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Matt Levine's Money Stuff talked about this yesterday. I'll post a couple of the relevant paragraphs. > The regulators’ response to SVB — guaranteeing all depo
by lukas099 4y ago
Matt Levine's Money Stuff talked about this yesterday. I'll post a couple of the relevant paragraphs.
> The regulators’ response to SVB — guaranteeing all depositors, but also the Fed’s Bank Term Funding Program to finance other banks’ bond portfolios at par[7] — increases the value of other banks’ optionality, which encourages them to take more risk, because their deposits are safer. (I suppose this is the real moral hazard concern.) And so there should be more regulatory and supervisory changes to tamp down the other banks’ risks.
> [...]
> [T]he post-SVB actions have made bank deposits a lot safer, which is a nice windfall for the shareholders of every other regional bank that has a lot of losses on held-to-maturity securities. And so in exchange for that windfall the regulators should regulate those banks much more strictly, which will make them actually safer (and reduce the government’s exposure to their risks), but will also reduce their profitability.
- em500 4y agoEmeritus a University of Chicago finance professor John Cochrane has been screaming for years that the whole design of more and more regulations combined with all sorts of implicit ex-post creditor insurance is structurally unstable and all but guarantees bank runs and collapses every decade or so. That the only thing that can work is much higher capital (not reserve!) requirements, i.e., a lot higher shareholder equity vs debt on the balance sheet. He mentions that existing bank regulations already number hundreds of thousands of pages, yet the regulators apparently got blindsided by duration/convexity risk which is CFA / MBA finance textbook material. Just like generals, regulators are always fighting the previous crisis.