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My fear is not these "small" banks failing. It's that everyone runs to the top 3 large ones and they will get so huge that their failure will be unthinkably bad

My fear is not these "small" banks failing. It's that everyone runs to the top 3 large ones and they will get so huge that their failure will be unthinkably bad. Even if they do not fail their power to for example debank people would be a huge problem. Sadly I don't see congress breaking them into small units or adding stronger regulations.

JumpCrisscross 4y ago
> that everyone runs to the top 3 large ones and they will get so huge that their failure will be unthinkably bad Outside BofA, their balance sheets are healthy. There isn’t serious speculation of contagion out of the regional banks. We put in place regulations to prevent this after 2008. Numpties rolled it back for “community banks” in 2017 [1], and that’s why we have this problem. [1] https://apnews.com/article/banking-crisis-congress-lobbying-svb-c2bc00ad41ae7fd1ec9d0ffb781383f2 https://apnews.com/article/banking-crisis-congress-lobbying-...
- throwaway2203 4y ago
  Is this related to the Dodd-Frank rollbacks?
  - JumpCrisscross 4y ago
    > this related to the Dodd-Frank rollbacks Mostly. The other component is how we pretend HTM Treasuries both hold their value and are liquid. Europe marks to market daily. I think you should get to choose: mark at $1, but they don’t count as liquid, or mark to market and they contribute to your liquidity ratio. (The rollback meant nobody was measuring liquidity. SVB would have failed its LCR in March 2022.)
    - TMWNN 4y ago
      SVB's Tier 1 ratio was 12%, among the highest for US regional banks. <https://www.morningstar.com/articles/1144363/which-bank-stocks-are-most-at-risk-of-a-liquidity-crisis https://www.morningstar.com/articles/1144363/which-bank-stoc...> If you don't believe me, listen to Larry Summers and Dan Tarullo explicitly confirming that SVB would have passed a Fed stress test in 2022. <https://www.youtube.com/watch?v=cYgz4KSRPww#t=5m10s https://www.youtube.com/watch?v=cYgz4KSRPww#t=5m10s>
      - JumpCrisscross 4y ago
        > listen to Larry Summers and Dan Tarullo explicitly confirming that SVB would have passed a Fed stress test in 2022 They literally don’t have the data to make this claim. The Fed does. SVB would have failed its LCR in March 2022.
        tekknik 4y ago
        So they don’t have the data, only the Fed…and you? Data please, as this says different: https://www.factcheck.org/2023/03/what-to-know-about-trump-era-bank-deregulation-and-bank-failures/ https://www.factcheck.org/2023/03/what-to-know-about-trump-e...
  - TMWNN 4y ago
    JumpCrisscross is wrong; the 2018 modifications had nothing to do with SVB's collapse (or what is happening with First Republic). SVB collapsed because it made a bad bet on where interest rates were going (and did not hedge for risk), making it vulnerable to short-term liquidity issues. That has nothing to do with the 2018 raising of the minimum AUM for application of Tier 1 capital requirements from $50 billion to $250 billion. SVB's Tier 1 ratio was 12%, among the highest for US regional banks. <https://www.morningstar.com/articles/1144363/which-bank-stocks-are-most-at-risk-of-a-liquidity-crisis https://www.morningstar.com/articles/1144363/which-bank-stoc...> Listen to Larry Summers and Dan Tarullo explicitly confirming that SVB would have passed a Fed stress test in 2022. <https://www.youtube.com/watch?v=cYgz4KSRPww#t=5m10s https://www.youtube.com/watch?v=cYgz4KSRPww#t=5m10s> While SVB and Credit Suisse's collapses' causes are directly unrelated, depositor outflows were involved in both, as opposed to fundamental issues with their balance sheets. Credit Suisse's Tier 1 ratio was as good as that of UBS or any other big European bank. <https://www.wsj.com/articles/credit-suisses-death-gives-birth-to-new-type-of-bank-crisis-39bee5b9 https://www.wsj.com/articles/credit-suisses-death-gives-birt...> At the end of the day, a loss of clients' faith in a bank is something that no stress test can directly measure ahead of time.
    - hedora 4y ago
      The US Fed disagrees with you: https://www.reuters.com/business/finance/us-fed-points-finger-trump-era-rollback-svb-demise-2023-04-29/ https://www.reuters.com/business/finance/us-fed-points-finge... I’m inclined to agree with the fed, since the 2018 change to the law is what made it legal for SVB to make the bad bet that put them out of business. Also, they were aware of the regulation in question, since they paid lobbyists to get that specific rule rolled back specifically so that they could structure their holdings to overinvest in treasuries.
      - TMWNN 4y ago
