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What I find interesting is that a lot of people are pointing to this and getting worried because these bank failures are the largest since the GFC. But aren't w

What I find interesting is that a lot of people are pointing to this and getting worried because these bank failures are the largest since the GFC. But aren't we actually so far seeing the opposite of what we should be worried about. In the GFC the problem that this all became a disorderly collapse. But so far this has seemed... pretty orderly? No depositors have been wiped out, no contagion has spread. Sure, equity holders got wiped out, but that's what equity holders are risking in return for their higher expected returns. It's difficult to celebrate "well things haven't completely blown up so far"... but, well, it's possible that this particular problem is actually being handled in a better way than last time.

JumpCrisscross 3y ago
> it's possible that this particular problem is actually being handled in a better way than last time It seems to be. Fingers crossed. And we have solutions to keep it from happening again this way. I’ve seen smart proposals. One I like is banks get to choose: HTM securities are liquid and marked to market or inviolable in value, in which case they’re held at face but do not count as liquid. (One can also do something fancy in between, but that seems to invite trouble.)
- echelon 3y ago
  I like your other comment down thread, >> slaw 51 minutes ago >> only estimated $13 billion will be printed > JumpCrisscross 46 minutes ago > Not printed. FDIC would levy a special assessment on its > member banks, including JPMorgan, if those costs are > realised. (Note that up to $40bn of enterprise value [1] > was also just destroyed.) "Equivalent exchange."
  - JumpCrisscross 3y ago
    The special assessment was discussed in respect of SVB [1]. [1] https://www.reuters.com/markets/us/fdics-special-fee-make-banks-pay-svb-cleanup-2023-04-12/ https://www.reuters.com/markets/us/fdics-special-fee-make-ba...
- HWR_14 3y ago
  As I understand, that proposal is pretty much the decision banks already make when purchasing assets. Assets are either marked as HTM and assumed to be illiquid and at face value or they are not marked as HTM and assumed to fluctuate in value.
  - JumpCrisscross 3y ago
    > Assets are either marked as HTM and assumed to be illiquid and at face value or they are not marked as HTM and assumed to fluctuate in value No, the liquidity coverage ratio defers to GAAP for all asset values, and doesn’t discount Level 1 assets [1]. So a U.S. Treasury is considered comparable to unrestricted Federal Reserve balances [2]. My proposal is screw GAAP, for liquidity calculations, your assets are market valued every quarter. If there is legitimate concern about an asset not having a market, it isn’t a HQLA. [1] https://www.occ.treas.gov/news-issuances/federal-register/2014/79fr61440.pdf https://www.occ.treas.gov/news-issuances/federal-register/20... page 61471 [2] https://www.richmondfed.org/-/media/richmondfedorg/publications/research/economic_brief/2016/pdf/eb_16-01.pdf https://www.richmondfed.org/-/media/richmondfedorg/publicati...
    - xmcqdpt2 3y ago
      The HQLA assets in LCR calculation are priced at "fair value" (see your footnote 1 for example) which is the present market value. The haircut is not there to account for mark-to-market losses but for potential losses due to lower market depth. This is explicitly stated in the Basel 3 rules https://www.bis.org/basel_framework/chapter/LCR/30.htm?inforce=20191215&published=20200605 https://www.bis.org/basel_framework/chapter/LCR/30.htm?infor... 30.40 footnote 1, for example. You can be insolvent and still meet LCR because LCR is based on average 30 days outflow. So if you have 600B of liabilities and 300B of assets but all those assets are HQLA 1 and your net outflow for LCR is calculated at 100B you have a 300% LCR and yet are very much insolvent.
      - JumpCrisscross 3y ago
        > HQLA assets in LCR calculation are priced at "fair value" (see your footnote 1 for example) which is the present market value Held-to-maturity securities' fair value, under GAAP, is amortized cost [1][2]. From an accounting perspective, this sort of makes sense. From a liquidity perspective, it does not. This is specific to the American implementation of Basel III because it incorporates GAAP. [1] https://viewpoint.pwc.com/dt/us/en/pwc/accounting_guides/loans_and_investment/loans_and_investment_US/chapter_3_accounting__1_US/34_accounting_for_de_US.html https://viewpoint.pwc.com/dt/us/en/pwc/accounting_guides/loa... [2] https://libertystreeteconomics.newyorkfed.org/2015/02/available-for-sale-understanding-bank-securities-portfolios/#:~:text=Held%20to%20maturity%20(HTM)%3A,either%20of%20the%20above%20definitions https://libertystreeteconomics.newyorkfed.org/2015/02/availa....
- _heimdall 3y ago
  One really important option that I've yet to see considered is rolling back a change from 2013 that allowed banks to buy securities directly from the central bank at any time. Previously banks would only buy on the open market unless a specific lot of securities was put up for sale. The Fed was concerned that future increases in interest rates would be delayed if banks didn't immediately increase the cost/rates of securities to match so they wanted to be a direct player in the market. If the Fed can raise rates and then immediately start offering securities at the higher pricethe open market would have to follow suit. Unfortunately that's exactly what banks did in 2020/2021 when they were handed piles of cash. Now those securities are a risk and here we are. Without that rule change banks would have found other places to park the cash, they wouldn't have been able to load their books with too many low yield government securities.
peepeepoopoo5 3y ago
> no contagion has spread What are you talking about? This is contagion from FTX/Silvergate/SVB/Signature/Credit Suisse, all of which have failed in recent weeks.
- JumpCrisscross 3y ago
