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This is bad news on two fronts: * the risk driver for these ongoing smaller bank failures is (reportedly) the rise in interest rates. This concerns such a basi

This is bad news on two fronts: * the risk driver for these ongoing smaller bank failures is (reportedly) the rise in interest rates. This concerns such a basic aspect of bank risk management one wonders how this sector could even call it self banking * the solution seems to be to create ever larger banking behemoths (on the premise that they they can better manage risks) - as if we don't have enough examples (Lehman, Credit Suisse that this is not so). In fact this aggregation only commingles all sort of risks inside a gigantic opaque pool, makes the private-public dependency (TBTF) and all its perverse incentives even more entrenched, and ultimately creates the conditions for systemic failure It is all so egregiously non-sensical and sub-optimal. People famously have the political systems that they deserve. In turn this perpetuates the banking systems that they deserve.

papito 4y ago
"Larger banking behemoths" is NOT the solution - it's the result of deregulation and gutting of oversight - also referred to by libertarians here as "small government". These banks should have been aggressively audited and diversification should have been enforced, as it used to be. We just keep going in this "deregulate-collapse-regulate" cycle.
- junofan 4y ago
  They took a 40% hit to deposits. What do you want them to do? It’s not survivable. This is just how our banking system works.
  - matwood 4y ago
    > This is just how our banking system works. That's just how business works. Many businesses would have a hard time surviving losing 40% of their business in a short period of time.
  - TacticalCoder 4y ago
    > They took a 40% hit to deposits. What do you want them to do? It’s not survivable. This is just how our banking system works. You're making it sound like people taking out their money out were those in the wrong, causing the failure of the bank. That's not what happened. People taking their money out were in the right. The root cause is bankers at FRB miscalculating risk. And they are those who were wrong.
    - r00fus 4y ago
      I mean, banks are allowed to curtail the egress of funds through rules limiting the velocity of funds. I see this in some of the recent high-interest yield offerings. Of course, then the super-rich and their millions might stay away. But perhaps that's the most stable course after you have too many "over the FDIC limit" account balances.
  - 0zemp2c 4y ago
    those people fled because they were told to by the financial press this really feels like a setup to let a big bank buy a little bank for nothing if we are really talking about people fleeing banks in "trouble", they would all close tomorrow...and don't tell me about stress-tests, those don't incorporate things like a broad collapse in commercial RE (which ALL the banks will be hit by)
    - JumpCrisscross 4y ago
      > those people fled because they were told to by the financial press …reporting First Republic’s balance sheet losses and falling stock and bond prices. > feels like a setup to let a big bank buy a little bank for nothing It’s not. That JPMorgan wound up buying it means literally nobody else submitted a valid bid, because the OCC and FDIC would have much preferred to not waive rules in making this happen. (Remember, too, the $30bn the big guys deposited with First Republic in March [1].) [1] https://www.cnbc.com/2023/03/16/group-of-financial-institutions-in-talks-to-deposit-about-20-billion-in-first-republic-sources-say.html https://www.cnbc.com/2023/03/16/group-of-financial-instituti...
    - xmcqdpt2 4y ago
      Real estate (commercial and otherwise) is included in the stress tests, https://www.federalreserve.gov/publications/2023-Stress-Test-Scenarios.htm https://www.federalreserve.gov/publications/2023-Stress-Test... I think financial regulators are a bit too soft-touched, but they aren't so incompetent that they would neglect real estate, of all things, in stress test scenarios in this post GFC world.
  - papito 4y ago
    WHY did they take the hit? Because the word was out these banks were putting all of their eggs in one bond basket at the time of increasing interest rates. I am a just a simple country 401K investor, and even I knew not to do that.
    - makomk 4y ago
      Your 401k is presumably mostly invested in shares. Banks aren't allowed to structure their investments like that (it's considered too risky). In general they have limited options for investment which are generally bad in times of increasing interest rates with the remaining ones being bad during recessions, not to mention the impact of the current collapse in commercial real estate demand. As far as I can tell there's no way for the government and the Fed to pursue the policies they have been without blowing up the banking system as a consequence.
  - toast0 4y ago
    A 40% withdrawal in a short time isn't survivable. Can't really fix that in a bank that does bank things. But the underlying situation that made depositors nervous could be addressed by regulation. Some ideas, not necessarily good or thought out, would include: mark assets to market, so the present value is reported accurately, but also report on expected future values at some intervals; an on the record increase of deposit insurance maximums would also help confidence, although there's lots of details there.
  - roenxi 4y ago
    Peter Schiff tried to run a full reserve bank and was shut down by the regulators. So it is just how the banking system works, but it is by fighting the free market all the way through. I don't like to recommend podcasts, but in of his podcast [0] he had a really interesting walkthrough of his perspective on the regulators working to shut down his bank. For me it was the most powerful advertisement for cryptocurrency I've heard to date. An opinion that would probably annoy Schiff. Even if you don't believe in any particular bank, in a 0 interest rate environment a full reserve bank would have been competitive. If you don't get money anyway, avoiding the inevitable crash when rates rose would have been a nice selling point. [0] https://schiffradio.com/ https://schiffradio.com/ Ep. 887
    - chii 4y ago
      I tried to find an explanation for why the Feds didn't want a narrow bank. This article has some speculations, but nothing definitive: https://www.chicagobooth.edu/review/safest-bank-fed-wont-sanction https://www.chicagobooth.edu/review/safest-bank-fed-wont-san... It doesn't quite make sense why the Feds don't want narrow banks, except that they might compete with traditional banks (and those banks' deep reaches into the Fed's policy decision makers are forcing out potential competition before they take root).
      - naveen99 4y ago
        Fed wants the public savings to fund private sector loans, not public sector spending, which they already do with presaving taxes.
    - yellowstuff 4y ago
      Matt Levine has explained the Fed's disdain for narrow banking. Fed payments are a subsidy for regular banks, and regular banks are effectively public/private partnerships that make loans, enforce regulations, and generally satisfy the goals of the government. A narrow bank would capture the entire subsidy and not satisfy any of the other goals.
