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This article misses the mark IMO. It really doesn't seem like the bank was taking on risks that a ton of banks aren't also exposed to just doing normal 'bank st

This article misses the mark IMO. It really doesn't seem like the bank was taking on risks that a ton of banks aren't also exposed to just doing normal 'bank stuff' The banks primarily invest in mortgages, and treasuries, and so a lesser extent business loans. That's about as 'safe' as it gets! If they wanted inflation protection they could invest in, what? Securities? Then they'd be an investment bank. Even if this was legal, then if market went down and there was a run and there would be an article about how the bank should have held bonds and treasuries. If they held cash they wouldn't be a 'bank' anymore and couldn't offer what few services they do. Banks are exposed to interest rate risk. They borrow short and lend long. Anybody taking a look at their checking account today will see they can get higher yields by moving their money around from their traditional bank to new high yield accounts from e.g. Synchrony and many others. Based on this I don't see this ending with First Republic. Now, I am sympathetic to claims of mismanagement, but I don't see it at the bank level. I'm just a amateur here but if I had to point my finger at something that exacerbates these problems its the US government's continued support for long (15yr+) fixed-rate loans. These really appear to be US government creation. Meanwhile our federal gov is running record peacetime deficits. If interest rates remain high (and its hard to see them coming down very quickly) its going to blow a gaping hole in the federal budget.

danielmarkbruce 3y ago
This isn't right. Banks have always needed to manage interest rate risk. They do this by owning a range of securities with different maturities. It is bad practice to hold too much long dated stuff (as a %). Most banks have managed their book appropriately. They've taken some losses, but not so much they wiped themselves out (as First Republic have done, and SVB did too).
- junofan 3y ago
  Hold on a second. I thought the Fed opened a special loan program for precisely this situation after SVB. Why isn’t that program sufficient for First Republic?
  - danielmarkbruce 3y ago
    For at least two reasons: 1) It doesn't help them to borrow money at 4-5% if their loan book is earning less than (or even slightly more, because operating costs). Locking in losses won't save them. 2) The FDIC decided that things had further deteriorated at First Republic (ie, more deposits pulled than they expected) and downgraded their CAMEL rating. The Fed won't lend money once a rating drops to some level (I'm not sure exactly where they draw the line) Their assets are worth less than their liabilities. They are toast.
compsciphd 3y ago
One can argue that banks shouldn't be able to invest "normal" saving deposits, only things given them for long term (i.e. CDs). Therefore, a client shouldn't expect interest on normal savings, but if they want to see their cash grow, have to give it to the bank in a manner that they gives the bank a higher level of guarantee that they wont withdraw it (and since the bank can't invest the "normal savings", that cash should always be there and a run should therefore be "impossible", or at least much harder). This would make banking more expensive overall though, possibly changing the model where we essentially are paid to bank at a bank to having to pay to bank at a bank.

danielmarkbruce 3y ago

This isn't right. Banks have always needed to manage interest rate risk. They do this by owning a range of securities with different maturities. It is bad practice to hold too much long dated stuff (as a %). Most banks have managed their book appropriately. They've taken some losses, but not so much they wiped themselves out (as First Republic have done, and SVB did too).

junofan 3y ago
Hold on a second. I thought the Fed opened a special loan program for precisely this situation after SVB. Why isn’t that program sufficient for First Republic?
- danielmarkbruce 3y ago
  For at least two reasons: 1) It doesn't help them to borrow money at 4-5% if their loan book is earning less than (or even slightly more, because operating costs). Locking in losses won't save them. 2) The FDIC decided that things had further deteriorated at First Republic (ie, more deposits pulled than they expected) and downgraded their CAMEL rating. The Fed won't lend money once a rating drops to some level (I'm not sure exactly where they draw the line) Their assets are worth less than their liabilities. They are toast.

compsciphd 3y ago

One can argue that banks shouldn't be able to invest "normal" saving deposits, only things given them for long term (i.e. CDs). Therefore, a client shouldn't expect interest on normal savings, but if they want to see their cash grow, have to give it to the bank in a manner that they gives the bank a higher level of guarantee that they wont withdraw it (and since the bank can't invest the "normal savings", that cash should always be there and a run should therefore be "impossible", or at least much harder). This would make banking more expensive overall though, possibly changing the model where we essentially are paid to bank at a bank to having to pay to bank at a bank.