  > is contagion from FTX/Silvergate/SVB/Signature/Credit Suisse SVB joined that party de novo. Silvergate and FTX were coupled. Signature was to both crypto and SVB. First Republic to SVB. I haven’t seen a great source for linking First Republic and Credit Suisse, though I could see some shared funding channel being shrapnelled.
  - cuteboy19 3y ago
    Credit Suisse was it's own separate glacial disaster
- unicornmama 3y ago
  Each of those bank failures taken individually did not cause the other banks to fail. They each failed due to their own issues in isolation. Thus it may be incorrect to say that there is a contagion.
  - mejutoco 3y ago
    One could claim the contagion was the erosion of trust in smaller banks.
    - bhaak 3y ago
      Credit Suisse was not a smaller bank until they fucked up pretty hard to become one and then failed completely.
      - qwytw 3y ago
        Credit Suisse was not that related to the others. It was an investment bank first and foremost.
mjfl 3y ago
you should be worried about the case where inflation continues to rise and the unrealized losses from these bonds increases and may cause a much more consequential default now that the bond portfolios are becoming more and more concentrated. Basically the fed needs to slow the rate at which it is raising interest rates, even if inflation continues. The problem is it's going to take a long time to release this pressure, since the majority of the bonds that are in crisis have expirys in like 30 years. So we are looking at entrenched inflation for a decade long period or more, or an explosion of our banking system, or both!
- JumpCrisscross 3y ago
  > you should be worried about the case where inflation continues to rise and the unrealized losses from these bonds increases and may cause a much more consequential default No, you shouldn’t. Duration is stress tested at the larger banks. The smaller banks lobbied to be exempted from liquidity coverage ratios in 2017 and got it, which is a large part of why we are in this mess. There is no evidence the Fed is constrained by bank balance sheets. (This could change, regionally, with CRE write downs. But again, money being destroyed.)
  - deleted 3y ago
    [deleted]
  - votepaunchy 3y ago
    > Duration is stress tested at the larger banks. Then why do we read this: “Fed’s Bank Tests Overlooked Risk of Rapid Rise in Interest Rates”. https://www.bloomberg.com/news/articles/2023-03-15/fed-s-key-bank-test-overlooked-interest-rate-risk-for-a-decade https://www.bloomberg.com/news/articles/2023-03-15/fed-s-key...
    - JumpCrisscross 3y ago
      Short answer is we didn’t pay attention to it but we do now and we always measured it. That’s how SVB’s issues were flagged in 2021 [1]. (The systemic solution will be re-defining HQLAs in the LCR to reflect market value [2].) [1] https://www.nytimes.com/2023/03/19/business/economy/fed-silicon-valley-bank.html https://www.nytimes.com/2023/03/19/business/economy/fed-sili... [2] https://www.richmondfed.org/-/media/richmondfedorg/publications/research/economic_brief/2016/pdf/eb_16-01.pdf https://www.richmondfed.org/-/media/richmondfedorg/publicati...
roenxi 3y ago
> But so far this has seemed... pretty orderly? No depositors have been wiped out, no contagion has spread. Making disorder the enemy is something of a distraction tactic. General rate of growth matters a lot more and much has been sacrificed in the name of trying to make the market look pretty at the cost of keeping the incentives properly aligned. Disorder is more of a code word for the wealthy and powerful being at risk of losing their social standing. The rest of us should be worried about general wealth and prosperity. Which, I might add, is maximised by the occasional dose of collapse in badly designed systems. Joseph Gentile has been given 2 goes now at wiping out his creditors; there was no need for that - the 2008 bailouts just gave him cover to go and get people wiped out a 2nd time. The real question now is who is actually eating these losses? Is it old people with pensions? Because while it would be karmic justice to start wiping out elderly investors because they were the ones with political control ignoring all the problems building over the decades, but that would still be a huge problem. They should have let 2000 or 2008 play out to their natural conclusions to minimise the overall damage. This one is a bunch of people going bankrupt in ways that could easily be predicted a decade ago. These losses have been created by Fed policy. And we'll probably find when the dust settles that they have once again stuffed everything up, there is no reason to believe this time is different. There have been bank crisises to safely assume that this time will not be different unless, miraculously, hindsight shows they changed tack.
- avoutthere 3y ago
  > it would be karmic justice to start wiping out elderly investors because they were the ones with political control ignoring all the problems building over the decades Are you "ignoring all the problems" of today? Or do you just not have the "political control" to change things? What makes you think that "elderly investors" had more control during their lifetimes?
  - mandmandam 3y ago
    Millenials hold 4.36% of US wealth. Boomers hold 53.2%. Those figures are from 2020 - it's probably gotten worse since. ... And those wealth holders aren't just ignoring the problems of today; they're exacerbating them. Ageism won't solve our problems - all of this is still very much a class issue. But let's not pretend that as a generation, the Boomers didn't fail like no generation has ever failed. And let's not pretend they aren't still blaming the victim.
barrysteve 3y ago
An orderly collapse of a long standing glorious military is no less terrifying than all the big banks folding themselves into a singularity. The pull into oblivion is quite agreeable to people, for some reason.
- deleted 3y ago
  [deleted]
TheAlchemist 3y ago
