", right?

peripitea 4y ago
The term "real" is overloaded. The author is clearly using a meaning here that is different from the one you are using, but that is intentional. His usage makes sense in the context of that particular segment of his writing. From an equity perspective, those losses are very real whether they are realized or not.
- chordalkeyboard 4y ago
  As Schumpeter predicted, the complexity of our economy is has outstripped our language and consequently our ability to understand it.
colinsane 4y ago
now we’re getting into weird philosophical questions: if every bank had sold these treasuries (realizing the loss) and used the proceeds to buy similar treasuries, their portfolio would be basically the same: same present value (obviously), and same to within a few percent future cashflows. at any layer above the balance sheet, these two worlds are difficult to distinguish. so what makes one “real” and the other not?

lliamander 4y ago

So, I'm a layman here, but I feel like he makes narrow banking (i.e. full-reserve or maturity-matched banking) sound more dangerous than it probably is, for instance: > Take an exploding mortgage, the only way to finance homes in a dystopian alternate universe. It’s like the mortgages you are familiar with, except it is callable on demand by the bank. If you get the call and can’t repay the mortgage by the close of the day, you lose your house. What did you do wrong to make the mortgage explode? Literally nothing; exploding mortgages just explode sometimes. Keeps you on your toes. It sounds to me like this could simply be solved with mortgage insurance. Granted, that insurance might be more expensive than it is now, but when a mortgage explodes you end up owning your house outright. Seems like not a bad deal. To reduce their risk (and consequently the cost of the insurance) the insurer would probably take on responsibility for finding alternate lending in the case of the loan being called, and the home owner would never hear about it until after the new lending was secured. I'm sure there would be other problems, but it is not at all clear to me that those problems are worse than the ones we have now.

fwlr 4y ago
An exploding mortgage wrapped in mortgage insurance has exactly the same shape as a conventional mortgage from a fractional reserve bank. The insurer would be doing something like “fractional reserve insurance”, i.e. only holding some fraction of the total insurance payout it’s liable for, and you’d have the same problems. If you legislate that insurers can’t do fractional reserve insuring, the cost of insurance would go up so high that the only people who could afford insurance are people who could plausibly afford to buy the house outright. The reason “fractional reserves” keep creeping back in whenever you try to offer mortgages to more than just rich people is because fractional reserves are a way to invent money out of thin air, and you have to invent money out of thin air because the not-rich people buying the houses do not have the money to afford the house (but they can make that money if they focus on it for 10 or 20 or 30 years). You often see people demand to know why banks are allowed to do fractional reserve banking. And this is the reason: it lets banks offer mortgages and credit cards to most of the public. Most people don’t have much money, but do have a lot of future earnings. Giving people access today to large chunks of their future earnings is a big social good but it fundamentally requires money to be invented from thin air, and that invented money is then gradually filled in with real money over time as the earnings come in. So somebody somewhere has to be inventing trillions of dollars. This is risky. The capitalist way is to have private entities who profit when they manage their risk well, since that provides the strongest incentives for competency. And the democratic-capitalist way is to heavily regulate those private entities, eating some portion of their profit to provide some extra value to the public.

jscipione 4y ago

The Federal Funds Target Range chart shows how President Trump was targeted by partisan forces at the fed. Interest rates went up to slow the economy just as soon as Trump was inaugurated in 2016 so that it would appear that President Trump's economic plan was failing. Yet after suffering through two consecutive years of the destruction of the US economy under Joe Biden it is clear that President Trump's economic plan was working well, and that he was railroaded by the Fed that has been weaponized against the American people.

stevedekorte 4y ago

"Society depends on this mismatch existing. It must exist somewhere." I see no reason why bank deposits can be fully backed, and ppl who choose to can buy into bonds funds separately. For example, only ~6% of gov bonds are held by banks: https://www.statista.com/statistics/201881/holders-of-the-us-public-debt/ https://www.statista.com/statistics/201881/holders-of-the-us...