        >I’m inclined to agree with the fed, since the 2018 change to the law is what made it legal for SVB to make the bad bet that put them out of business. As Quarles says, the report does not actually provide any evidence of this. Let me repeat: At 12%, SVB's Tier 1 capital ratio was well above the industry standard (5-7%). SVB collapsed because of a liquidity crisis driven by its unusual depositor industry concentration. Nothing SVB did would have been illegal pre-2018; to put another way, poor risk management is not inherently illegal, any more than any other bad investment that ends up losing money is illegal.
- RC_ITR 4y ago
  >Outside BofA, their balance sheets are healthy. Woah, let's not over-exaggerate in times like these. Bank of America has about $110bn of unrealized losses on HTM securities, but that is against $200bn of Tier-1 capital. Comp that to SVB who had $16bn of unrealized losses against about that much Tier-1 capital. BoA has a worse balance sheet that peers, but not an unhealthy one.
  - deleted 4y ago
    [deleted]
  - cm2187 4y ago
    A bank cannot afford to loose half of its capital base without creating a panic. I'd rather not think what a market scare on BoA would look like.
    - collegeburner 4y ago
      it would suck ass for a few weeks but would actually be pretty simple: ppl withdraw deposits 80% of them go to JPMC JPMC buys BofA
- junofan 4y ago
  Sounds like BofA has a problem too? Why are you blaming 2017 numpties?
  - JumpCrisscross 4y ago
    > Sounds like BofA has a problem too? They do! But it won’t tank the bank. Because they’ve been working on them for years. Because they’re still under Dodd-Frank’s liquidity coverage rules. > Why are you blaming 2017 numpties? They rolled back the regulations that would have, if not prevented this mess, caught it much sooner. BofA has similar issues, but it’s subjected to stress tests. As a result, the risk has been managed in a way it wasn’t at these banks.
    - tekknik 4y ago
      > They rolled back the regulations that would have, if not prevented this mess, caught it much sooner. Not at all, in fact SVB grew so quick that even with the rule in place they wouldn’t have been caught. https://www.factcheck.org/2023/03/what-to-know-about-trump-era-bank-deregulation-and-bank-failures/ https://www.factcheck.org/2023/03/what-to-know-about-trump-e... The day political parties/sides die, we can finally start living and being a fruitful country again. I literally cannot wait for that day.
- cm2187 4y ago
  Neither regulations or good capital and liquidity ratios helped Credit Suisse. Banking is about trust, if people are getting worried about you, it doesn't matter what your financial statements say, you are done.
  - JumpCrisscross 4y ago
    > Neither regulations or good capital and liquidity ratios helped Credit Suisse Different regulatory regimes. But it helped make their takeover possible. In Credit Suisse’s case, specifically, it is difficult to see an alternate endgame. The regulations worked to ease the unwinding. And Switzerland’s lack of receivership showed.
loeg 4y ago
> they will get so huge that their failure will be unthinkably bad That's already the state of the world. That's why they're considered systemically important banks. https://en.wikipedia.org/wiki/Systemically_important_financial_institution https://en.wikipedia.org/wiki/Systemically_important_financi...
- KerrAvon 4y ago
  It's why Obama didn't put anyone in jail for this mess. He should have. We'd be in much better shape.
  - JumpCrisscross 4y ago
    > He should have. We'd be in much better shape We’d be in better shape if we’d kept the rules we wrote after 2008 to keep 2008 from happening again.
    - readthenotes1 4y ago
      We'd be in better shape if we kept the rules we wrote after 1929 to keep 1929 from happening again.
      - vkou 4y ago
        Except 1929 didn't happen again, the problems in 2008, and in 2023 were completely different. The problems in 2023 were made significantly worse by the rollback on liquidity rules in 2017, which, if we may recall, was not a year that Obama was exerting any influence on banking rules.
        KirillPanov 4y ago
        https://en.wikipedia.org/wiki/Glass–Steagall:_Aftermath_of_repeal https://en.wikipedia.org/wiki/Glass–Steagall:_Aftermath_of_r...
    - makomk 4y ago
0zemp2c 4y ago
all of the banks have some Treasuries yielding next to nothing all of the banks have DOA car loans (bigger than student loans now?) all of the banks have mortgages they underwrote for thirty years at 3%...these may be a relative loss to Treasuries for a generation all of the banks financed now-empty commercial real estate when I last checked, First Republic was #10 in % of holdings not covered by FDIC, and plenty of big banks were ahead of them First Republic may have sucked, but your bank does too