It depends what do you call 'pretty orderly'. FRC was trading at 120$/share in January, 15$/share a week ago, and 1.5$/share on Friday after hours. Pretty close to the Bear Stearns path if you ask me ! When Bear Stearns was bought by JPM, there wasn't an immediate collapse of everything - no contagion or anything. On the surface that is. The underlying problems of this crisis are still there - JPM buying (or ... being forced to buy) FRC doesn't solve any of those problems. It's just buying time.
- fallingknife 3y ago
  The difference is that in 2008 all the major banks had taken on exactly the same balance sheet risk as Bear Stearns. In this case, what brought down SVB was the risk they took on the left side of their balance sheet, and this was pretty unique. FRC was taken down in the resulting panic, not because they shared the risk of SVB. FRC went under because it has been a zombie since the SVB collapes collapse, and the final blow came because they had to publicly report the damage they took then. It's not because of any further deterioration since. That s why there is no panic now. I don't expect there to be any additional casualties from this in the near term as the panic is over. In the longer term, though, I expect additional consolidation because of the fact that the government has all but instructed CFOs to move to larger banks through their statement that only "systemically important" institutions will be bailed out.
  - zamnos 3y ago
    Aren't all banks holding a bunch of low-yield 10-year Treasury bonds, like SVB and FRC were, and using somewhat questionable (even if required to by regulators) HtM accounting for them?
    - xmcqdpt2 3y ago
      Yes, but losses at SVB and FRC were a lot heavier than at most banks, https://am.jpmorgan.com/content/dam/jpm-am-aem/global/en/insights/eye-on-the-market/silicon-valley-bank-failure-amv.pdf https://am.jpmorgan.com/content/dam/jpm-am-aem/global/en/ins...
sschueller 3y ago
No depositors have been wiped out because we are changing the rules as we go. In the end it will be the little guy or the general tax payers that will get screwed while the ones that knowingly took dangerous risks got a defacto bailout by the rules being changed in their favor at the last minute.
- matwood 3y ago
  Are you saying depositors knowingly took dangerous risks?
  - deleted 3y ago
    [deleted]
- opportune 3y ago
  I doubt depositors who at best got a bit more yield more on savings accounts benefitted nearly as much in aggregate as FRB employees (who got big bonuses) or the people who got extremely good terms on mortgages from FRB (I’ve heard sub-3% even for jumbo)
- astrange 3y ago
  Bank executives normally get fired and lose all their shares when the FDIC shuts down a bank.
- xp84 3y ago
  > general tax payers FDIC isn't taxpayer funded though, right? It's funded by insurance paid by banks. Personally I haven't given a dime to a bank my whole adult life other than mortgage interest, so I'm confident saying I'm not bearing the cost of FDIC covering depositors. > the ones that knowingly took dangerous risks got a defacto bailout Depositors, the only ones who got "bailed out," were not informed of whatever investment choices were made by these banks. Occam's razor: Do you think they would have gotten any depositors at all if they'd advertised "There's a small chance our bank will fail and you'll lose everything if interest rates go up by about 400bps from their current all-time low"? Also these banks weren't paying like, insane 15% interest rates or something -- they may have been a bit better than average, but not in too-good-to-be-true territory.
opportune 3y ago
Every time these banks fail, the value of your money gets a little less, and in aggregate the returns in your checking/savings accounts decrease. We’ve also set a precedent for future recessions/shifts towards hawkish policy: if you’re a bank exec, be as reckless as possible while demand for loans is high and shift that value to yourself with stock incentivizes and bonuses. Markets are defined by activity at the margins so if it’s not you, it’ll be whichever other bank is ballsy or poorly managed enough to do it. You can even pass on some of the gains to consumers, who will know it’s unsustainable but that their deposits are protected, so you can write and hold as many unprofitable loans as possible on your books. When the music stops the only people screwed are shareholders and all the people whose money you devalued. Or, the precedent is that the Fed gets scared of raising rates and basically ends up letting banks tell them if they’re allowed to raise rates. Which will mostly be answered with “no”
- SilverBirch 3y ago
  Is that even true? FDIC estimates it will have to come up with $13Bn, which will eventually be clawed back through insurance costs to big banks. Meanwhile FRC was worth $22Bn a few months ago and that's now gone to zero. So isn't it actually the case that the total money supply has gone down during this collapse, so the value of my money has actually gone up?
  - opportune 3y ago
    FRC having a market cap of X has nothing to do with the monetary supply. That is the value of a single transaction of a portion of the bank’s ownership between a buyer and seller at a certain price, divided by the number of shares, multiplied by all existing shares. During that transaction, the actual money was transferred from buyer to seller and was the same across both sides before, during, and after the tx and FRB going bankrupt - the monetary supply was the same the entire time. The only way the monetary supply changes is when a bank loan begins or ends, or when the Fed buys or sells something, because those are the only cases in which a transaction occurs with more or less money across all parties after it completes. In all other transactions money is just moving from one account to another (but the Fed issues money, so their account is special in that it can create or destroy any quantity). Reality is a bit more complicated than this, but when a bank gets a deposit for $100 that becomes both a bank asset ($100) and liability (they need to be able to pay out $100 on short notice). Loaning the money out to another account in the bank, you’ll notice that the bank now has $200 in liabilities, $100 in cash assets, and a loan for $100 paying some interest