7 ms·

Bring back Glass Steagall and stop all this madness. Regular banking should be boring, not all that profitable and separated from speculation.

by jgeada 4y ago

toomuchtodo 4y ago
My hot take is that demand deposits should be only invested in (EDIT: short dated, thx codexb) US treasuries (a la Narrow Bank), backed by the Federal Reserve and if a bank (or anyone) wants to lend, they can issue bonds to borrow versus the Rube Goldberg mechanism we currently have of deposits, FDIC, and then the Fed still providing an unlimited guarantee anyway. The bond market already is built to handle this, and we should stop treating demand deposits as this Schrödinger collateral. If you want to insure lending, insure the lending directly, not with consumer and business cash. I know there are no simple solutions to complex problems, but this all seems very unnecessary when you pull the system apart conceptually. > codexb
- deleted 4y ago
  [deleted]
- rolobio 4y ago
  [flagged]
- lostsoil 4y ago
  If that happens start preparing to pay money(instead of receiving interest) for your demand deposits.
  - toomuchtodo 4y ago
    Most people do not receive interest in their deposit accounts (or its minimal) because banks keep the spread between paying depositors nothing and the interest the Fed pays on reserves held at the central bank. A Narrow Bank (which the Fed won't approve [1]) would cover their costs with that same spread. Failing that, one can invest in short dated government securities (US treasuries) directly. "All Roads Lead To Treasuries" if you will. If someone is going to gamble your money, might as well be the US government (treasuries are considered "risk free") vs your rando bank executive leadership team (the CEO of SVB collected ~$9.9 million in 2022 total comp for overseeing and approving suboptimal duration risk mgmt decisions). If banking is to be boring and minimally profitable, that leads us to the idea that it should be a utility, not a risk taking venture, no? And if the Fed interest is covering the costs of banking, aren't we already all paying that cost as taxes? [1] https://www.chicagobooth.edu/review/safest-bank-fed-wont-sanction https://www.chicagobooth.edu/review/safest-bank-fed-wont-san...
  - soperj 4y ago
    that already happens for many.
- codexb 4y ago
  By all accounts, most of their demand deposits were invested in US treasuries. Those treasuries are just worth less now because of interest rate hikes and so even if they didn't have to do a fire sale on billions in treasuries, it still wouldn't be enough to cover deposits. There are no completely safe investments.
- opportune 4y ago
  IMO the Fed should provide publicly available CBDC banking (implemented as a narrow bank with no ROI and no risk, just a balance in a fed table) and make it easy to move that money into treasuries or to integrate with eg visa/banks for payments. Then commercial banking becomes a competition of who can best manage risk/return on deposits, provide a good UX, integrate with other value add financial services, have the best risk models for lending, etc. I just don’t see a point in a banking system where my deposits are going to be stored in something dead-simple like treasuries with the interest skimmed off, when I could easily do that myself. The current system where I as a normal (not off-grid or doing some fringe thing like going all cash) consumer have to trust at least one bank with my money, only to get 0% interest in my checking and be exposed to risk, does not seem fair.
  - toomuchtodo 4y ago
    I think there is some nuance around CBDC vs simple "accounts" but I agree with your thesis, as do others, on issuing deposit accounts directly from the Fed. https://rooseveltinstitute.org/wp-content/uploads/2021/08/GDI_Central-Banking-For-All_201806.pdf https://rooseveltinstitute.org/wp-content/uploads/2021/08/GD... (Central Banking for All: A Public Option for Bank Accounts By Morgan Ricks, John Crawford, and Lev Menand* | June 2018)
globalreset 4y ago
Current global dollar-based financial system can only be sustained by an ever-increasing leverage, that allows rolling over the ever-increasing pile of dollar-denominated debt. Since 1971 everything (all relevant policies) were geared towards increasing the amount of debt in the system. It's no surprise that student debt, mortgage debt, credit card, auto loans and whatever else were ballooning. Regular banks not making risky bets would go against it, so it will not be done.
andrewmutz 4y ago
Would Glass-Steagall have prevented the SVB failure?
- tptacek 4y ago
  I don't think so. SVB wasn't an investment bank, was it?
- NovemberWhiskey 4y ago