- Scoundreller 4y ago
  > First Republic was #10 in % of holdings not covered by FDIC That's actually a good thing: it means a small (relative) haircut the uninsured have to pay for everyone to get their first $250k guaranteed. When a bank fails and there's a small handful with over $250k in their account, they're going to lose everything over $250k to cover everyone else.
  - smcin 4y ago
    No, that's what used to happen, pre-SVB. It has now been established as precedent that if depositors of "regional" (or "systemic") banks have enough clout/create enough panic, they can get infinite protection. We will see if FR depositors' money over the FDIC limit is made whole. If that happens with FR, then Congress should legislate to raise or index-link FDIC limits, for everyone. (If not, we have moral hazard for both depositors and well-managed banks; and also smaller banks have to compete at an ever-increasing disadvantage.)
    - Scoundreller 4y ago
      It's actually happened before that. Limit was retroactively raised from $100k to $250k after IndyMac collapsed. But that was for everyone by law (first temporarily by https://archive.fdic.gov/view/fdic/3388 https://archive.fdic.gov/view/fdic/3388 then by Dodd-Frank retroactively & permanently). Even then I thought it was a bad idea because it discouraged depositors from spreading around their assets. Whether we'll see them treat future failures like SVB or not, TBD!
cm2187 4y ago
That's a long term issue, but the contraction of credit is my shorter term concern. When deposits flow out of regional banks into big banks, it limits the capacity of those regional banks to fund themselves and forces them to cut lending (not the least to not consume their liquidity). On the other hand the big banks might receive more deposits but they can't lend it either because they are constrained by capital requirements, not funding. So logically you should have a contraction of credit, which combined with higher rates, is going to be ugly. Clearly the markets aren't pricing that right now.
dehrmann 4y ago
When SVB was failing, I told anyone who would listen we need 100% FDIC insurance for all normal bank accounts. The usual response was we need to punish startups for being reckless, and we need market forces to encourage banks to be well-managed. It turns out having the time or know-how to identify poorly managed banks is rare (and if you did, you should be in the business of short selling, not making widgets), but we all know which banks are too big to fail, so just move your money there.
- deleted 4y ago
  [deleted]
- taeric 4y ago
  There is a reason we don't want billionaires to feel safe with their assets sitting places. We want them actively using said assets to make the world better. Not just living off of leveraged value forever. To that end, I'm not sure I see good argument for 100% protection. Money sitting in a bank deposit only creates wealth if we have the banks actively lending. And, annoyingly to me, the largest form of this for the "too big to fail" banks seems to be credit card schemes. Which I actively despise, at the moment. It also incentivizes banks to hunt out places to loan money. Which is why we have ridiculously complicated securities to back mortgages. The amount of those that have been made is only "safe" for the banks with a ton of the extra machinery they have put on top. Which has costs. Edit: I should add that I'm not 100% on my stance here. Would love to be challenged on any of the above. Can only help my understanding.
  - dehrmann 4y ago
    > There is a reason we don't want billionaires to feel safe with their assets sitting places... Between inflation and income taxes, you don't need to worry about this. I literally can't remember the last time banks paid enough interest to beat inflation and cover 37% income tax (almost 50% if you're in CA).
    - taeric 4y ago
      Billionaires care very little on either of those things? Leveraged income is not taxed. Is why you don't pay taxes as income on the loan to pay for your house. And inflation they have beat with other returns. If anything, this is reason to keep the insurance rate low. After all, they only "lose" the uninsured part that is not recovered in bank seizure. The scare quotes about people losing 100% of their money in SVB was just that, scare quotes. The assets did not disappear 100% and depositors are first in line. If anything, that should incentivise wealthy people to pay attention to how a bank is being run. Full insurance means I don't give a shit.
walrus01 4y ago
Eventually you'll end up with something like Canada, with a "big five" banks.
jones6ofMont 4y ago
[dead]