and principle over time. Those loans can be valued at some price between starting and ending based on risk, duration, and rates. When the Fed raised rates, those previously issued loans at lower rates become less valuable. Now the bank has the same amount of liabilities but less valuable assets. Banks can lend from each other to make up for short term liquidity problems, but if the situation gets bad enough, nobody will lend to the bank anymore and they can only look at their balance sheet in terms of their current asset prices (which may have fallen a lot compared to the full value they were using for accounting) and liabilities. Shortly thereafter they become unable to meet liabilities and are considered to have failed and enter receivership (basically bankruptcy). The monetary supply then changes in one of two ways: it decreases by any amount that depositors lose due to the bank not having it (they end up with an account with less dollars) or it increases by any new money loaned/printed to shore up the failed bank’s balance sheet so it can be sold off to other banks (since in aggregate it has negative value, it can’t completely sell off as-is). I don’t know exactly what financial trickery backs FDIC insurance but I suspect it’s not new-money. What is monetary supply inflation is when the failed bank exercises the new Fed backstop to cover losses past FDIC, because this lets them sell some debt-based-instruments at coupon value (amount ultimately due) rather than fair-market-value (amount if you tried to sell it right now) to the Fed (remember, them buying stuff means more money gets created). And that is why these bank failures are causing everybody with cash to be effectively bailing out depositors: https://www.reuters.com/business/finance/feds-new-banking-backstop-could-slow-balance-sheet-drawdown-2023-03-15/ https://www.reuters.com/business/finance/feds-new-banking-ba...
0zemp2c 3y ago
you should be concerned that regulators, the financial press, large banks etc all seem to have guided this process I see no reason why FRC couldn't have just gone on...shown a quarterly loss from time to time, lose and/or gain depositors, shrink or grow... its as if it was "decided" that this bank will be sold off for literally 1 penny on the dollar when the crisis deepens, The Fed will lower rates and all of FRCs bonds will be in the green again...and JPM got them for free
- opportune 3y ago
  What? And how exactly would FRC have just gone on? They were insolvent. The fed and regulators have to provide their current receivership terms (depositors will be made whole) to prevent banks runs and a liquidity collapse. Without these terms FRB would have collapsed long ago, as would have many other regional banks in the panic that would ensue as everybody takes their money to a TBTF bank. The fed can only let you use those terms when you’ve failed, because otherwise they’d be massive money printers and accelerate inflation greatly (for the part that’s not funded by existing insurance terms, or bank fees, which btw are gonna have to go up each time this happens). And the Fed can’t let banks like FRC continue to operate after receivership because it’s essentially bailing out shareholders and execs with public money.
- smileysteve 3y ago
  > when the crisis deepens If, then when. This is the gamble. With JPM getting them for free, the bonds pay out on a long enough time horizon OR if the federal reserve slows or changes direction.
_heimdall 3y ago
I'm not sure I would call it orderly so far. SVB failed so quickly the Fed couldn't go through their usual process. The Fed had to throw out the rules and effectively stare that FDIC limits don't matter and all deposits are fully insured. They were then so concerned about First Republic failing quickly after SVB that they in all likelyhood helped orchestrate a $30B deposit by major banks to help provide liquidity. That move is extremely odd and really looks a lot like market manipulation and collusion. They also must have known that was a short term measure to delay the failure until they could let the smoke clear and find a buyer, banks would have provided First Republic loans or invested in the bank if they had any faith in it's long term viability, depositing cash is just a show of force.
- bugglebeetle 3y ago
  More explicitly, the Fed is so committed to destroying wage growth that it will happily blow up banks and throw all of its ostensible rules out the window.
  - FormerBandmate 3y ago
    Inflation is a serious problem. It is not just wage growth. Most Americans are seeing declining real wages because of the high rates of inflation
    - _heimdall 3y ago
      That's by design. When the economy is improving people are getting better off. Once it gets ahead of itself and inflation rises the only way it can slow back down is for people to feel more pain.
    - bugglebeetle 3y ago
      Much of inflation is being driven by corporate concentration and failed tax policy: https://scholarworks.umass.edu/econ_workingpaper/343/ https://scholarworks.umass.edu/econ_workingpaper/343/ While much of wage growth is being driven by a plague-induced labor shortage and in response to the above. Cranking the interest rate dial to 11 solves very little besides impoverishing workers to preserve the dysfunctional status quo for the wealthy and business owners. This is quite obvious in how they’re handling all these bank failures.
roflyear 3y ago
Those same people are saying inflation has been 20% for the last decade.
tootie 3y ago
Basically yes. All things being equal it's better that banks don't collapse but this far regulators have done an excellent job containing the fallout and preventing contagion. In 2007 the failures were amongst investment banks and there was no statutory authority to do an orderly liquidation (there is now) and the Bush admin was seemingly disinterested in responding. Thus a panic ensued. This time we're applying well-tested and reliable procedures and they're working as expected.
deleted 3y ago
[deleted]
anon291 3y ago
Order is hard; disorder is easy. That is to say... everything is orderly until it's not.

