5 ms·

I don't know much about finance, but I'm confused how the blame for a bank run seems to lie with the people who put their money in a bank and then want to take

I don't know much about finance, but I'm confused how the blame for a bank run seems to lie with the people who put their money in a bank and then want to take it out, as opposed to the bank not being able to support their customers withdrawing their money, which seems like it should be one of the first priorities for a bank.

deleted 4y ago
[deleted]
mrcode007 4y ago
The bank was at fault. No question about that. But do you really believe that all of the customers all of the sudden needed to spend $42B the next day to make payroll?
- mrguyorama 4y ago
  No but a bank having poor risk management is a very justifiable reason to take all your money out of it.
- rglover 4y ago
  It shouldn't matter. If I want my money, in part or in full, you should give it to me.
  - qotgalaxy 4y ago
    [dead]
  - Scarblac 4y ago
    How much would you be willing to pay for an account for which that was always true?
    - sebzim4500 4y ago
      I'd certainly accept a lower interest rate.
      - prottog 4y ago
        But would you pay a negative interest rate, i.e. a fee? Wouldn't having millions of dollars available on demand be a service that you would have to pay for?
        sebzim4500 4y ago
        Yeah, but I don't think I would have to. German bank accounts are guaranteed by the government but still pay a positive interest rate.
    - rglover 4y ago
      Depends on the balance, but I could see a tiered monthly subscription model working well. So, if I have $10,000, my monthly fee is relatively low or just free, but if I have > $1M that fee goes up. Could be a percentage with a ceiling or an annual cap. Could just package it as Priority Withdraw Guarantee and charge it as an add-on and part of the guarantee is that your cash will be kept in a reserve independent of investment activities.
- jerf 4y ago
  The game theory on this is vicious, but not that complicated. Standing on some sort of "customers shouldn't participate in bank runs" principle is a great way to end up in some sort of trouble or other. It also isn't exactly clear to me how to stand "customers shouldn't participate in bank runs" on any sort of firm ethical basis that both stands up to theoretical scrutiny and also is an ethic that can be practically lived by. You put money in a bank. The bank counters with a promise that you can withdraw it whenever you like. Is it really somehow immoral for you to take it up on that promise when you become concerned they can't hold it up? Having already put your money in the bank, is it now somehow also your responsibility for them to be able to live up to their promise, let alone their promises to other people? Am I morally obligated to see that my bank has a reasonable chance to not fulfill their promise, but just live life as if it's not? You might be able to work this into an ethic, but I would submit that at the very least it's going to be a long journey, not something that can be simply asserted as an unexamined premise. Taking a consequentialist point of view is superficially appealing, but it is unclear to me that across any time span other than a hyper-short one that a full accounting of the situation leads to an obligation to depositors to ignore threats to their deposit. You can easily simply end up destroying the bank system as a whole as you require people to incur risks they're not willing to incur in order to do some banking and other such things, so they choose not to bank at all. "You need to leave your money in even when it's at immediate risk and also you're not allowed to consider second and higher order consequences because that's immoral too and also you're not allowed to ask the banks to consider them either" gets to be rather untenable on a number of levels; even if you want to propose such an ethic theoretically it clearly fails the living-by-it-practically test. But, again, I'm not saying you couldn't possibly work this into a coherent ethic, I'm just saying, it's pretty challenging. It's hard to avoid that you basically end up writing in that you should allow people to basically lie to your face about the promises they made to you and you're morally obligated to live by those lies.
- lowkey 4y ago
  If you were caught holding $1 million in investor funds designated to pay your employees salaries for the next X months and you learned there was a real risk of your bank failing. Knowing that only $250k of those funds were FDIC insured, would you have left your funds in the bank and hoped for the best? If you answered Yes, how would you explain your decision to your investors or employees?
  - vlovich123 4y ago
    Maybe you should have kept it in a managed money market account instead of a savings account? FDIC limits aren’t some mysterious new thing and businesses do have other options available.
    - lowkey 4y ago
      Sure, that would have been ideal in hindsight but based on the scenario I described above, I would argue that the depositor is simply being prudent to withdraw their funds from a bank if they are concerned about it’s stability. There is zero benefit for them to take the risk of leaving their funds with the bank and considerable downside.
majormajor 4y ago
"How do banks work" is one of those practical things that probably deserves more explicit overview in middle- and high-school, but failing that, It's a Wonderful Life came out almost 80 years ago. So I don't think some scrutiny of bank customers here is a very severe sort of victim blaming (edit: especially if blaming the Twitter-blathering VCs inciting the run more than the individual companies). The bank screwed up. People noticed. Months passed without it being a HUGE panic deal. Then a bunch of influential people did their best to make it even worse, before being mostly foiled by the government, who kicked the can down the road. On the other hand, 80 years is a long time. Maybe Hollywood needs to do a remake. With Marvel characters.
- kzrdude 4y ago
  How does it work in practice if I transfer $2 million from one bank to the other? Clearly no bank supports withdrawing it in cash, fine. But the transfer should just be a decrement of a number in the first bank and an increment of it in the account on the second bank. What other effects do I need to think about? (Serious question)
  - deleted 4y ago
    [deleted]
  - mrcode007 4y ago
    the cash can be held while SAR takes place (suspicious activity review). If you’re converting currencies there are also FX mechanics where the bank will quote your transfer on the FX market and try to make a buck here and there before releasing your transfer which can add delays.