JumpCrisscross 4y ago

> that everyone runs to the top 3 large ones and they will get so huge that their failure will be unthinkably bad Outside BofA, their balance sheets are healthy. There isn’t serious speculation of contagion out of the regional banks. We put in place regulations to prevent this after 2008. Numpties rolled it back for “community banks” in 2017 [1], and that’s why we have this problem. [1] https://apnews.com/article/banking-crisis-congress-lobbying-svb-c2bc00ad41ae7fd1ec9d0ffb781383f2 https://apnews.com/article/banking-crisis-congress-lobbying-...

throwaway2203 4y ago
Is this related to the Dodd-Frank rollbacks?
- JumpCrisscross 4y ago
  > this related to the Dodd-Frank rollbacks Mostly. The other component is how we pretend HTM Treasuries both hold their value and are liquid. Europe marks to market daily. I think you should get to choose: mark at $1, but they don’t count as liquid, or mark to market and they contribute to your liquidity ratio. (The rollback meant nobody was measuring liquidity. SVB would have failed its LCR in March 2022.)
  - TMWNN 4y ago
    SVB's Tier 1 ratio was 12%, among the highest for US regional banks. <https://www.morningstar.com/articles/1144363/which-bank-stocks-are-most-at-risk-of-a-liquidity-crisis https://www.morningstar.com/articles/1144363/which-bank-stoc...> If you don't believe me, listen to Larry Summers and Dan Tarullo explicitly confirming that SVB would have passed a Fed stress test in 2022. <https://www.youtube.com/watch?v=cYgz4KSRPww#t=5m10s https://www.youtube.com/watch?v=cYgz4KSRPww#t=5m10s>
    - JumpCrisscross 4y ago
      > listen to Larry Summers and Dan Tarullo explicitly confirming that SVB would have passed a Fed stress test in 2022 They literally don’t have the data to make this claim. The Fed does. SVB would have failed its LCR in March 2022.
      - tekknik 4y ago
        So they don’t have the data, only the Fed…and you? Data please, as this says different: https://www.factcheck.org/2023/03/what-to-know-about-trump-era-bank-deregulation-and-bank-failures/ https://www.factcheck.org/2023/03/what-to-know-about-trump-e...
- TMWNN 4y ago
  JumpCrisscross is wrong; the 2018 modifications had nothing to do with SVB's collapse (or what is happening with First Republic). SVB collapsed because it made a bad bet on where interest rates were going (and did not hedge for risk), making it vulnerable to short-term liquidity issues. That has nothing to do with the 2018 raising of the minimum AUM for application of Tier 1 capital requirements from $50 billion to $250 billion. SVB's Tier 1 ratio was 12%, among the highest for US regional banks. <https://www.morningstar.com/articles/1144363/which-bank-stocks-are-most-at-risk-of-a-liquidity-crisis https://www.morningstar.com/articles/1144363/which-bank-stoc...> Listen to Larry Summers and Dan Tarullo explicitly confirming that SVB would have passed a Fed stress test in 2022. <https://www.youtube.com/watch?v=cYgz4KSRPww#t=5m10s https://www.youtube.com/watch?v=cYgz4KSRPww#t=5m10s> While SVB and Credit Suisse's collapses' causes are directly unrelated, depositor outflows were involved in both, as opposed to fundamental issues with their balance sheets. Credit Suisse's Tier 1 ratio was as good as that of UBS or any other big European bank. <https://www.wsj.com/articles/credit-suisses-death-gives-birth-to-new-type-of-bank-crisis-39bee5b9 https://www.wsj.com/articles/credit-suisses-death-gives-birt...> At the end of the day, a loss of clients' faith in a bank is something that no stress test can directly measure ahead of time.
  - hedora 4y ago