    - pjc50 4y ago
      > Peter Schiff tried to run a full reserve bank and was shut down by the regulators I've heard this before and I very much doubt that is the full story. Does anyone have the _regulators_ side of this argument?
- jameshart 4y ago
  Split large diversified banks into small banks with correlated asset portfolios and you will get MORE banking collapses, not less.
HPsquared 4y ago
The banks know that all they need to do is become too big to fail. I.e. if I owe a thousand dollars it's my problem, if I owe a billion dollars it's the other guy's problem.
- once_inc 4y ago
  If you owe a billion dollars, it's everyone's problem.
  - markus_zhang 4y ago
    This almost leads to the conclusion that large corporations should be owned by the state.
    - rqtwteye 4y ago
      Or that they shouldn’t exist.
      - markus_zhang 4y ago
        To make sure large corporations don't exist, we would need a strong government that is not controlled by large corporations, which almost sounds like ________
  - HWR_14 4y ago
    A billion dollars is an absorbable loss by a lot of entities. Even winding it down, Meta is reported to have lost $4 billion in VR this quarter, Blue Origins is deficit funded by Bezos to the tune of 1 billion a quarter.
yieldcrv 4y ago
> People famously have the political systems that they deserve. Partisans invalidate people that care about the ways both sides are the same. We know which ways the parties are different, it is perfectly fine to be more frustrated in the ways they're the same.
opportune 4y ago
Ironically banks are some of the least shareholder friendly businesses, they direct a lot of profits to their own bonuses during good times rather than expanding their balance sheet or returning the profits to shareholders. I wonder how much this paradigm contributes to bad outcomes as it could easily incentivize short-termism and recklessness. Poisoning the books with bad choices that won’t take effect for multiple years or a decade, or comes with individually asymmetric risk less than the business’ asymmetric risk (10% of bank failure just means 10% I retire early) seems really tempting when it means years of big bonuses. Given that banks seem to have an uncanny ability to destroy themselves in spite of an ever increasing set of regulations trying to stop them from doing so, and the current trend indicates in the future we’ll be left with just a few blessed TBTF banks, I think we ought to consider a system where the Government or Fed provides the core functionality of “let me put $X in an account so I can use $X in the future” for free and banks compete based on value added. It’s the least-worst outcome, because otherwise people are going to turn to crypto to avoid the for-profit oligopoly subsidized by repeated debasement and access to Fed lending/liquidity tools unavailable to the public.
- stephenitis 4y ago
  TBTF = To Big To Fail
- CPLX 4y ago
  > banks seem to have an uncanny ability to destroy themselves in spite of an ever increasing set of regulations That’s the opposite of what is happening. Regulation has been decreasing.
  - aikinai 4y ago
    Depends heavily on your time scale.
    - djbusby 4y ago
      What scale should we use?
echelon 4y ago
> * the risk driver for these ongoing smaller bank failures is (reportedly) the rise in interest rates. It's a failure to diversify investments and adequately respond to a changing interest rate environment. > * the solution seems to be to create ever larger banking behemoths (on the premise that they they can better manage risks) Regulation alone can fix it. Just place further controls on how banks can invest their funds (ie. recommended allocation percentages per instrument and risk type), require stringent reporting, and perform stress tests to verify compliance. The scary thing now is that banks with depreciated assets know they're in this zombie state. They just haven't been pushed over yet. It'd be easy to find out which banks these are. Might make for a questionably ethical opportunity to short banking stocks...
- sokoloff 4y ago
  Why would it be questionably ethical to short the stock of a company that your analysis shows is significantly overvalued? That seems entirely ethical to me.
  - davidw 4y ago
    And it's not a risk-free investment either. They might be able to stumble along, long enough for interest rates to turn around, and come out ok on the other side.
bannedbybros 4y ago
[dead]
HWR_14 4y ago
Big banks are better risk hedged! In this case because the government requires them to be as a result of post-2008 laws. SVB lobbied successfully to get the burden for complying with those regulations not to apply to small under 250-billion dollar banks when coincidentally they were just under that number a few years ago.
- JumpCrisscross 4y ago
  > SVB lobbied successfully to get the burden for complying with those regulations not to apply to small under 250-billion dollar banks when coincidentally they were just under that number a few years ago To be clear, the rules they lobbied out of wouldn’t have forced them to hedge. They would have drawn attention to the problem much earlier.
fallingknife 4y ago
My tinfoil hat view of this is that it's part of a creeping state takeover of banking in everything but name. 1. assume the liabilities of the banking system (complete in 2008) 2. induce consolidation of the industry into a few megabanks with the "systemically important" designation making small banks dangerous (in progress) 3. use the government protection as leverage to make these few remaining banks obey government priorities without ever having to pass a law. e.g. effective censorship of entities the government doesn't like by cutting off from the banking system entirely (the goal)
- ikekkdcjkfke 4y ago
  More like the other way around
- ThunderSizzle 4y ago
  > use the government protection as leverage to make these few remaining banks obey government priorities without ever having to pass a law Ala fascism. Government control of private business without government actually owning those businesses.
  - CPLX 4y ago
    You sure it’s not the other way around? As far as I can tell what’s actually happening is business has taken over government.
    - ThunderSizzle 4y ago
      It's effectively the same. Monarchy isn't a king ruling over lords, it's a king balancing the interests of the lords so that they continue to grant him his kingship. A king who fails to balance this properly can easily lose his head. Monarchies are just disguised oligarchies, and e.g. Fascist Germany was no different - Hitler had to balance the interests of the various groups against each other enough so as not to lose his head, which in the end completely failed at the toll of millions dead. A government "controlling" megacorps also need to balance these megacorps & other mega-influencers so that no one group becomes too powerful and too dissatisfied enough to overturn the current ruling system. Megacorps like Google obviously have plenty of tools at their disposal even in a democracy with "fair & free & secure elections" via shadow-banning, increasing prices/costs, curtailing suggestions, labeling disinformation, decreasing visibility, etc., to attempt to sway public opinion sufficiently to cause a desirable election outcome. This is before even attempting to actually sway elections via election rigging, ballot stuffing, etc., or bypass elections entirely through some sort of pseudo-paramilitary action (e.g. coup). Of course, the more blatant these actions become, the more the interests of the other important influences can come into play (e.g. if Google ever did attempt a paramilitary coup, they would need heavy support elsewhere to ensure the military or the States didn't stop it), whereas Google shadow-banning certain political views can go largely ignored if it's not perceived by the public to matter much.