  No; Glass-Steagall allowed commercial banks to own investment-grade bonds.
giantg2 4y ago
Would that have made the difference? I thought that restricted banks to "safe" investments, which SVB's likely were. It's simply that they couldn't extract enough liquidity from that position to cover the run. Or were there other restrictions?
- rolobio 4y ago
  SVB failed because they bought government bonds, typically the most secure thing. The problem is the Federal Reserve raised interest rates, which made the bonds pointless. They Fed will supposedly keep raising rates, which I expect will make more banks fail. After all, if the most-secure thing (bonds) is not secure, what is?
  - giantg2 4y ago
    I assume most banks should be going after shorter term bonds to adjust with those changes. Wasn't the problem with SVB that they had too much money in long term bonds and MBS? So they were locked into really low rates (based on today's srandards), which is fine if they held to maturity, but they couldn't hold due to the withdrawals and then nobody wants to buy those low rate securities for them to exit without losing too much.
  - GabeIsko 4y ago
    It's really important to make this distinction: those bonds were, and still are safe investments, guaranteed by the full faith and credit of the United States Government. The issue is that you have to wait for them to mature. So SVB had too much of their depositor's money tied up in long term investments. I don't want to turn this into another tutorial about pricing works on the bond market, but the issue isn't that they invested in bonds, it's that they made a bet about the Federal reserve reversing course and not hiking interest rates. This is really stupid - the federal reserve has been saying over and over again that they will not be lowering rates any time soon.
    - matwood 4y ago
      And they also had a bank run. I think it was Stratechery that mentioned everyone knew the issue SVB was in for months. Had there been no bank run, SVB would possibly have been fine. With that said, it's good they got punished for poor decisions given their depositor profile.
tptacek 4y ago
By all accounts, SVB's banking was boring. They borrowed short and lent long, and their long bets were very safe. The problem wasn't that they too exciting bets; its that they played the standard playbook incompetently.
- kurthr 4y ago
  They actually let their interest rate hedges expire in '22 (while they had no CRO). That was insane. Every banker knows about duration/rate risk so this is really next level incompetence. The best spin I can think of is that they assumed HTM was sufficient to prevent a bank run, but it wasn't.
  - toomuchtodo 4y ago
    If the comment below is accurate, HTM assets can not legally be hedged against interest rate risk. https://news.ycombinator.com/item?id=35130813 https://news.ycombinator.com/item?id=35130813
    - kurthr 4y ago
      Maybe remarking them that way let them get rid of the expensive hedges? That would be even more damning. Edit: I went looking and PWC has a nice overview... 6.4.3.4 Hedging held-to-maturity debt securities ASC 815-20-25-12(d) provides guidance on the eligibility of held-to-maturity debt securities for designation as a hedged item in a fair value hedge. ... The notion of hedging the interest rate risk in a security classified as held to maturity is inconsistent with the held-to-maturity classification under ASC 320, which requires the reporting entity to hold the security until maturity regardless of changes in market interest rates. For this reason, ASC 815-20-25-43(c)(2) indicates that interest rate risk may not be the hedged risk in a fair value hedge of held-to-maturity debt securities. https://viewpoint.pwc.com/dt/us/en/pwc/accounting_guides/derivatives_and_hedg/derivatives_and_hedg_US/chapter_6_hedges_of__US/64_hedging_fixedrate_US.html https://viewpoint.pwc.com/dt/us/en/pwc/accounting_guides/der...
    - kragen 4y ago
      i saw that, but then i also saw matt levine saying they should have hedged their htm assets against interest rate risk, which presumably he wouldn't have said if it were illegal
SilasX 4y ago
Buying long-term Treasurys and booking them as high-grade capital (whatever they call it) was legal under GS too, and was the cause of SVB's failure. SVB was killed by the boring part, not the startup banking risk.
- GabeIsko 4y ago
  Large venture capitalist depositors demanding to pull out billions of dollars because of relatively minor liquidity risk definitely contributed to the bank run though.
  - SilasX 4y ago
    That's irrelevant to the topic of this subthread, about Glass-Steagall and the regulations that would have prevented this.