  - vlovich123 4y ago
    For the bank? Your money is a lien. By transferring the money to another bank you’re saying “hey bank. I’ve decided the loan I gave you is due right now. Gimme gimme gimme”. In most cases, the amount you move is a pittance and they find it in the couch cushions (ie they’re holding that in cash to float precisely for this purpose or they sell some assets to provide liquidity). All banks carry more loans than they can meet instantaneously. That’s definitionally how they work. They use the loans you give them to hand out loans to others at a much higher interest rate and collect the difference. What happened here is that the VCs generated a run such that SVB had to liquidate a lot of assets. Moreover, these assets were long term investments. Meaning unlike your sudden and immediate demand for the money, they had to sell those assets on the open market. Unfortunately, since interest rates had gone up the loans the bank had given out were not as valuable on the market and the bank had to take a loss. For example, it had given out a million dollar loan at 3% over 30 years but now it was selling it at 750k on the open market because no one is buying 3% interest rate loans because currently the rate is ~5% (they couldn’t wait the remainder of the loan duration). That created a huge hole in their balance books. They tried to shore it up with a loan which would have plugged the hole but that fell through for some reason I forget (not sure why they announced they were looking for a loan before they had closed it). So in practice you don’t have to think about anything. Moving $2 million is nothing. It’s when you move $2 million and convince 1000 other people to move it all at the same time that you can make the bank feel some pain (I don’t have a sense on the amount of money moved that cause a problem - all numbers here made up). What I don’t understand is that a simple change to the regulation would close the ability of random people to create bank runs. If you want to transfer > X million ahead of time, you must give an N day notice. Additionally, the bank can choose to deny it if it’s coming from a regular (ie not money market) account (chequing / savings). You have a special carve out for regular periodic payments and you’re done. It’s kind of ridiculous that you can give a loan to someone and then arbitrarily ask for the entirety of the money immediately without warning.
barkingcat 4y ago
all banks in the western capitalist regime will fail with the exact same problem. there is no modern western bank that is capitalized 100% - if everyone goes to every single bank and withdraws their money, the entire western economy collapses. it's up to the depositors (the customers) to know that if they withdraw 100% of their cash, the entire system collapses. as a human living in the current era, you either buy into this, or you go and live in a compound with gold bricks and weapons stashed in the basement, or you become a cryptobro, or you become like Russia and start wars to gather resources and land.
krisoft 4y ago
> I don't know much about finance Banks are not piggy banks. They don’t just pile the deposits into a vault. They estimate how much money is likely going to be whitdrawn in a certain period and invest the rest. That means that the bank might not be able to pay out all the money they owe if a large percentage of the depositors all at once request their deposits returned.
- lowkey 4y ago
  > That means that the bank might not be able to pay out all the money they owe if a large percentage of the depositors all at once request their deposits returned. It isn’t that large a percentage of deposits - less than 20% for most banks by my estimate. Notably in 2020 the Federal Reserve reduced the required reserve ratio for banks to zero, though they do have other requirements such as a minimum equity ratio and such. The reality is that fractional reserve banks have a massive failure mode if even a modest percent of demand accounts were to withdraw in a short period. My sincere hope is that these recent developments raise awareness for how fragile the current system is and there is enough public outcry to effect meaningful change. As it stands a checking or savings account at an FDIC insured bank is an unsecured loan to a leveraged counterparty that uses your funds for speculation, backed by an insurance program with $142 billion protecting $17 Trillion in deposits. (0.7% coverage) If the FDIC fund is insufficient in a crisis either the US Taxpayer or all dollar holders will be left holding the bag.
  - prottog 4y ago
    Back when people agreed that shiny rocks are a good medium of exchange and store of value, it made sense for them to pay banks to hold on to their money. It was impractical to hold large amounts of physical material under your mattress; it's a big theft risk, as well as just taking up room. So there was economic value in a specialized entity that would safeguard your wealth, i.e. a bank. And banks didn't have to speculate with their deposits, since they were already being paid to be custodians. Now that the medium of exchange and store of value is fiat currency that is digitally printed or burned by the Fed, it's the opposite. Most transactions happen with nothing physical changing hands. The marginal cost of a bank to take on more deposits is nothing. It's no longer natural for banks to be paid by depositors directly as custodians, which is why they have to make money elsewhere; as you said, leveraged (but regulated) speculation. We've decided that this is overall a good thing for society. > backed by an insurance program with $142 billion protecting $17 Trillion in deposits This part's kind of misleading, since it's not like all $17 trillion (or even some significant part of it) will leave the US banking system entirely. Almost all of it just goes from one bank to another. When too much leaves one particular bank at once, you get a bank run. But the system as a whole remains balanced, and there's no conceivable scenario where enough people will take money out of the banking system for it all to crumble. Where would the money go, under people's mattresses or other currencies?
MikeDelta 4y ago
No bank out there has enough to repay the deposits of all their customers at once, that is just not how (most) banks work. In other words, you can practically bring down any deposit-taking bank by starting a large-enough bank run. (Except maybe if the central-bank intervenes.)