ikekkdcjkfke 4y ago
Having anything deposited over the secured amount is giving another private entity an unsecured laon, just like pre-paying for unrecieved goods
lordnacho 4y ago
Well I agree with your two asterisks. The thing that gives rise to it is that people who are deciding on what to do about the rising rates are all incentivized the same way: write new loans or lose your job. Each bank has its own set of customers, strengths in marketing, and so on. The loan officers then choose the best of that pool. If that means firms that are at greater risk to rising rates, they still pick the better credits out of the ones they are presented with. It's basically a mugs game. Gathering everything in a big bad bucket is indeed just hiding it until the next crisis. Gotta wonder what size of crisis this will eventually cause, not sure if I want to be around when it happens. But: > People famously have the political systems that they deserve. I'm not sure most people through history or right now really have had much say in what political system they live under.
- once_inc 4y ago
  More centralization would mean more government interventions and bailouts. That means socializing the losses. If the excrements hit the atmospheric propulsion devices, governments can always re-institute a gold standard, but that just moves the pain from the haves to the have-nots.
- markus_zhang 4y ago
  People cannot wait for the aristocracy to surrender power to them. Throughout history there is exactly one way to make some say in the political system.
- Varqu 4y ago
  I struggle to understand why there is no "deposit banks" category which would include heavy regulation, with full reserves required. There is certainly a significant number of people who just want to keep their money safe. They would happily pay 50 or 100 USD per month for an actual bank service where your money is just stored and not lend out to someone else.
  - lordnacho 4y ago
    Isn't this called a "narrow bank"? Maybe I'm mixing terms but I've heard the idea.
tclover 4y ago
Everything goes according to this book https://en.m.wikipedia.org/wiki/Imperialism,_the_Highest_Stage_of_Capitalism https://en.m.wikipedia.org/wiki/Imperialism,_the_Highest_Sta...
- MichaelMoser123 4y ago
  the book says there is no technological progress because the bad capitalists are living off their rents, or something like this. However we have seen some technological progress since 1916... (and the planned economies used to be stagnant)
slashdev 4y ago
Yes, concentrating all the power and all the risk in a few giant banks that also tend to do risky investments as well seems like a terrible idea for both customers and stability. Canada has a system like this, although it is very well regulated and hasn’t so far blown up. What it does do though is give very little competition or choice to the consumer. The Canadian bank oligopoly is only slightly less horrible than the Canadian telecom oligopoly. Both are as anti free market competition as you get. It looks like the U.S. banking system is headed the same way.
- _heimdall 4y ago
  Is that what made it so easy for Trudeau to freeze banks accounts of protrsters at the trucker rallies?
  - slashdev 4y ago
    That and the nearly unchecked power of the Canadian executive branch. I think without the oligopoly of banks it would have been too difficult to pull off on short notice. The Canadian prime minister may not rule over much compared to the U.S. President, but he is the king if he has a majority government. The courts are there, as in the U.S. to uphold the constitution, but they’re slow. You can get away with a lot before they catch up.
  - noarchy 4y ago
    No that was the Emergencies Act. https://www.cbc.ca/news/politics/emergencies-act-explainer-1.6351504 https://www.cbc.ca/news/politics/emergencies-act-explainer-1...
gshulegaard 4y ago
I think this comment is missing a key bit of context in that regionals/smaller banks were exempted from some of the regulations of Dodd-Frank. https://www.npr.org/sections/thetwo-way/2018/05/22/613390275/congress-to-undo-part-of-dodd-frank-easing-rules-for-mid-sized-smaller-banks https://www.npr.org/sections/thetwo-way/2018/05/22/613390275... So it's not that we assume bigger banks can better manage risk, we are simply, currently regulating them to manage risk better.
- alistairSH 4y ago
  Isn't the answer then to require small banks to conform to the same rules as big banks? Instead of allowing them to fail and be acquired by big banks?
  - gshulegaard 4y ago
    Well that's precisely what we were doing until 2018 when lobbyists and the Trump Administration carved out exceptions for banks with less than (or equal to) $250 Billion in assets (see link above). So a more pertinent question from my perspective is: "Who's brilliant idea was this anyway? /s" But if "the answer" you are referring to is to prevent consolidation in banking, then I think it's not quite as cut-and-dry. Regulation, especially risk-management regulations, can act as barriers to entry and create an environment that favors larger/established institutions leading to market consolidation. As an over simplification by a layman, it could look something like: - Higher regulation constrains profitability and raises fixed costs of running a bank (compliance burden). - This means that the amount of assets under control by a bank has to be higher in order for the bank to be profitable. - This higher floor reduces the likelihood new banks start (since the asset requirements to be profitable are higher). - Existing banks, in an effort to increase profits, acquire and merge with other banks. These final two trends (less banks starting, more MnA's) are what could drive market consolidation. In a lot of ways Airlines are an example of this in a different industry. I am definitely _not_ suggesting small banks should be exempted from Dodd-Frank like they were. I actually found the 2018 deregulation disturbing and disappointing. I am only trying to illustrate that even if 2018 hadn't happened, I don't know for sure if there would be more competition in the banking industry. (Only that the banks we do have would be less risky)
kyrra 4y ago
