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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 shoul

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.
- nr378 4y ago
  > If you want to transfer > X million ahead of time, you must give an N day notice. We have those kind of fixed-term and notice accounts, but many businesses and consumers prefer to use more flexible demand-deposit accounts. You could theoretically regulate demand-deposit accounts out of existence and say everyone now has to use fixed-term and notice accounts, but that might have significant implications on the level of deposits that people choose to hold with banks (as opposed to just handling the cash themselves, where they have no such notice requirements), and this will have significant knock-on impacts to the availability of credit. > Additionally, the bank can choose to deny it if it’s coming from a regular (ie not money market) account (chequing / savings). Under what circumstances could they choose to deny it? For how long can they choose to deny it? I wouldn't personally be too fond of lending my own hard earned money to an entity that can arbitrarily choose not to give it back for an indefinite period of time in a way that gives me no legal recourse... Again such a regulatory change could have significant knock-on implications to the quantity of deposits and the availability of credit. The tricky things with bank runs are there aren't any easy solutions - the best one we've come up with so far is deposit insurance, although this has it's limits (both metaphorically and literally).
nr378 4y ago
> 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 The transfer actually decrements two numbers at the first bank and increments two numbers at the second bank, and typically also mutates two further numbers at another institution, as so: If you transfer your deposit from a bank, then that bank needs to decrement it's liability to you. If it's decrementing it's liabilities, it also needs to decrement it's assets by an equal amount (otherwise it'd be making a profit with this transaction, which it's clearly not). We therefore know from this that the first bank needs to transfer an asset of some kind from itself to the second bank. The second bank then needs to increment their liabilities to record the fact they now owe you money, and they need to increment their assets to record the fact that they now own this new asset they've just received. The asset that changes hands is typically Central Bank reserves, which is essentially money that is held in an account with the Federal Reserve. In order for the money to change hands, the Federal Reserve has to decrement the amount of reserves that are owned by/sit in the account of the first bank, and increment the amount of reservers that are owned by the second bank. The other effect you need to think about is what happens if the first bank doesn't have a sufficiency of reserves to settle for this transaction? In this case, the sending bank would need to sell some of it's other assets so that it receives reserves from other institutions, before sending those reserves to the second bank, or alternatively it can go to the Federal Reserve and ask the Fed to create new reserves and lend those reserves to the bank, securing the loan against eligible collateral (such as US treasuries, as in the new Bank Term Funding Program), which it agrees to repay later (either with reserves that it receives in the future from other inbound transfers, or by ultimately selling the assets).
lesuorac 4y ago
That's not how a transfer works though. If it was I could manufacture money out of thin air just by never decrementing my ledger. What actually happens is that banks have accounts at other banks. If you transfer say $230 from your account at SVB to PG&E at First Signature then what really happens is SVB decrements 1k from you and increments 1k to themselves and tells First Signature to decrement 1k from SVB's account and increment 1k to PG&E's account. (Take a look at #4 on how a wire transfer works [1]). So when you want to transfer large sums it causes a bit issue as SVB might not have an account that size at the given bank. So they'll need forewarning so they can do a bunch of other transfers so that they do. There's a practically issue with SVB having accounts at literally every other bank so if SVB and First Signature have an account at a common bank that works as well with just an extra step of transfers. https://www.bitsaboutmoney.com/archive/bank-transfers-as-a-payment-method/ https://www.bitsaboutmoney.com/archive/bank-transfers-as-a-p... [1]: https://en.wikipedia.org/wiki/Wire_transfer#Process https://en.wikipedia.org/wiki/Wire_transfer#Process

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.

nr378 4y ago
> If you want to transfer > X million ahead of time, you must give an N day notice. We have those kind of fixed-term and notice accounts, but many businesses and consumers prefer to use more flexible demand-deposit accounts. You could theoretically regulate demand-deposit accounts out of existence and say everyone now has to use fixed-term and notice accounts, but that might have significant implications on the level of deposits that people choose to hold with banks (as opposed to just handling the cash themselves, where they have no such notice requirements), and this will have significant knock-on impacts to the availability of credit. > Additionally, the bank can choose to deny it if it’s coming from a regular (ie not money market) account (chequing / savings). Under what circumstances could they choose to deny it? For how long can they choose to deny it? I wouldn't personally be too fond of lending my own hard earned money to an entity that can arbitrarily choose not to give it back for an indefinite period of time in a way that gives me no legal recourse... Again such a regulatory change could have significant knock-on implications to the quantity of deposits and the availability of credit. The tricky things with bank runs are there aren't any easy solutions - the best one we've come up with so far is deposit insurance, although this has it's limits (both metaphorically and literally).

nr378 4y ago

> 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 The transfer actually decrements two numbers at the first bank and increments two numbers at the second bank, and typically also mutates two further numbers at another institution, as so: If you transfer your deposit from a bank, then that bank needs to decrement it's liability to you. If it's decrementing it's liabilities, it also needs to decrement it's assets by an equal amount (otherwise it'd be making a profit with this transaction, which it's clearly not). We therefore know from this that the first bank needs to transfer an asset of some kind from itself to the second bank. The second bank then needs to increment their liabilities to record the fact they now owe you money, and they need to increment their assets to record the fact that they now own this new asset they've just received. The asset that changes hands is typically Central Bank reserves, which is essentially money that is held in an account with the Federal Reserve. In order for the money to change hands, the Federal Reserve has to decrement the amount of reserves that are owned by/sit in the account of the first bank, and increment the amount of reservers that are owned by the second bank. The other effect you need to think about is what happens if the first bank doesn't have a sufficiency of reserves to settle for this transaction? In this case, the sending bank would need to sell some of it's other assets so that it receives reserves from other institutions, before sending those reserves to the second bank, or alternatively it can go to the Federal Reserve and ask the Fed to create new reserves and lend those reserves to the bank, securing the loan against eligible collateral (such as US treasuries, as in the new Bank Term Funding Program), which it agrees to repay later (either with reserves that it receives in the future from other inbound transfers, or by ultimately selling the assets).

lesuorac 4y ago

That's not how a transfer works though. If it was I could manufacture money out of thin air just by never decrementing my ledger. What actually happens is that banks have accounts at other banks. If you transfer say $230 from your account at SVB to PG&E at First Signature then what really happens is SVB decrements 1k from you and increments 1k to themselves and tells First Signature to decrement 1k from SVB's account and increment 1k to PG&E's account. (Take a look at #4 on how a wire transfer works [1]). So when you want to transfer large sums it causes a bit issue as SVB might not have an account that size at the given bank. So they'll need forewarning so they can do a bunch of other transfers so that they do. There's a practically issue with SVB having accounts at literally every other bank so if SVB and First Signature have an account at a common bank that works as well with just an extra step of transfers. https://www.bitsaboutmoney.com/archive/bank-transfers-as-a-payment-method/ https://www.bitsaboutmoney.com/archive/bank-transfers-as-a-p... [1]: https://en.wikipedia.org/wiki/Wire_transfer#Process https://en.wikipedia.org/wiki/Wire_transfer#Process