deleted 4y ago

[deleted]

mrcode007 4y ago

The bank was at fault. No question about that. But do you really believe that all of the customers all of the sudden needed to spend $42B the next day to make payroll?

mrguyorama 4y ago
No but a bank having poor risk management is a very justifiable reason to take all your money out of it.
rglover 4y ago
It shouldn't matter. If I want my money, in part or in full, you should give it to me.
- qotgalaxy 4y ago
  [dead]
- Scarblac 4y ago
  How much would you be willing to pay for an account for which that was always true?
  - sebzim4500 4y ago
    I'd certainly accept a lower interest rate.
    - prottog 4y ago
      But would you pay a negative interest rate, i.e. a fee? Wouldn't having millions of dollars available on demand be a service that you would have to pay for?
      - sebzim4500 4y ago
        Yeah, but I don't think I would have to. German bank accounts are guaranteed by the government but still pay a positive interest rate.
  - rglover 4y ago
    Depends on the balance, but I could see a tiered monthly subscription model working well. So, if I have $10,000, my monthly fee is relatively low or just free, but if I have > $1M that fee goes up. Could be a percentage with a ceiling or an annual cap. Could just package it as Priority Withdraw Guarantee and charge it as an add-on and part of the guarantee is that your cash will be kept in a reserve independent of investment activities.
jerf 4y ago
The game theory on this is vicious, but not that complicated. Standing on some sort of "customers shouldn't participate in bank runs" principle is a great way to end up in some sort of trouble or other. It also isn't exactly clear to me how to stand "customers shouldn't participate in bank runs" on any sort of firm ethical basis that both stands up to theoretical scrutiny and also is an ethic that can be practically lived by. You put money in a bank. The bank counters with a promise that you can withdraw it whenever you like. Is it really somehow immoral for you to take it up on that promise when you become concerned they can't hold it up? Having already put your money in the bank, is it now somehow also your responsibility for them to be able to live up to their promise, let alone their promises to other people? Am I morally obligated to see that my bank has a reasonable chance to not fulfill their promise, but just live life as if it's not? You might be able to work this into an ethic, but I would submit that at the very least it's going to be a long journey, not something that can be simply asserted as an unexamined premise. Taking a consequentialist point of view is superficially appealing, but it is unclear to me that across any time span other than a hyper-short one that a full accounting of the situation leads to an obligation to depositors to ignore threats to their deposit. You can easily simply end up destroying the bank system as a whole as you require people to incur risks they're not willing to incur in order to do some banking and other such things, so they choose not to bank at all. "You need to leave your money in even when it's at immediate risk and also you're not allowed to consider second and higher order consequences because that's immoral too and also you're not allowed to ask the banks to consider them either" gets to be rather untenable on a number of levels; even if you want to propose such an ethic theoretically it clearly fails the living-by-it-practically test. But, again, I'm not saying you couldn't possibly work this into a coherent ethic, I'm just saying, it's pretty challenging. It's hard to avoid that you basically end up writing in that you should allow people to basically lie to your face about the promises they made to you and you're morally obligated to live by those lies.
lowkey 4y ago
If you were caught holding $1 million in investor funds designated to pay your employees salaries for the next X months and you learned there was a real risk of your bank failing. Knowing that only $250k of those funds were FDIC insured, would you have left your funds in the bank and hoped for the best? If you answered Yes, how would you explain your decision to your investors or employees?
- vlovich123 4y ago