    The US Fed disagrees with you: https://www.reuters.com/business/finance/us-fed-points-finger-trump-era-rollback-svb-demise-2023-04-29/ https://www.reuters.com/business/finance/us-fed-points-finge... I’m inclined to agree with the fed, since the 2018 change to the law is what made it legal for SVB to make the bad bet that put them out of business. Also, they were aware of the regulation in question, since they paid lobbyists to get that specific rule rolled back specifically so that they could structure their holdings to overinvest in treasuries.
    - TMWNN 4y ago
      >I’m inclined to agree with the fed, since the 2018 change to the law is what made it legal for SVB to make the bad bet that put them out of business. As Quarles says, the report does not actually provide any evidence of this. Let me repeat: At 12%, SVB's Tier 1 capital ratio was well above the industry standard (5-7%). SVB collapsed because of a liquidity crisis driven by its unusual depositor industry concentration. Nothing SVB did would have been illegal pre-2018; to put another way, poor risk management is not inherently illegal, any more than any other bad investment that ends up losing money is illegal.
RC_ITR 4y ago
>Outside BofA, their balance sheets are healthy. Woah, let's not over-exaggerate in times like these. Bank of America has about $110bn of unrealized losses on HTM securities, but that is against $200bn of Tier-1 capital. Comp that to SVB who had $16bn of unrealized losses against about that much Tier-1 capital. BoA has a worse balance sheet that peers, but not an unhealthy one.
- deleted 4y ago
  [deleted]
- cm2187 4y ago
  A bank cannot afford to loose half of its capital base without creating a panic. I'd rather not think what a market scare on BoA would look like.
  - collegeburner 4y ago
    it would suck ass for a few weeks but would actually be pretty simple: ppl withdraw deposits 80% of them go to JPMC JPMC buys BofA
junofan 4y ago
Sounds like BofA has a problem too? Why are you blaming 2017 numpties?
- JumpCrisscross 4y ago
  > Sounds like BofA has a problem too? They do! But it won’t tank the bank. Because they’ve been working on them for years. Because they’re still under Dodd-Frank’s liquidity coverage rules. > Why are you blaming 2017 numpties? They rolled back the regulations that would have, if not prevented this mess, caught it much sooner. BofA has similar issues, but it’s subjected to stress tests. As a result, the risk has been managed in a way it wasn’t at these banks.
  - tekknik 4y ago
    > They rolled back the regulations that would have, if not prevented this mess, caught it much sooner. Not at all, in fact SVB grew so quick that even with the rule in place they wouldn’t have been caught. https://www.factcheck.org/2023/03/what-to-know-about-trump-era-bank-deregulation-and-bank-failures/ https://www.factcheck.org/2023/03/what-to-know-about-trump-e... The day political parties/sides die, we can finally start living and being a fruitful country again. I literally cannot wait for that day.
cm2187 4y ago
Neither regulations or good capital and liquidity ratios helped Credit Suisse. Banking is about trust, if people are getting worried about you, it doesn't matter what your financial statements say, you are done.
- JumpCrisscross 4y ago
  > Neither regulations or good capital and liquidity ratios helped Credit Suisse Different regulatory regimes. But it helped make their takeover possible. In Credit Suisse’s case, specifically, it is difficult to see an alternate endgame. The regulations worked to ease the unwinding. And Switzerland’s lack of receivership showed.