Bring back Glass Steagall and stop all this madness. Regular banking should be boring, not all that profitable and separated from speculation.

by jgeada 4y ago

Bring back Glass Steagall and stop all this madness. Regular banking should be boring, not all that profitable and separated from speculation.

toomuchtodo 4y ago

My hot take is that demand deposits should be only invested in (EDIT: short dated, thx codexb) US treasuries (a la Narrow Bank), backed by the Federal Reserve and if a bank (or anyone) wants to lend, they can issue bonds to borrow versus the Rube Goldberg mechanism we currently have of deposits, FDIC, and then the Fed still providing an unlimited guarantee anyway. The bond market already is built to handle this, and we should stop treating demand deposits as this Schrödinger collateral. If you want to insure lending, insure the lending directly, not with consumer and business cash. I know there are no simple solutions to complex problems, but this all seems very unnecessary when you pull the system apart conceptually. > codexb

deleted 4y ago
[deleted]
rolobio 4y ago
[flagged]
lostsoil 4y ago
If that happens start preparing to pay money(instead of receiving interest) for your demand deposits.
- toomuchtodo 4y ago
  Most people do not receive interest in their deposit accounts (or its minimal) because banks keep the spread between paying depositors nothing and the interest the Fed pays on reserves held at the central bank. A Narrow Bank (which the Fed won't approve [1]) would cover their costs with that same spread. Failing that, one can invest in short dated government securities (US treasuries) directly. "All Roads Lead To Treasuries" if you will. If someone is going to gamble your money, might as well be the US government (treasuries are considered "risk free") vs your rando bank executive leadership team (the CEO of SVB collected ~$9.9 million in 2022 total comp for overseeing and approving suboptimal duration risk mgmt decisions). If banking is to be boring and minimally profitable, that leads us to the idea that it should be a utility, not a risk taking venture, no? And if the Fed interest is covering the costs of banking, aren't we already all paying that cost as taxes? [1] https://www.chicagobooth.edu/review/safest-bank-fed-wont-sanction https://www.chicagobooth.edu/review/safest-bank-fed-wont-san...
- soperj 4y ago
  that already happens for many.
codexb 4y ago
By all accounts, most of their demand deposits were invested in US treasuries. Those treasuries are just worth less now because of interest rate hikes and so even if they didn't have to do a fire sale on billions in treasuries, it still wouldn't be enough to cover deposits. There are no completely safe investments.
opportune 4y ago
IMO the Fed should provide publicly available CBDC banking (implemented as a narrow bank with no ROI and no risk, just a balance in a fed table) and make it easy to move that money into treasuries or to integrate with eg visa/banks for payments. Then commercial banking becomes a competition of who can best manage risk/return on deposits, provide a good UX, integrate with other value add financial services, have the best risk models for lending, etc. I just don’t see a point in a banking system where my deposits are going to be stored in something dead-simple like treasuries with the interest skimmed off, when I could easily do that myself. The current system where I as a normal (not off-grid or doing some fringe thing like going all cash) consumer have to trust at least one bank with my money, only to get 0% interest in my checking and be exposed to risk, does not seem fair.
- toomuchtodo 4y ago
  I think there is some nuance around CBDC vs simple "accounts" but I agree with your thesis, as do others, on issuing deposit accounts directly from the Fed. https://rooseveltinstitute.org/wp-content/uploads/2021/08/GDI_Central-Banking-For-All_201806.pdf https://rooseveltinstitute.org/wp-content/uploads/2021/08/GD... (Central Banking for All: A Public Option for Bank Accounts By Morgan Ricks, John Crawford, and Lev Menand* | June 2018)

globalreset 4y ago

Current global dollar-based financial system can only be sustained by an ever-increasing leverage, that allows rolling over the ever-increasing pile of dollar-denominated debt. Since 1971 everything (all relevant policies) were geared towards increasing the amount of debt in the system. It's no surprise that student debt, mortgage debt, credit card, auto loans and whatever else were ballooning. Regular banks not making risky bets would go against it, so it will not be done.

andrewmutz 4y ago

Would Glass-Steagall have prevented the SVB failure?