  Maybe you should have kept it in a managed money market account instead of a savings account? FDIC limits aren’t some mysterious new thing and businesses do have other options available.
  - lowkey 4y ago
    Sure, that would have been ideal in hindsight but based on the scenario I described above, I would argue that the depositor is simply being prudent to withdraw their funds from a bank if they are concerned about it’s stability. There is zero benefit for them to take the risk of leaving their funds with the bank and considerable downside.

majormajor 4y ago

"How do banks work" is one of those practical things that probably deserves more explicit overview in middle- and high-school, but failing that, It's a Wonderful Life came out almost 80 years ago. So I don't think some scrutiny of bank customers here is a very severe sort of victim blaming (edit: especially if blaming the Twitter-blathering VCs inciting the run more than the individual companies). The bank screwed up. People noticed. Months passed without it being a HUGE panic deal. Then a bunch of influential people did their best to make it even worse, before being mostly foiled by the government, who kicked the can down the road. On the other hand, 80 years is a long time. Maybe Hollywood needs to do a remake. With Marvel characters.

kzrdude 4y ago
How does it work in practice if I transfer $2 million from one bank to the other? Clearly no bank supports withdrawing it in cash, fine. But the transfer should just be a decrement of a number in the first bank and an increment of it in the account on the second bank. What other effects do I need to think about? (Serious question)
- deleted 4y ago
  [deleted]
- mrcode007 4y ago
  the cash can be held while SAR takes place (suspicious activity review). If you’re converting currencies there are also FX mechanics where the bank will quote your transfer on the FX market and try to make a buck here and there before releasing your transfer which can add delays.
- vlovich123 4y ago
  For the bank? Your money is a lien. By transferring the money to another bank you’re saying “hey bank. I’ve decided the loan I gave you is due right now. Gimme gimme gimme”. In most cases, the amount you move is a pittance and they find it in the couch cushions (ie they’re holding that in cash to float precisely for this purpose or they sell some assets to provide liquidity). All banks carry more loans than they can meet instantaneously. That’s definitionally how they work. They use the loans you give them to hand out loans to others at a much higher interest rate and collect the difference. What happened here is that the VCs generated a run such that SVB had to liquidate a lot of assets. Moreover, these assets were long term investments. Meaning unlike your sudden and immediate demand for the money, they had to sell those assets on the open market. Unfortunately, since interest rates had gone up the loans the bank had given out were not as valuable on the market and the bank had to take a loss. For example, it had given out a million dollar loan at 3% over 30 years but now it was selling it at 750k on the open market because no one is buying 3% interest rate loans because currently the rate is ~5% (they couldn’t wait the remainder of the loan duration). That created a huge hole in their balance books. They tried to shore it up with a loan which would have plugged the hole but that fell through for some reason I forget (not sure why they announced they were looking for a loan before they had closed it). So in practice you don’t have to think about anything. Moving $2 million is nothing. It’s when you move $2 million and convince 1000 other people to move it all at the same time that you can make the bank feel some pain (I don’t have a sense on the amount of money moved that cause a problem - all numbers here made up). What I don’t understand is that a simple change to the regulation would close the ability of random people to create bank runs. If you want to transfer > X million ahead of time, you must give an N day notice. Additionally, the bank can choose to deny it if it’s coming from a regular (ie not money market) account (chequing / savings). You have a special carve out for regular periodic payments and you’re done. It’s kind of ridiculous that you can give a loan to someone and then arbitrarily ask for the entirety of the money immediately without warning.