JumpCrisscross 3y ago

> it's possible that this particular problem is actually being handled in a better way than last time It seems to be. Fingers crossed. And we have solutions to keep it from happening again this way. I’ve seen smart proposals. One I like is banks get to choose: HTM securities are liquid and marked to market or inviolable in value, in which case they’re held at face but do not count as liquid. (One can also do something fancy in between, but that seems to invite trouble.)

echelon 3y ago
I like your other comment down thread, >> slaw 51 minutes ago >> only estimated $13 billion will be printed > JumpCrisscross 46 minutes ago > Not printed. FDIC would levy a special assessment on its > member banks, including JPMorgan, if those costs are > realised. (Note that up to $40bn of enterprise value [1] > was also just destroyed.) "Equivalent exchange."
- JumpCrisscross 3y ago
  The special assessment was discussed in respect of SVB [1]. [1] https://www.reuters.com/markets/us/fdics-special-fee-make-banks-pay-svb-cleanup-2023-04-12/ https://www.reuters.com/markets/us/fdics-special-fee-make-ba...
HWR_14 3y ago
As I understand, that proposal is pretty much the decision banks already make when purchasing assets. Assets are either marked as HTM and assumed to be illiquid and at face value or they are not marked as HTM and assumed to fluctuate in value.
- JumpCrisscross 3y ago
  > Assets are either marked as HTM and assumed to be illiquid and at face value or they are not marked as HTM and assumed to fluctuate in value No, the liquidity coverage ratio defers to GAAP for all asset values, and doesn’t discount Level 1 assets [1]. So a U.S. Treasury is considered comparable to unrestricted Federal Reserve balances [2]. My proposal is screw GAAP, for liquidity calculations, your assets are market valued every quarter. If there is legitimate concern about an asset not having a market, it isn’t a HQLA. [1] https://www.occ.treas.gov/news-issuances/federal-register/2014/79fr61440.pdf https://www.occ.treas.gov/news-issuances/federal-register/20... page 61471 [2] https://www.richmondfed.org/-/media/richmondfedorg/publications/research/economic_brief/2016/pdf/eb_16-01.pdf https://www.richmondfed.org/-/media/richmondfedorg/publicati...
  - xmcqdpt2 3y ago
    The HQLA assets in LCR calculation are priced at "fair value" (see your footnote 1 for example) which is the present market value. The haircut is not there to account for mark-to-market losses but for potential losses due to lower market depth. This is explicitly stated in the Basel 3 rules https://www.bis.org/basel_framework/chapter/LCR/30.htm?inforce=20191215&published=20200605 https://www.bis.org/basel_framework/chapter/LCR/30.htm?infor... 30.40 footnote 1, for example. You can be insolvent and still meet LCR because LCR is based on average 30 days outflow. So if you have 600B of liabilities and 300B of assets but all those assets are HQLA 1 and your net outflow for LCR is calculated at 100B you have a 300% LCR and yet are very much insolvent.
    - JumpCrisscross 3y ago
      > HQLA assets in LCR calculation are priced at "fair value" (see your footnote 1 for example) which is the present market value Held-to-maturity securities' fair value, under GAAP, is amortized cost [1][2]. From an accounting perspective, this sort of makes sense. From a liquidity perspective, it does not. This is specific to the American implementation of Basel III because it incorporates GAAP. [1] https://viewpoint.pwc.com/dt/us/en/pwc/accounting_guides/loans_and_investment/loans_and_investment_US/chapter_3_accounting__1_US/34_accounting_for_de_US.html https://viewpoint.pwc.com/dt/us/en/pwc/accounting_guides/loa... [2] https://libertystreeteconomics.newyorkfed.org/2015/02/available-for-sale-understanding-bank-securities-portfolios/#:~:text=Held%20to%20maturity%20(HTM)%3A,either%20of%20the%20above%20definitions https://libertystreeteconomics.newyorkfed.org/2015/02/availa....
_heimdall 3y ago
One really important option that I've yet to see considered is rolling back a change from 2013 that allowed banks to buy securities directly from the central bank at any time. Previously banks would only buy on the open market unless a specific lot of securities was put up for sale. The Fed was concerned that future increases in interest rates would be delayed if banks didn't immediately increase the cost/rates of securities to match so they wanted to be a direct player in the market. If the Fed can raise rates and then immediately start offering securities at the higher pricethe open market would have to follow suit. Unfortunately that's exactly what banks did in 2020/2021 when they were handed piles of cash. Now those securities are a risk and here we are. Without that rule change banks would have found other places to park the cash, they wouldn't have been able to load their books with too many low yield government securities.

peepeepoopoo5 3y ago

> no contagion has spread What are you talking about? This is contagion from FTX/Silvergate/SVB/Signature/Credit Suisse, all of which have failed in recent weeks.