tptacek 4y ago
I don't think so. SVB wasn't an investment bank, was it?
NovemberWhiskey 4y ago
No; Glass-Steagall allowed commercial banks to own investment-grade bonds.

giantg2 4y ago

Would that have made the difference? I thought that restricted banks to "safe" investments, which SVB's likely were. It's simply that they couldn't extract enough liquidity from that position to cover the run. Or were there other restrictions?

rolobio 4y ago
SVB failed because they bought government bonds, typically the most secure thing. The problem is the Federal Reserve raised interest rates, which made the bonds pointless. They Fed will supposedly keep raising rates, which I expect will make more banks fail. After all, if the most-secure thing (bonds) is not secure, what is?
- giantg2 4y ago
  I assume most banks should be going after shorter term bonds to adjust with those changes. Wasn't the problem with SVB that they had too much money in long term bonds and MBS? So they were locked into really low rates (based on today's srandards), which is fine if they held to maturity, but they couldn't hold due to the withdrawals and then nobody wants to buy those low rate securities for them to exit without losing too much.
- GabeIsko 4y ago
  It's really important to make this distinction: those bonds were, and still are safe investments, guaranteed by the full faith and credit of the United States Government. The issue is that you have to wait for them to mature. So SVB had too much of their depositor's money tied up in long term investments. I don't want to turn this into another tutorial about pricing works on the bond market, but the issue isn't that they invested in bonds, it's that they made a bet about the Federal reserve reversing course and not hiking interest rates. This is really stupid - the federal reserve has been saying over and over again that they will not be lowering rates any time soon.
  - matwood 4y ago
    And they also had a bank run. I think it was Stratechery that mentioned everyone knew the issue SVB was in for months. Had there been no bank run, SVB would possibly have been fine. With that said, it's good they got punished for poor decisions given their depositor profile.

tptacek 4y ago

By all accounts, SVB's banking was boring. They borrowed short and lent long, and their long bets were very safe. The problem wasn't that they too exciting bets; its that they played the standard playbook incompetently.

kurthr 4y ago
They actually let their interest rate hedges expire in '22 (while they had no CRO). That was insane. Every banker knows about duration/rate risk so this is really next level incompetence. The best spin I can think of is that they assumed HTM was sufficient to prevent a bank run, but it wasn't.
- toomuchtodo 4y ago
  If the comment below is accurate, HTM assets can not legally be hedged against interest rate risk. https://news.ycombinator.com/item?id=35130813 https://news.ycombinator.com/item?id=35130813
  - kurthr 4y ago
    Maybe remarking them that way let them get rid of the expensive hedges? That would be even more damning. Edit: I went looking and PWC has a nice overview... 6.4.3.4 Hedging held-to-maturity debt securities ASC 815-20-25-12(d) provides guidance on the eligibility of held-to-maturity debt securities for designation as a hedged item in a fair value hedge. ... The notion of hedging the interest rate risk in a security classified as held to maturity is inconsistent with the held-to-maturity classification under ASC 320, which requires the reporting entity to hold the security until maturity regardless of changes in market interest rates. For this reason, ASC 815-20-25-43(c)(2) indicates that interest rate risk may not be the hedged risk in a fair value hedge of held-to-maturity debt securities. https://viewpoint.pwc.com/dt/us/en/pwc/accounting_guides/derivatives_and_hedg/derivatives_and_hedg_US/chapter_6_hedges_of__US/64_hedging_fixedrate_US.html https://viewpoint.pwc.com/dt/us/en/pwc/accounting_guides/der...
  - kragen 4y ago
    i saw that, but then i also saw matt levine saying they should have hedged their htm assets against interest rate risk, which presumably he wouldn't have said if it were illegal

SilasX 4y ago

Buying long-term Treasurys and booking them as high-grade capital (whatever they call it) was legal under GS too, and was the cause of SVB's failure. SVB was killed by the boring part, not the startup banking risk.

GabeIsko 4y ago
Large venture capitalist depositors demanding to pull out billions of dollars because of relatively minor liquidity risk definitely contributed to the bank run though.
- SilasX 4y ago
  That's irrelevant to the topic of this subthread, about Glass-Steagall and the regulations that would have prevented this.