WSJ opinion pages have been publishing a lot of great things on this front trying to show possible reasons for these failures: * https://www.wsj.com/articles/deposit-insurance-encourages-bank-failures-risk-informed-discipline-interbank-market-reserves-interest-bailout-5f985d77?mod=itp_wsj&ru=yahoo https://www.wsj.com/articles/deposit-insurance-encourages-ba... - argues the FDIC and Fed encourages poor investment of money by banks. * https://www.wsj.com/articles/the-silicon-valley-bank-bailout-chorus-yellen-treasury-fed-fdic-deposit-limit-dodd-frank-run-cc80761e?mod=itp_wsj&ru=yahoo https://www.wsj.com/articles/the-silicon-valley-bank-bailout... - attacks the decision makers in the Fed and Treasury. * https://www.wsj.com/articles/president-biden-bank-failures-silicon-valley-bank-signature-bank-markets-white-house-fdic-deposit-insurance-fund-a5538900?mod=itp_wsj&ru=yahoo https://www.wsj.com/articles/president-biden-bank-failures-s... - argues the government is lying when it says it won't tax Americans to bail out these banks. * https://www.wsj.com/articles/barney-frank-signature-bank-failure-silicon-valley-bank-dodd-frank-congress-elizabeth-warren-d1588178?mod=itp_wsj&ru=yahoo https://www.wsj.com/articles/barney-frank-signature-bank-fai... - highlights Bernie Frank (of Dodd Frank) interviews saying the Fed has it in for crypto. * https://www.wsj.com/articles/a-proven-way-to-avoid-moral-hazard-receivership-certificate-modified-deposit-payoff-fdic-fed-8b74dc06?mod=itp_wsj&ru=yahoo https://www.wsj.com/articles/a-proven-way-to-avoid-moral-haz... - the FDIC should not fully pay our deposits beyond the limits. (Written by a former FDIC chairman) * https://www.wsj.com/articles/the-fdic-should-act-like-a-real-insurer-reciprocal-deposit-arrangement-spreading-risk-svb-moral-hazard-dac7e312 https://www.wsj.com/articles/the-fdic-should-act-like-a-real... the FDIC should act like a normal insurance company and base cost to insur based on risk. (Former currency comptroller and FDIC member) * https://www.wsj.com/articles/federal-reserve-michael-barr-senate-testimony-martin-gruenberg-silicon-valley-bank-failure-f16d23d8?mod=itp_wsj&ru=yahoo https://www.wsj.com/articles/federal-reserve-michael-barr-se... and https://www.wsj.com/articles/the-fed-absolves-itself-silicon-valley-bank-michael-barr-congress-federal-reserve-failure-2c675ba1?mod=opinion_lead_pos1 https://www.wsj.com/articles/the-fed-absolves-itself-silicon... say the Fed is deflecting blame from itself. The article basically blams the Fed for being asleep at the wheel.
brookst 4y ago
I agree we should not have gotten here, but given the situation we are in, I'm not sure there was a better outcome possible. Let FR fail to teach uninsured investors a lesson? That has some moral appeal but not sure it would be a better long term outcome.
- nologic01 4y ago
  Short term actions are constrained by realities on the ground. Long term actions are only constrained by ideology, vested interests and disregard for collective welfare.
- flakeoil 4y ago
  I'm pretty sure the companies and people who held their money in First Republic would survive losing the money they had with them (in most cases it's only a part of their assets). I'm also quite sure the owners of the First Republic stock could afford losing the value of those stocks. It might have been a little tough for some of them, but most would just shrug it off. I do not understand why government and other banks are so anxious about a bank or two failing? Is it because all other banks are also rotten and leveraged?
  - brookst 4y ago
    It's never the direct effects. It would likely cause people and companies with uninsured money in other banks to pull their funds out, quite possibly leading to cascading failures even for banks that are perfectly smart and healthy today. The simple fact is that no bank can survive a run. Not a single one. Because that's how the business works. IMO the best offramp from the systemic problem is to announce a schedule to phase out any protection for uninsured deposits. Say, 100% insurance for the next 6 months, declining by 1% per month after that, phased out completely in 8ish years. Slow enough to avoid panic and dramatic swings while allowing the industry to create new products and address the market need.
    - flakeoil 4y ago
      Yes, and there needs to be some kind of restriction on how much one can expect to be allowed to withdraw in a certain amount of time. If too many want to pull out, there should be an automatic stop and everybody should know about this. The bank should maybe even be required to pay out a little extra interest as compensation. Better this kind of limited draw out than having to rescue banks left and right and having huge amounts of regulation which can never fully stop these kind of events.
sdfghswe 4y ago
Bigger banks are more regulated. SIVB wasn't subject to the same regulations.
zitterbewegung 4y ago
This was a last minute effort to avoid the bank to become bankrupt and the FDIC stepping in and using their reserves and paying out to the depositors. I agree with you that the solution could have been just the FDIC assuming control of the bank which would have put pressure on the FDIC's reserves but, large banks generally have been buying out smaller banks to become larger and this has been going on for decades. What could have been going on behind the scenes is that large banks were being pressured to buy it out similar to 2008.
- loeg 4y ago
  JPMorgan is actually prohibited from buying other banks in general due to their size. The FDIC gave them an exemption in the process of soliciting bids for First Republic over the weekend and maybe last week.
api 4y ago
Our industry is the same. Example: "Individual authentication systems are often insecure, so lets pool all our permission management under the umbrella of two or three huge companies that manage all authentication for everything in the entire world via mechanisms like OIDC." We apparently like to trade noticeably frequent (but still fairly infrequent) small failures for rare catastrophic failures. The key here is that these rare catastrophic failures are rare enough that we can pretend they won't happen. Enough time goes by between incidents that we have time to forget and claim ignorance. Eventually humanity will pool all risk in one basket so big that when it breaks we will go extinct. The end.
- nologic01 4y ago
  Gigantism has many "features" going for it: Like you say, it pushes risks to the tail (lower probability). Low probability - high impact events are easily mis-priced and thus this becomes a rent extraction channel. Removing competition by acquisitions means the market can be distorted more easily. Another source of non-earned profit. But there are also subtler benefits: Gigantism creates de-facto regulatory capture (how could a lowly government bureaucrat go against the "giant"?). Such leverage versus rule-makers can be tweaked to optimize... wait for it, further risk-less profit. Finally, "giants" can offer excess compensation and prestige to attract key talented individuals, essentially a scorched earth strategy to suppress any other actors. All-in-all a horrible pattern that doesn't really offer any benefit (besides to the few insiders in the top of the pyramid). Delivering innovative products or services requires a certain scale but that is typically an order of magnitude smaller than observed sectoral concentrations. Why is it happening if it is so toxic? Well, society is stupid. More stupid in fact than many (if not most) of its individuals. The hope is that there is a sufficient number of independently evolving societies so that low-IQ societies imbibing on toxic stuff go extinct (not physically, as a cultural pattern).
MuffinFlavored 4y ago