loeg 4y ago

> they will get so huge that their failure will be unthinkably bad That's already the state of the world. That's why they're considered systemically important banks. https://en.wikipedia.org/wiki/Systemically_important_financial_institution https://en.wikipedia.org/wiki/Systemically_important_financi...

KerrAvon 4y ago
It's why Obama didn't put anyone in jail for this mess. He should have. We'd be in much better shape.
- JumpCrisscross 4y ago
  > He should have. We'd be in much better shape We’d be in better shape if we’d kept the rules we wrote after 2008 to keep 2008 from happening again.
  - readthenotes1 4y ago
    We'd be in better shape if we kept the rules we wrote after 1929 to keep 1929 from happening again.
    - vkou 4y ago
      Except 1929 didn't happen again, the problems in 2008, and in 2023 were completely different. The problems in 2023 were made significantly worse by the rollback on liquidity rules in 2017, which, if we may recall, was not a year that Obama was exerting any influence on banking rules.
      - KirillPanov 4y ago
        https://en.wikipedia.org/wiki/Glass–Steagall:_Aftermath_of_repeal https://en.wikipedia.org/wiki/Glass–Steagall:_Aftermath_of_r...
  - makomk 4y ago

0zemp2c 4y ago

all of the banks have some Treasuries yielding next to nothing all of the banks have DOA car loans (bigger than student loans now?) all of the banks have mortgages they underwrote for thirty years at 3%...these may be a relative loss to Treasuries for a generation all of the banks financed now-empty commercial real estate when I last checked, First Republic was #10 in % of holdings not covered by FDIC, and plenty of big banks were ahead of them First Republic may have sucked, but your bank does too

Scoundreller 4y ago
> First Republic was #10 in % of holdings not covered by FDIC That's actually a good thing: it means a small (relative) haircut the uninsured have to pay for everyone to get their first $250k guaranteed. When a bank fails and there's a small handful with over $250k in their account, they're going to lose everything over $250k to cover everyone else.
- smcin 4y ago
  No, that's what used to happen, pre-SVB. It has now been established as precedent that if depositors of "regional" (or "systemic") banks have enough clout/create enough panic, they can get infinite protection. We will see if FR depositors' money over the FDIC limit is made whole. If that happens with FR, then Congress should legislate to raise or index-link FDIC limits, for everyone. (If not, we have moral hazard for both depositors and well-managed banks; and also smaller banks have to compete at an ever-increasing disadvantage.)
  - Scoundreller 4y ago
    It's actually happened before that. Limit was retroactively raised from $100k to $250k after IndyMac collapsed. But that was for everyone by law (first temporarily by https://archive.fdic.gov/view/fdic/3388 https://archive.fdic.gov/view/fdic/3388 then by Dodd-Frank retroactively & permanently). Even then I thought it was a bad idea because it discouraged depositors from spreading around their assets. Whether we'll see them treat future failures like SVB or not, TBD!

cm2187 4y ago

That's a long term issue, but the contraction of credit is my shorter term concern. When deposits flow out of regional banks into big banks, it limits the capacity of those regional banks to fund themselves and forces them to cut lending (not the least to not consume their liquidity). On the other hand the big banks might receive more deposits but they can't lend it either because they are constrained by capital requirements, not funding. So logically you should have a contraction of credit, which combined with higher rates, is going to be ugly. Clearly the markets aren't pricing that right now.

dehrmann 4y ago

When SVB was failing, I told anyone who would listen we need 100% FDIC insurance for all normal bank accounts. The usual response was we need to punish startups for being reckless, and we need market forces to encourage banks to be well-managed. It turns out having the time or know-how to identify poorly managed banks is rare (and if you did, you should be in the business of short selling, not making widgets), but we all know which banks are too big to fail, so just move your money there.

deleted 4y ago
[deleted]
taeric 4y ago
There is a reason we don't want billionaires to feel safe with their assets sitting places. We want them actively using said assets to make the world better. Not just living off of leveraged value forever. To that end, I'm not sure I see good argument for 100% protection. Money sitting in a bank deposit only creates wealth if we have the banks actively lending. And, annoyingly to me, the largest form of this for the "too big to fail" banks seems to be credit card schemes. Which I actively despise, at the moment. It also incentivizes banks to hunt out places to loan money. Which is why we have ridiculously complicated securities to back mortgages. The amount of those that have been made is only "safe" for the banks with a ton of the extra machinery they have put on top. Which has costs. Edit: I should add that I'm not 100% on my stance here. Would love to be challenged on any of the above. Can only help my understanding.
- dehrmann 4y ago
  > There is a reason we don't want billionaires to feel safe with their assets sitting places... Between inflation and income taxes, you don't need to worry about this. I literally can't remember the last time banks paid enough interest to beat inflation and cover 37% income tax (almost 50% if you're in CA).
  - taeric 4y ago
    Billionaires care very little on either of those things? Leveraged income is not taxed. Is why you don't pay taxes as income on the loan to pay for your house. And inflation they have beat with other returns. If anything, this is reason to keep the insurance rate low. After all, they only "lose" the uninsured part that is not recovered in bank seizure. The scare quotes about people losing 100% of their money in SVB was just that, scare quotes. The assets did not disappear 100% and depositors are first in line. If anything, that should incentivise wealthy people to pay attention to how a bank is being run. Full insurance means I don't give a shit.

walrus01 4y ago

Eventually you'll end up with something like Canada, with a "big five" banks.

jones6ofMont 4y ago

[dead]