JumpCrisscross 3y ago
> is contagion from FTX/Silvergate/SVB/Signature/Credit Suisse SVB joined that party de novo. Silvergate and FTX were coupled. Signature was to both crypto and SVB. First Republic to SVB. I haven’t seen a great source for linking First Republic and Credit Suisse, though I could see some shared funding channel being shrapnelled.
- cuteboy19 3y ago
  Credit Suisse was it's own separate glacial disaster
unicornmama 3y ago
Each of those bank failures taken individually did not cause the other banks to fail. They each failed due to their own issues in isolation. Thus it may be incorrect to say that there is a contagion.
- mejutoco 3y ago
  One could claim the contagion was the erosion of trust in smaller banks.
  - bhaak 3y ago
    Credit Suisse was not a smaller bank until they fucked up pretty hard to become one and then failed completely.
    - qwytw 3y ago
      Credit Suisse was not that related to the others. It was an investment bank first and foremost.

mjfl 3y ago

you should be worried about the case where inflation continues to rise and the unrealized losses from these bonds increases and may cause a much more consequential default now that the bond portfolios are becoming more and more concentrated. Basically the fed needs to slow the rate at which it is raising interest rates, even if inflation continues. The problem is it's going to take a long time to release this pressure, since the majority of the bonds that are in crisis have expirys in like 30 years. So we are looking at entrenched inflation for a decade long period or more, or an explosion of our banking system, or both!

JumpCrisscross 3y ago
> you should be worried about the case where inflation continues to rise and the unrealized losses from these bonds increases and may cause a much more consequential default No, you shouldn’t. Duration is stress tested at the larger banks. The smaller banks lobbied to be exempted from liquidity coverage ratios in 2017 and got it, which is a large part of why we are in this mess. There is no evidence the Fed is constrained by bank balance sheets. (This could change, regionally, with CRE write downs. But again, money being destroyed.)
- deleted 3y ago
  [deleted]
- votepaunchy 3y ago
  > Duration is stress tested at the larger banks. Then why do we read this: “Fed’s Bank Tests Overlooked Risk of Rapid Rise in Interest Rates”. https://www.bloomberg.com/news/articles/2023-03-15/fed-s-key-bank-test-overlooked-interest-rate-risk-for-a-decade https://www.bloomberg.com/news/articles/2023-03-15/fed-s-key...
  - JumpCrisscross 3y ago
    Short answer is we didn’t pay attention to it but we do now and we always measured it. That’s how SVB’s issues were flagged in 2021 [1]. (The systemic solution will be re-defining HQLAs in the LCR to reflect market value [2].) [1] https://www.nytimes.com/2023/03/19/business/economy/fed-silicon-valley-bank.html https://www.nytimes.com/2023/03/19/business/economy/fed-sili... [2] https://www.richmondfed.org/-/media/richmondfedorg/publications/research/economic_brief/2016/pdf/eb_16-01.pdf https://www.richmondfed.org/-/media/richmondfedorg/publicati...

roenxi 3y ago

> But so far this has seemed... pretty orderly? No depositors have been wiped out, no contagion has spread. Making disorder the enemy is something of a distraction tactic. General rate of growth matters a lot more and much has been sacrificed in the name of trying to make the market look pretty at the cost of keeping the incentives properly aligned. Disorder is more of a code word for the wealthy and powerful being at risk of losing their social standing. The rest of us should be worried about general wealth and prosperity. Which, I might add, is maximised by the occasional dose of collapse in badly designed systems. Joseph Gentile has been given 2 goes now at wiping out his creditors; there was no need for that - the 2008 bailouts just gave him cover to go and get people wiped out a 2nd time. The real question now is who is actually eating these losses? Is it old people with pensions? Because while it would be karmic justice to start wiping out elderly investors because they were the ones with political control ignoring all the problems building over the decades, but that would still be a huge problem. They should have let 2000 or 2008 play out to their natural conclusions to minimise the overall damage. This one is a bunch of people going bankrupt in ways that could easily be predicted a decade ago. These losses have been created by Fed policy. And we'll probably find when the dust settles that they have once again stuffed everything up, there is no reason to believe this time is different. There have been bank crisises to safely assume that this time will not be different unless, miraculously, hindsight shows they changed tack.

avoutthere 3y ago
> it would be karmic justice to start wiping out elderly investors because they were the ones with political control ignoring all the problems building over the decades Are you "ignoring all the problems" of today? Or do you just not have the "political control" to change things? What makes you think that "elderly investors" had more control during their lifetimes?
- mandmandam 3y ago
  Millenials hold 4.36% of US wealth. Boomers hold 53.2%. Those figures are from 2020 - it's probably gotten worse since. ... And those wealth holders aren't just ignoring the problems of today; they're exacerbating them. Ageism won't solve our problems - all of this is still very much a class issue. But let's not pretend that as a generation, the Boomers didn't fail like no generation has ever failed. And let's not pretend they aren't still blaming the victim.

barrysteve 3y ago

An orderly collapse of a long standing glorious military is no less terrifying than all the big banks folding themselves into a singularity. The pull into oblivion is quite agreeable to people, for some reason.