> This concerns such a basic aspect of bank risk management one wonders how this sector could even call it self banking I feel like message boards like reddit/HackerNews are notorious for over-simplifying any topic. It's "reductionist". "How could these paid professionals consider themselves qualified?! As somebody not in that field without any insider knowledge or specific details into why hard decisions with tradeoffs were made, I know better, it's taught in economics 101!"
- 300bps 4y ago
  notorious for over-simplifying any topic My last employer we managed money for community banks. I actually created the system that generated interest rate shock reports that showed the impact to a portfolio of fixed income assets for interest rate shocks of -300 to +300 basis points. Nobody thought interest rates would go +300 bp in such a short amount of time, especially in the short end of the yield curve. Banks essentially have 2 portfolios. Their loan portfolio is where they take the risk and it goes up and down with the traditional business cycle. Their fixed income portfolio is supposed to be almost no risk. They were whipsawed by the fed that lowered interest rates so quickly that it forced banks to buy longer-duration securities to just find any kind of yield within the regulatory constraints they were allowed to buy. Then the fed raised interest rates even more quickly causing staggering losses in the "almost no risk" fixed income portfolios of banks. Expect a lot more banks to be taken over even with the emergency backstops the fed has put into place. Look what the Fed did: https://www.federalreserve.gov/monetarypolicy/bst_recenttrends.htm https://www.federalreserve.gov/monetarypolicy/bst_recenttren... In 2008 the Fed flooded the economy with $2 trillion. In 2020 the Fed jumped up and flooded the economy with an additional $7 trillion. In September 2022 they started taking that money back (which incidentally led to tech company layoffs). As of March 2023 they removed about $600 billion. Then they suddenly put over half of that right back into the economy when SVB failed. It's impossible to predict or even appropriately react to what the Federal Reserve is doing.
  - berkeleyjunk 4y ago
    It maybe impossible to predict what the Fed would do but it is certainly possible to avoid a lot of the damage by duration matching of assets and liabilities. e.g. Do not take short term deposits in checking that are callable at any time and invest them in 10 year maturity instruments. No issues at all taking proceeds from 5 year CDs and putting them into 5 year maturity bonds.
jmyeet 4y ago
> the risk driver for these ongoing smaller bank failures is (reportedly) the rise in interest rates. Ultimately it's poor risk management. If you take depositor funds and buy 10-30 year bonds with them then you're exposed to a run on the bank and rising interest rates will devalue your bonds. The bank instead could've rolled 30-90 day Fed funds instead but they didn't. Why? Lower yield. Put another way: the bank took a risk with depositor funds and they get wiped out because of it while depositors are fine. > the solution seems to be to create ever larger banking behemoths Yes and no. At the heart of this is fractional reserve banking, which has been wildly successful. Like any kind of risk-spreading business (including insurance) bigger is generally better because variance is less and everything becomes more predictable. I understand (and agree with) concerns about consolidation creating an oligopoly. Ultimately though, what backstops the entire financial system is the government. This was true before and it's true now. The Federal Reserve is even called the lender of last resort.
indymike 4y ago
> In fact this aggregation only commingles all sort of risks inside a gigantic opaque pool, makes the private-public dependency (TBTF) and all its perverse incentives even more entrenched, and ultimately creates the conditions for systemic failure This is the real issue. Bigger institutions aggregate risk.
ineedasername 4y ago
The solution could also be to require banks to be more cautious, which was actually the case before 2018. But the US political system rolled back precautions that were put in place in the aftermath of the 2008 crisis.
hristov 4y ago
The difference was that the larger behemoths were required by law to manage risk better. They were subject to a stricter ongoing regulatory regime. The medium banks convinced the corrupt Trump administration and a bunch of corrupt law makers to pass a law that subjects them to a much lighter regulatory regime. Their reasoning was that if a bank with "only" 250 billion of deposits fails it will not have a systemic effect on the economy. That reasoning was really dumb and now that a couple of medium banks failed the stupidity of that reasoning is obvious for everyone to see. Of course wiping out 250 billion dollars of deposits will cause a bank panic and will have an overall negative effect on the economy, and the fed is working hard to make sure this does not happen. But generally speaking smaller banks are not by nature riskier. They only got riskier because they passed themselves this law that allowed them to get riskier. And now they will get a reputation for being riskier, and since in banking reputation is everything, they will become riskier.
iancmceachern 4y ago
And where is the accountability? The facts seem to point to poor management, but in the case of SVB all the leaders there were all over linkedin acting like they were the victim, not the perpetrators.
d_burfoot 4y ago
> People famously have the political systems that they deserve. This sentiment is widely expressed, but it seems absurd and offensive to me. Citizens of countries such as Finland, Switzerland and Singapore enjoy much superior quality of government to what we have in the US. Does that mean Americans are ethically or intellectually inferior to Finns, Swiss, and Singaporeans? The government of Pakistan is not very good: does that mean Pakistanis are less ethical or intelligent?
- MichaelZuo 4y ago
  I've always thought the implication of the saying is that in aggregate they are. I don't think that necessarily translates to the median individual.
- nologic01 4y ago
  Unless you believe in overlords or secret societies the quality of government is more or less a direct result of the ethical constitution of a society - at least for a sovereign nation. The difficulty is that it is a collective phenomenon - as you can establish fairly easily by picking somebody from society X and embedding them in society Y. Ofcourse there is no collective without individuals, so ultimately it is aspects of individually adopted ethical codes and behaviors that it is responsible for a poor collective organization. A standalone computer that operates reasonably but is connected to other computers via a broken API's will lead to overall broken network operations. There is also something we might call a society's "intellectual constitution", the collective ability to execute required changes, devise institutions and tools etc. But this is subordinated to the ethical dimension (where there is a will there is always a way).
- slt2021 4y ago
  in US its not people who have government they deserve. It is Corporations have the government they pay/lobby for. only in the US there are voters and political donors/lobbyist. Other developed countries only have voters decide on election outcome & policy.
blackoil 4y ago
One aspect is that these behemoths have more stringent regulations than the likes of svb