barkingcat 4y ago

all banks in the western capitalist regime will fail with the exact same problem. there is no modern western bank that is capitalized 100% - if everyone goes to every single bank and withdraws their money, the entire western economy collapses. it's up to the depositors (the customers) to know that if they withdraw 100% of their cash, the entire system collapses. as a human living in the current era, you either buy into this, or you go and live in a compound with gold bricks and weapons stashed in the basement, or you become a cryptobro, or you become like Russia and start wars to gather resources and land.

krisoft 4y ago

> I don't know much about finance Banks are not piggy banks. They don’t just pile the deposits into a vault. They estimate how much money is likely going to be whitdrawn in a certain period and invest the rest. That means that the bank might not be able to pay out all the money they owe if a large percentage of the depositors all at once request their deposits returned.

lowkey 4y ago
> That means that the bank might not be able to pay out all the money they owe if a large percentage of the depositors all at once request their deposits returned. It isn’t that large a percentage of deposits - less than 20% for most banks by my estimate. Notably in 2020 the Federal Reserve reduced the required reserve ratio for banks to zero, though they do have other requirements such as a minimum equity ratio and such. The reality is that fractional reserve banks have a massive failure mode if even a modest percent of demand accounts were to withdraw in a short period. My sincere hope is that these recent developments raise awareness for how fragile the current system is and there is enough public outcry to effect meaningful change. As it stands a checking or savings account at an FDIC insured bank is an unsecured loan to a leveraged counterparty that uses your funds for speculation, backed by an insurance program with $142 billion protecting $17 Trillion in deposits. (0.7% coverage) If the FDIC fund is insufficient in a crisis either the US Taxpayer or all dollar holders will be left holding the bag.
- prottog 4y ago
  Back when people agreed that shiny rocks are a good medium of exchange and store of value, it made sense for them to pay banks to hold on to their money. It was impractical to hold large amounts of physical material under your mattress; it's a big theft risk, as well as just taking up room. So there was economic value in a specialized entity that would safeguard your wealth, i.e. a bank. And banks didn't have to speculate with their deposits, since they were already being paid to be custodians. Now that the medium of exchange and store of value is fiat currency that is digitally printed or burned by the Fed, it's the opposite. Most transactions happen with nothing physical changing hands. The marginal cost of a bank to take on more deposits is nothing. It's no longer natural for banks to be paid by depositors directly as custodians, which is why they have to make money elsewhere; as you said, leveraged (but regulated) speculation. We've decided that this is overall a good thing for society. > backed by an insurance program with $142 billion protecting $17 Trillion in deposits This part's kind of misleading, since it's not like all $17 trillion (or even some significant part of it) will leave the US banking system entirely. Almost all of it just goes from one bank to another. When too much leaves one particular bank at once, you get a bank run. But the system as a whole remains balanced, and there's no conceivable scenario where enough people will take money out of the banking system for it all to crumble. Where would the money go, under people's mattresses or other currencies?

MikeDelta 4y ago

No bank out there has enough to repay the deposits of all their customers at once, that is just not how (most) banks work. In other words, you can practically bring down any deposit-taking bank by starting a large-enough bank run. (Except maybe if the central-bank intervenes.)