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TheAlchemist 3y ago

It depends what do you call 'pretty orderly'. FRC was trading at 120$/share in January, 15$/share a week ago, and 1.5$/share on Friday after hours. Pretty close to the Bear Stearns path if you ask me ! When Bear Stearns was bought by JPM, there wasn't an immediate collapse of everything - no contagion or anything. On the surface that is. The underlying problems of this crisis are still there - JPM buying (or ... being forced to buy) FRC doesn't solve any of those problems. It's just buying time.

fallingknife 3y ago
The difference is that in 2008 all the major banks had taken on exactly the same balance sheet risk as Bear Stearns. In this case, what brought down SVB was the risk they took on the left side of their balance sheet, and this was pretty unique. FRC was taken down in the resulting panic, not because they shared the risk of SVB. FRC went under because it has been a zombie since the SVB collapes collapse, and the final blow came because they had to publicly report the damage they took then. It's not because of any further deterioration since. That s why there is no panic now. I don't expect there to be any additional casualties from this in the near term as the panic is over. In the longer term, though, I expect additional consolidation because of the fact that the government has all but instructed CFOs to move to larger banks through their statement that only "systemically important" institutions will be bailed out.
- zamnos 3y ago
  Aren't all banks holding a bunch of low-yield 10-year Treasury bonds, like SVB and FRC were, and using somewhat questionable (even if required to by regulators) HtM accounting for them?
  - xmcqdpt2 3y ago
    Yes, but losses at SVB and FRC were a lot heavier than at most banks, https://am.jpmorgan.com/content/dam/jpm-am-aem/global/en/insights/eye-on-the-market/silicon-valley-bank-failure-amv.pdf https://am.jpmorgan.com/content/dam/jpm-am-aem/global/en/ins...

sschueller 3y ago

No depositors have been wiped out because we are changing the rules as we go. In the end it will be the little guy or the general tax payers that will get screwed while the ones that knowingly took dangerous risks got a defacto bailout by the rules being changed in their favor at the last minute.

matwood 3y ago
Are you saying depositors knowingly took dangerous risks?
- deleted 3y ago
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opportune 3y ago
I doubt depositors who at best got a bit more yield more on savings accounts benefitted nearly as much in aggregate as FRB employees (who got big bonuses) or the people who got extremely good terms on mortgages from FRB (I’ve heard sub-3% even for jumbo)
astrange 3y ago
Bank executives normally get fired and lose all their shares when the FDIC shuts down a bank.
xp84 3y ago
> general tax payers FDIC isn't taxpayer funded though, right? It's funded by insurance paid by banks. Personally I haven't given a dime to a bank my whole adult life other than mortgage interest, so I'm confident saying I'm not bearing the cost of FDIC covering depositors. > the ones that knowingly took dangerous risks got a defacto bailout Depositors, the only ones who got "bailed out," were not informed of whatever investment choices were made by these banks. Occam's razor: Do you think they would have gotten any depositors at all if they'd advertised "There's a small chance our bank will fail and you'll lose everything if interest rates go up by about 400bps from their current all-time low"? Also these banks weren't paying like, insane 15% interest rates or something -- they may have been a bit better than average, but not in too-good-to-be-true territory.

opportune 3y ago

Every time these banks fail, the value of your money gets a little less, and in aggregate the returns in your checking/savings accounts decrease. We’ve also set a precedent for future recessions/shifts towards hawkish policy: if you’re a bank exec, be as reckless as possible while demand for loans is high and shift that value to yourself with stock incentivizes and bonuses. Markets are defined by activity at the margins so if it’s not you, it’ll be whichever other bank is ballsy or poorly managed enough to do it. You can even pass on some of the gains to consumers, who will know it’s unsustainable but that their deposits are protected, so you can write and hold as many unprofitable loans as possible on your books. When the music stops the only people screwed are shareholders and all the people whose money you devalued. Or, the precedent is that the Fed gets scared of raising rates and basically ends up letting banks tell them if they’re allowed to raise rates. Which will mostly be answered with “no”