papito 4y ago

"Larger banking behemoths" is NOT the solution - it's the result of deregulation and gutting of oversight - also referred to by libertarians here as "small government". These banks should have been aggressively audited and diversification should have been enforced, as it used to be. We just keep going in this "deregulate-collapse-regulate" cycle.

junofan 4y ago
They took a 40% hit to deposits. What do you want them to do? It’s not survivable. This is just how our banking system works.
- matwood 4y ago
  > This is just how our banking system works. That's just how business works. Many businesses would have a hard time surviving losing 40% of their business in a short period of time.
- TacticalCoder 4y ago
  > They took a 40% hit to deposits. What do you want them to do? It’s not survivable. This is just how our banking system works. You're making it sound like people taking out their money out were those in the wrong, causing the failure of the bank. That's not what happened. People taking their money out were in the right. The root cause is bankers at FRB miscalculating risk. And they are those who were wrong.
  - r00fus 4y ago
    I mean, banks are allowed to curtail the egress of funds through rules limiting the velocity of funds. I see this in some of the recent high-interest yield offerings. Of course, then the super-rich and their millions might stay away. But perhaps that's the most stable course after you have too many "over the FDIC limit" account balances.
- 0zemp2c 4y ago
  those people fled because they were told to by the financial press this really feels like a setup to let a big bank buy a little bank for nothing if we are really talking about people fleeing banks in "trouble", they would all close tomorrow...and don't tell me about stress-tests, those don't incorporate things like a broad collapse in commercial RE (which ALL the banks will be hit by)
  - JumpCrisscross 4y ago
    > those people fled because they were told to by the financial press …reporting First Republic’s balance sheet losses and falling stock and bond prices. > feels like a setup to let a big bank buy a little bank for nothing It’s not. That JPMorgan wound up buying it means literally nobody else submitted a valid bid, because the OCC and FDIC would have much preferred to not waive rules in making this happen. (Remember, too, the $30bn the big guys deposited with First Republic in March [1].) [1] https://www.cnbc.com/2023/03/16/group-of-financial-institutions-in-talks-to-deposit-about-20-billion-in-first-republic-sources-say.html https://www.cnbc.com/2023/03/16/group-of-financial-instituti...
  - xmcqdpt2 4y ago
    Real estate (commercial and otherwise) is included in the stress tests, https://www.federalreserve.gov/publications/2023-Stress-Test-Scenarios.htm https://www.federalreserve.gov/publications/2023-Stress-Test... I think financial regulators are a bit too soft-touched, but they aren't so incompetent that they would neglect real estate, of all things, in stress test scenarios in this post GFC world.
- papito 4y ago
  WHY did they take the hit? Because the word was out these banks were putting all of their eggs in one bond basket at the time of increasing interest rates. I am a just a simple country 401K investor, and even I knew not to do that.
  - makomk 4y ago
    Your 401k is presumably mostly invested in shares. Banks aren't allowed to structure their investments like that (it's considered too risky). In general they have limited options for investment which are generally bad in times of increasing interest rates with the remaining ones being bad during recessions, not to mention the impact of the current collapse in commercial real estate demand. As far as I can tell there's no way for the government and the Fed to pursue the policies they have been without blowing up the banking system as a consequence.
- toast0 4y ago
  A 40% withdrawal in a short time isn't survivable. Can't really fix that in a bank that does bank things. But the underlying situation that made depositors nervous could be addressed by regulation. Some ideas, not necessarily good or thought out, would include: mark assets to market, so the present value is reported accurately, but also report on expected future values at some intervals; an on the record increase of deposit insurance maximums would also help confidence, although there's lots of details there.
- roenxi 4y ago
  Peter Schiff tried to run a full reserve bank and was shut down by the regulators. So it is just how the banking system works, but it is by fighting the free market all the way through. I don't like to recommend podcasts, but in of his podcast [0] he had a really interesting walkthrough of his perspective on the regulators working to shut down his bank. For me it was the most powerful advertisement for cryptocurrency I've heard to date. An opinion that would probably annoy Schiff. Even if you don't believe in any particular bank, in a 0 interest rate environment a full reserve bank would have been competitive. If you don't get money anyway, avoiding the inevitable crash when rates rose would have been a nice selling point. [0] https://schiffradio.com/ https://schiffradio.com/ Ep. 887
  - chii 4y ago
    I tried to find an explanation for why the Feds didn't want a narrow bank. This article has some speculations, but nothing definitive: https://www.chicagobooth.edu/review/safest-bank-fed-wont-sanction https://www.chicagobooth.edu/review/safest-bank-fed-wont-san... It doesn't quite make sense why the Feds don't want narrow banks, except that they might compete with traditional banks (and those banks' deep reaches into the Fed's policy decision makers are forcing out potential competition before they take root).
    - naveen99 4y ago
      Fed wants the public savings to fund private sector loans, not public sector spending, which they already do with presaving taxes.
  - yellowstuff 4y ago
    Matt Levine has explained the Fed's disdain for narrow banking. Fed payments are a subsidy for regular banks, and regular banks are effectively public/private partnerships that make loans, enforce regulations, and generally satisfy the goals of the government. A narrow bank would capture the entire subsidy and not satisfy any of the other goals.
  - pjc50 4y ago
    > Peter Schiff tried to run a full reserve bank and was shut down by the regulators I've heard this before and I very much doubt that is the full story. Does anyone have the _regulators_ side of this argument?
jameshart 4y ago
Split large diversified banks into small banks with correlated asset portfolios and you will get MORE banking collapses, not less.

HPsquared 4y ago

The banks know that all they need to do is become too big to fail. I.e. if I owe a thousand dollars it's my problem, if I owe a billion dollars it's the other guy's problem.

once_inc 4y ago
If you owe a billion dollars, it's everyone's problem.
- markus_zhang 4y ago
  This almost leads to the conclusion that large corporations should be owned by the state.
  - rqtwteye 4y ago
    Or that they shouldn’t exist.
    - markus_zhang 4y ago
      To make sure large corporations don't exist, we would need a strong government that is not controlled by large corporations, which almost sounds like ________
- HWR_14 4y ago
  A billion dollars is an absorbable loss by a lot of entities. Even winding it down, Meta is reported to have lost $4 billion in VR this quarter, Blue Origins is deficit funded by Bezos to the tune of 1 billion a quarter.

yieldcrv 4y ago

> People famously have the political systems that they deserve. Partisans invalidate people that care about the ways both sides are the same. We know which ways the parties are different, it is perfectly fine to be more frustrated in the ways they're the same.

opportune 4y ago

Ironically banks are some of the least shareholder friendly businesses, they direct a lot of profits to their own bonuses during good times rather than expanding their balance sheet or returning the profits to shareholders. I wonder how much this paradigm contributes to bad outcomes as it could easily incentivize short-termism and recklessness. Poisoning the books with bad choices that won’t take effect for multiple years or a decade, or comes with individually asymmetric risk less than the business’ asymmetric risk (10% of bank failure just means 10% I retire early) seems really tempting when it means years of big bonuses. Given that banks seem to have an uncanny ability to destroy themselves in spite of an ever increasing set of regulations trying to stop them from doing so, and the current trend indicates in the future we’ll be left with just a few blessed TBTF banks, I think we ought to consider a system where the Government or Fed provides the core functionality of “let me put $X in an account so I can use $X in the future” for free and banks compete based on value added. It’s the least-worst outcome, because otherwise people are going to turn to crypto to avoid the for-profit oligopoly subsidized by repeated debasement and access to Fed lending/liquidity tools unavailable to the public.

stephenitis 4y ago
TBTF = To Big To Fail
CPLX 4y ago
> banks seem to have an uncanny ability to destroy themselves in spite of an ever increasing set of regulations That’s the opposite of what is happening. Regulation has been decreasing.
- aikinai 4y ago
  Depends heavily on your time scale.
  - djbusby 4y ago
    What scale should we use?

echelon 4y ago

> * the risk driver for these ongoing smaller bank failures is (reportedly) the rise in interest rates. It's a failure to diversify investments and adequately respond to a changing interest rate environment. > * the solution seems to be to create ever larger banking behemoths (on the premise that they they can better manage risks) Regulation alone can fix it. Just place further controls on how banks can invest their funds (ie. recommended allocation percentages per instrument and risk type), require stringent reporting, and perform stress tests to verify compliance. The scary thing now is that banks with depreciated assets know they're in this zombie state. They just haven't been pushed over yet. It'd be easy to find out which banks these are. Might make for a questionably ethical opportunity to short banking stocks...

sokoloff 4y ago
Why would it be questionably ethical to short the stock of a company that your analysis shows is significantly overvalued? That seems entirely ethical to me.
- davidw 4y ago
  And it's not a risk-free investment either. They might be able to stumble along, long enough for interest rates to turn around, and come out ok on the other side.

bannedbybros 4y ago

[dead]

HWR_14 4y ago

Big banks are better risk hedged! In this case because the government requires them to be as a result of post-2008 laws. SVB lobbied successfully to get the burden for complying with those regulations not to apply to small under 250-billion dollar banks when coincidentally they were just under that number a few years ago.

