4 ms·

> You can't have one bank totally safe from bank runs in an environment where every other bank keeps less than 10% of your cash on reserve. This breaks the syst

by Lazare 4y ago

> You can't have one bank totally safe from bank runs in an environment where every other bank keeps less than 10% of your cash on reserve. This breaks the system. Either everyone has to be fractional reserve, or no one can be. That's a somewhat absurd assertion. There's nothing about paying a bank a fee to keep your cash in a safe deposit box which is 1) novel 2) attractive or 3) at odds with a large system of fractional reserve banking. "You can pay some oddball special purpose depository institution in Wyoming to hold onto your money for you, but they're a bit dodgy and have a bunch of weird ties to crypto. And if they lose it, it's not insured by FDIC. Or you can put it in JP Morgan, and they'll pay you interest, and balances up to $250k are insured by FDIC, although realistically JP Morgan is very, very much too big to be allowed to fail, so the odds of those limits very relevant is almost precisely nil." If that choice seems at all tricky to you, much less if your answer is "Custodia", you need to realise what an incredibly tiny minority that places you in. Now, what is a threat to the banking system are narrow banks; for more on that see, eg, Matt Levine a few years ago: https://www.bloomberg.com/opinion/articles/2019-03-08/the-fed-versus-the-narrow-bank https://www.bloomberg.com/opinion/articles/2019-03-08/the-fe... The Fed was pretty clear that they were refusing to allow this business model because it was, in part, too safe. :)

tintweezl 4y ago
A way to do it, not saying this is their model I haven't looked into Custodia at all. But just for the sake of argument, would be to start out capitalized with X amount of cash which would allow 12.5X in deposits to be fully covered. As fees are generated and/or stock issued and sold, more deposits could be accepted. If this model were competing with traditional 10% margin banks, it might well be supported by stockholders due to its ability to withstand runs a priori.
- Lazare 4y ago
  Again though - let's say you do that, and then it turns out that someone has stolen a bunch of the cash - enough to burn through the overcapitalisation. If the bank isn't insured, then depositors end up taking losses, which means that - certainly for people with less than $250k of deposits - this "safe" bank is strictly less safe than a traditional bank. (And realistically, almost certainly less safe for large depsositors too.) So why would you pay money for a strictly inferior experience as a depositor when a traditional bank would pay you? And if the bank is insured, then you've got to cover the insurance fees out of the fees you collect from depositors. And the insurance is presumably either FDIC, or something which is some mixture or less generous and/or more risky (FDIC is backstopped by the US government; Joe's Discount Deposit Insurance Agency...isn't.). But even in the best case it's FDIC, in which case...what's the point? You're exactly as safe as a traditional bank, except you're refusing to make loans, so you have to charge your depositors fees. > If this model were competing with traditional 10% margin banks, it might well be supported by stockholders due to its ability to withstand runs a priori. It is true that while these models have no benefit to depositors, they nominally benefit shareholders, we are going to be wiped out in fewer cases. (Note, though, that a bank with this model can't neccessarilly withstand runs. Let's say a false rumour sweeps through that one of these banks has had money stolen from the vaults. People correctly realise that if this is true, and they're the last ones to withdraw money, there will be nothing left for them, so the race to withdraw first. Unlike a traditional bank, in this case all the deposits can be returned, but now you've got a bank with branches and staff but no depositors and thus no revenue. And the panicked depositors who pulled their money out and put it in some other bank will have no incentive to bring it back now that you've proven you could cover the deposits. Bankruptcy is likely inevitable at this point.) But in any case, sure, given the same risk adjusted return, it's rational to always prefer equity in something like Custodia than a traditional bank! But since there's no benefit to depositors, there's no way a bank could make an equivalent return. And while plenty of investors do want low risk, low return investments, it's hard to imagine any of them taking a flyer on something like Custodia, which is likely to be the exact opposite of that. None of this actually works.

by Lazare 4y ago

tintweezl 4y ago

A way to do it, not saying this is their model I haven't looked into Custodia at all. But just for the sake of argument, would be to start out capitalized with X amount of cash which would allow 12.5X in deposits to be fully covered. As fees are generated and/or stock issued and sold, more deposits could be accepted. If this model were competing with traditional 10% margin banks, it might well be supported by stockholders due to its ability to withstand runs a priori.

Lazare 4y ago
Again though - let's say you do that, and then it turns out that someone has stolen a bunch of the cash - enough to burn through the overcapitalisation. If the bank isn't insured, then depositors end up taking losses, which means that - certainly for people with less than $250k of deposits - this "safe" bank is strictly less safe than a traditional bank. (And realistically, almost certainly less safe for large depsositors too.) So why would you pay money for a strictly inferior experience as a depositor when a traditional bank would pay you? And if the bank is insured, then you've got to cover the insurance fees out of the fees you collect from depositors. And the insurance is presumably either FDIC, or something which is some mixture or less generous and/or more risky (FDIC is backstopped by the US government; Joe's Discount Deposit Insurance Agency...isn't.). But even in the best case it's FDIC, in which case...what's the point? You're exactly as safe as a traditional bank, except you're refusing to make loans, so you have to charge your depositors fees. > If this model were competing with traditional 10% margin banks, it might well be supported by stockholders due to its ability to withstand runs a priori. It is true that while these models have no benefit to depositors, they nominally benefit shareholders, we are going to be wiped out in fewer cases. (Note, though, that a bank with this model can't neccessarilly withstand runs. Let's say a false rumour sweeps through that one of these banks has had money stolen from the vaults. People correctly realise that if this is true, and they're the last ones to withdraw money, there will be nothing left for them, so the race to withdraw first. Unlike a traditional bank, in this case all the deposits can be returned, but now you've got a bank with branches and staff but no depositors and thus no revenue. And the panicked depositors who pulled their money out and put it in some other bank will have no incentive to bring it back now that you've proven you could cover the deposits. Bankruptcy is likely inevitable at this point.) But in any case, sure, given the same risk adjusted return, it's rational to always prefer equity in something like Custodia than a traditional bank! But since there's no benefit to depositors, there's no way a bank could make an equivalent return. And while plenty of investors do want low risk, low return investments, it's hard to imagine any of them taking a flyer on something like Custodia, which is likely to be the exact opposite of that. None of this actually works.