SilverBirch 3y ago
Is that even true? FDIC estimates it will have to come up with $13Bn, which will eventually be clawed back through insurance costs to big banks. Meanwhile FRC was worth $22Bn a few months ago and that's now gone to zero. So isn't it actually the case that the total money supply has gone down during this collapse, so the value of my money has actually gone up?
- opportune 3y ago
  FRC having a market cap of X has nothing to do with the monetary supply. That is the value of a single transaction of a portion of the bank’s ownership between a buyer and seller at a certain price, divided by the number of shares, multiplied by all existing shares. During that transaction, the actual money was transferred from buyer to seller and was the same across both sides before, during, and after the tx and FRB going bankrupt - the monetary supply was the same the entire time. The only way the monetary supply changes is when a bank loan begins or ends, or when the Fed buys or sells something, because those are the only cases in which a transaction occurs with more or less money across all parties after it completes. In all other transactions money is just moving from one account to another (but the Fed issues money, so their account is special in that it can create or destroy any quantity). Reality is a bit more complicated than this, but when a bank gets a deposit for $100 that becomes both a bank asset ($100) and liability (they need to be able to pay out $100 on short notice). Loaning the money out to another account in the bank, you’ll notice that the bank now has $200 in liabilities, $100 in cash assets, and a loan for $100 paying some interest and principle over time. Those loans can be valued at some price between starting and ending based on risk, duration, and rates. When the Fed raised rates, those previously issued loans at lower rates become less valuable. Now the bank has the same amount of liabilities but less valuable assets. Banks can lend from each other to make up for short term liquidity problems, but if the situation gets bad enough, nobody will lend to the bank anymore and they can only look at their balance sheet in terms of their current asset prices (which may have fallen a lot compared to the full value they were using for accounting) and liabilities. Shortly thereafter they become unable to meet liabilities and are considered to have failed and enter receivership (basically bankruptcy). The monetary supply then changes in one of two ways: it decreases by any amount that depositors lose due to the bank not having it (they end up with an account with less dollars) or it increases by any new money loaned/printed to shore up the failed bank’s balance sheet so it can be sold off to other banks (since in aggregate it has negative value, it can’t completely sell off as-is). I don’t know exactly what financial trickery backs FDIC insurance but I suspect it’s not new-money. What is monetary supply inflation is when the failed bank exercises the new Fed backstop to cover losses past FDIC, because this lets them sell some debt-based-instruments at coupon value (amount ultimately due) rather than fair-market-value (amount if you tried to sell it right now) to the Fed (remember, them buying stuff means more money gets created). And that is why these bank failures are causing everybody with cash to be effectively bailing out depositors: https://www.reuters.com/business/finance/feds-new-banking-backstop-could-slow-balance-sheet-drawdown-2023-03-15/ https://www.reuters.com/business/finance/feds-new-banking-ba...

0zemp2c 3y ago

you should be concerned that regulators, the financial press, large banks etc all seem to have guided this process I see no reason why FRC couldn't have just gone on...shown a quarterly loss from time to time, lose and/or gain depositors, shrink or grow... its as if it was "decided" that this bank will be sold off for literally 1 penny on the dollar when the crisis deepens, The Fed will lower rates and all of FRCs bonds will be in the green again...and JPM got them for free

opportune 3y ago
What? And how exactly would FRC have just gone on? They were insolvent. The fed and regulators have to provide their current receivership terms (depositors will be made whole) to prevent banks runs and a liquidity collapse. Without these terms FRB would have collapsed long ago, as would have many other regional banks in the panic that would ensue as everybody takes their money to a TBTF bank. The fed can only let you use those terms when you’ve failed, because otherwise they’d be massive money printers and accelerate inflation greatly (for the part that’s not funded by existing insurance terms, or bank fees, which btw are gonna have to go up each time this happens). And the Fed can’t let banks like FRC continue to operate after receivership because it’s essentially bailing out shareholders and execs with public money.
smileysteve 3y ago
> when the crisis deepens If, then when. This is the gamble. With JPM getting them for free, the bonds pay out on a long enough time horizon OR if the federal reserve slows or changes direction.

_heimdall 3y ago

I'm not sure I would call it orderly so far. SVB failed so quickly the Fed couldn't go through their usual process. The Fed had to throw out the rules and effectively stare that FDIC limits don't matter and all deposits are fully insured. They were then so concerned about First Republic failing quickly after SVB that they in all likelyhood helped orchestrate a $30B deposit by major banks to help provide liquidity. That move is extremely odd and really looks a lot like market manipulation and collusion. They also must have known that was a short term measure to delay the failure until they could let the smoke clear and find a buyer, banks would have provided First Republic loans or invested in the bank if they had any faith in it's long term viability, depositing cash is just a show of force.

bugglebeetle 3y ago
More explicitly, the Fed is so committed to destroying wage growth that it will happily blow up banks and throw all of its ostensible rules out the window.
- FormerBandmate 3y ago
  Inflation is a serious problem. It is not just wage growth. Most Americans are seeing declining real wages because of the high rates of inflation
  - _heimdall 3y ago
    That's by design. When the economy is improving people are getting better off. Once it gets ahead of itself and inflation rises the only way it can slow back down is for people to feel more pain.
  - bugglebeetle 3y ago
    Much of inflation is being driven by corporate concentration and failed tax policy: https://scholarworks.umass.edu/econ_workingpaper/343/ https://scholarworks.umass.edu/econ_workingpaper/343/ While much of wage growth is being driven by a plague-induced labor shortage and in response to the above. Cranking the interest rate dial to 11 solves very little besides impoverishing workers to preserve the dysfunctional status quo for the wealthy and business owners. This is quite obvious in how they’re handling all these bank failures.

roflyear 3y ago

Those same people are saying inflation has been 20% for the last decade.

tootie 3y ago

Basically yes. All things being equal it's better that banks don't collapse but this far regulators have done an excellent job containing the fallout and preventing contagion. In 2007 the failures were amongst investment banks and there was no statutory authority to do an orderly liquidation (there is now) and the Bush admin was seemingly disinterested in responding. Thus a panic ensued. This time we're applying well-tested and reliable procedures and they're working as expected.

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anon291 3y ago

Order is hard; disorder is easy. That is to say... everything is orderly until it's not.