JumpCrisscross 4y ago
> SVB lobbied successfully to get the burden for complying with those regulations not to apply to small under 250-billion dollar banks when coincidentally they were just under that number a few years ago To be clear, the rules they lobbied out of wouldn’t have forced them to hedge. They would have drawn attention to the problem much earlier.

fallingknife 4y ago

My tinfoil hat view of this is that it's part of a creeping state takeover of banking in everything but name. 1. assume the liabilities of the banking system (complete in 2008) 2. induce consolidation of the industry into a few megabanks with the "systemically important" designation making small banks dangerous (in progress) 3. use the government protection as leverage to make these few remaining banks obey government priorities without ever having to pass a law. e.g. effective censorship of entities the government doesn't like by cutting off from the banking system entirely (the goal)

ikekkdcjkfke 4y ago
More like the other way around
ThunderSizzle 4y ago
> use the government protection as leverage to make these few remaining banks obey government priorities without ever having to pass a law Ala fascism. Government control of private business without government actually owning those businesses.
- CPLX 4y ago
  You sure it’s not the other way around? As far as I can tell what’s actually happening is business has taken over government.
  - ThunderSizzle 4y ago
    It's effectively the same. Monarchy isn't a king ruling over lords, it's a king balancing the interests of the lords so that they continue to grant him his kingship. A king who fails to balance this properly can easily lose his head. Monarchies are just disguised oligarchies, and e.g. Fascist Germany was no different - Hitler had to balance the interests of the various groups against each other enough so as not to lose his head, which in the end completely failed at the toll of millions dead. A government "controlling" megacorps also need to balance these megacorps & other mega-influencers so that no one group becomes too powerful and too dissatisfied enough to overturn the current ruling system. Megacorps like Google obviously have plenty of tools at their disposal even in a democracy with "fair & free & secure elections" via shadow-banning, increasing prices/costs, curtailing suggestions, labeling disinformation, decreasing visibility, etc., to attempt to sway public opinion sufficiently to cause a desirable election outcome. This is before even attempting to actually sway elections via election rigging, ballot stuffing, etc., or bypass elections entirely through some sort of pseudo-paramilitary action (e.g. coup). Of course, the more blatant these actions become, the more the interests of the other important influences can come into play (e.g. if Google ever did attempt a paramilitary coup, they would need heavy support elsewhere to ensure the military or the States didn't stop it), whereas Google shadow-banning certain political views can go largely ignored if it's not perceived by the public to matter much.

ikekkdcjkfke 4y ago

Having anything deposited over the secured amount is giving another private entity an unsecured laon, just like pre-paying for unrecieved goods

lordnacho 4y ago

Well I agree with your two asterisks. The thing that gives rise to it is that people who are deciding on what to do about the rising rates are all incentivized the same way: write new loans or lose your job. Each bank has its own set of customers, strengths in marketing, and so on. The loan officers then choose the best of that pool. If that means firms that are at greater risk to rising rates, they still pick the better credits out of the ones they are presented with. It's basically a mugs game. Gathering everything in a big bad bucket is indeed just hiding it until the next crisis. Gotta wonder what size of crisis this will eventually cause, not sure if I want to be around when it happens. But: > People famously have the political systems that they deserve. I'm not sure most people through history or right now really have had much say in what political system they live under.

once_inc 4y ago
More centralization would mean more government interventions and bailouts. That means socializing the losses. If the excrements hit the atmospheric propulsion devices, governments can always re-institute a gold standard, but that just moves the pain from the haves to the have-nots.
markus_zhang 4y ago
People cannot wait for the aristocracy to surrender power to them. Throughout history there is exactly one way to make some say in the political system.
Varqu 4y ago
I struggle to understand why there is no "deposit banks" category which would include heavy regulation, with full reserves required. There is certainly a significant number of people who just want to keep their money safe. They would happily pay 50 or 100 USD per month for an actual bank service where your money is just stored and not lend out to someone else.
- lordnacho 4y ago
  Isn't this called a "narrow bank"? Maybe I'm mixing terms but I've heard the idea.

tclover 4y ago

Everything goes according to this book https://en.m.wikipedia.org/wiki/Imperialism,_the_Highest_Stage_of_Capitalism https://en.m.wikipedia.org/wiki/Imperialism,_the_Highest_Sta...

MichaelMoser123 4y ago
the book says there is no technological progress because the bad capitalists are living off their rents, or something like this. However we have seen some technological progress since 1916... (and the planned economies used to be stagnant)

slashdev 4y ago

Yes, concentrating all the power and all the risk in a few giant banks that also tend to do risky investments as well seems like a terrible idea for both customers and stability. Canada has a system like this, although it is very well regulated and hasn’t so far blown up. What it does do though is give very little competition or choice to the consumer. The Canadian bank oligopoly is only slightly less horrible than the Canadian telecom oligopoly. Both are as anti free market competition as you get. It looks like the U.S. banking system is headed the same way.

_heimdall 4y ago
Is that what made it so easy for Trudeau to freeze banks accounts of protrsters at the trucker rallies?
- slashdev 4y ago
  That and the nearly unchecked power of the Canadian executive branch. I think without the oligopoly of banks it would have been too difficult to pull off on short notice. The Canadian prime minister may not rule over much compared to the U.S. President, but he is the king if he has a majority government. The courts are there, as in the U.S. to uphold the constitution, but they’re slow. You can get away with a lot before they catch up.
- noarchy 4y ago
  No that was the Emergencies Act. https://www.cbc.ca/news/politics/emergencies-act-explainer-1.6351504 https://www.cbc.ca/news/politics/emergencies-act-explainer-1...

gshulegaard 4y ago

I think this comment is missing a key bit of context in that regionals/smaller banks were exempted from some of the regulations of Dodd-Frank. https://www.npr.org/sections/thetwo-way/2018/05/22/613390275/congress-to-undo-part-of-dodd-frank-easing-rules-for-mid-sized-smaller-banks https://www.npr.org/sections/thetwo-way/2018/05/22/613390275... So it's not that we assume bigger banks can better manage risk, we are simply, currently regulating them to manage risk better.

alistairSH 4y ago
Isn't the answer then to require small banks to conform to the same rules as big banks? Instead of allowing them to fail and be acquired by big banks?
- gshulegaard 4y ago
  Well that's precisely what we were doing until 2018 when lobbyists and the Trump Administration carved out exceptions for banks with less than (or equal to) $250 Billion in assets (see link above). So a more pertinent question from my perspective is: "Who's brilliant idea was this anyway? /s" But if "the answer" you are referring to is to prevent consolidation in banking, then I think it's not quite as cut-and-dry. Regulation, especially risk-management regulations, can act as barriers to entry and create an environment that favors larger/established institutions leading to market consolidation. As an over simplification by a layman, it could look something like: - Higher regulation constrains profitability and raises fixed costs of running a bank (compliance burden). - This means that the amount of assets under control by a bank has to be higher in order for the bank to be profitable. - This higher floor reduces the likelihood new banks start (since the asset requirements to be profitable are higher). - Existing banks, in an effort to increase profits, acquire and merge with other banks. These final two trends (less banks starting, more MnA's) are what could drive market consolidation. In a lot of ways Airlines are an example of this in a different industry. I am definitely _not_ suggesting small banks should be exempted from Dodd-Frank like they were. I actually found the 2018 deregulation disturbing and disappointing. I am only trying to illustrate that even if 2018 hadn't happened, I don't know for sure if there would be more competition in the banking industry. (Only that the banks we do have would be less risky)

kyrra 4y ago

WSJ opinion pages have been publishing a lot of great things on this front trying to show possible reasons for these failures: * https://www.wsj.com/articles/deposit-insurance-encourages-bank-failures-risk-informed-discipline-interbank-market-reserves-interest-bailout-5f985d77?mod=itp_wsj&ru=yahoo https://www.wsj.com/articles/deposit-insurance-encourages-ba... - argues the FDIC and Fed encourages poor investment of money by banks. * https://www.wsj.com/articles/the-silicon-valley-bank-bailout-chorus-yellen-treasury-fed-fdic-deposit-limit-dodd-frank-run-cc80761e?mod=itp_wsj&ru=yahoo https://www.wsj.com/articles/the-silicon-valley-bank-bailout... - attacks the decision makers in the Fed and Treasury. * https://www.wsj.com/articles/president-biden-bank-failures-silicon-valley-bank-signature-bank-markets-white-house-fdic-deposit-insurance-fund-a5538900?mod=itp_wsj&ru=yahoo https://www.wsj.com/articles/president-biden-bank-failures-s... - argues the government is lying when it says it won't tax Americans to bail out these banks. * https://www.wsj.com/articles/barney-frank-signature-bank-failure-silicon-valley-bank-dodd-frank-congress-elizabeth-warren-d1588178?mod=itp_wsj&ru=yahoo https://www.wsj.com/articles/barney-frank-signature-bank-fai... - highlights Bernie Frank (of Dodd Frank) interviews saying the Fed has it in for crypto. * https://www.wsj.com/articles/a-proven-way-to-avoid-moral-hazard-receivership-certificate-modified-deposit-payoff-fdic-fed-8b74dc06?mod=itp_wsj&ru=yahoo https://www.wsj.com/articles/a-proven-way-to-avoid-moral-haz... - the FDIC should not fully pay our deposits beyond the limits. (Written by a former FDIC chairman) * https://www.wsj.com/articles/the-fdic-should-act-like-a-real-insurer-reciprocal-deposit-arrangement-spreading-risk-svb-moral-hazard-dac7e312 https://www.wsj.com/articles/the-fdic-should-act-like-a-real... the FDIC should act like a normal insurance company and base cost to insur based on risk. (Former currency comptroller and FDIC member) * https://www.wsj.com/articles/federal-reserve-michael-barr-senate-testimony-martin-gruenberg-silicon-valley-bank-failure-f16d23d8?mod=itp_wsj&ru=yahoo https://www.wsj.com/articles/federal-reserve-michael-barr-se... and https://www.wsj.com/articles/the-fed-absolves-itself-silicon-valley-bank-michael-barr-congress-federal-reserve-failure-2c675ba1?mod=opinion_lead_pos1 https://www.wsj.com/articles/the-fed-absolves-itself-silicon... say the Fed is deflecting blame from itself. The article basically blams the Fed for being asleep at the wheel.

brookst 4y ago

I agree we should not have gotten here, but given the situation we are in, I'm not sure there was a better outcome possible. Let FR fail to teach uninsured investors a lesson? That has some moral appeal but not sure it would be a better long term outcome.

nologic01 4y ago
Short term actions are constrained by realities on the ground. Long term actions are only constrained by ideology, vested interests and disregard for collective welfare.
flakeoil 4y ago
I'm pretty sure the companies and people who held their money in First Republic would survive losing the money they had with them (in most cases it's only a part of their assets). I'm also quite sure the owners of the First Republic stock could afford losing the value of those stocks. It might have been a little tough for some of them, but most would just shrug it off. I do not understand why government and other banks are so anxious about a bank or two failing? Is it because all other banks are also rotten and leveraged?
- brookst 4y ago
  It's never the direct effects. It would likely cause people and companies with uninsured money in other banks to pull their funds out, quite possibly leading to cascading failures even for banks that are perfectly smart and healthy today. The simple fact is that no bank can survive a run. Not a single one. Because that's how the business works. IMO the best offramp from the systemic problem is to announce a schedule to phase out any protection for uninsured deposits. Say, 100% insurance for the next 6 months, declining by 1% per month after that, phased out completely in 8ish years. Slow enough to avoid panic and dramatic swings while allowing the industry to create new products and address the market need.
  - flakeoil 4y ago
    Yes, and there needs to be some kind of restriction on how much one can expect to be allowed to withdraw in a certain amount of time. If too many want to pull out, there should be an automatic stop and everybody should know about this. The bank should maybe even be required to pay out a little extra interest as compensation. Better this kind of limited draw out than having to rescue banks left and right and having huge amounts of regulation which can never fully stop these kind of events.

sdfghswe 4y ago

Bigger banks are more regulated. SIVB wasn't subject to the same regulations.

zitterbewegung 4y ago

This was a last minute effort to avoid the bank to become bankrupt and the FDIC stepping in and using their reserves and paying out to the depositors. I agree with you that the solution could have been just the FDIC assuming control of the bank which would have put pressure on the FDIC's reserves but, large banks generally have been buying out smaller banks to become larger and this has been going on for decades. What could have been going on behind the scenes is that large banks were being pressured to buy it out similar to 2008.

loeg 4y ago
JPMorgan is actually prohibited from buying other banks in general due to their size. The FDIC gave them an exemption in the process of soliciting bids for First Republic over the weekend and maybe last week.

api 4y ago

Our industry is the same. Example: "Individual authentication systems are often insecure, so lets pool all our permission management under the umbrella of two or three huge companies that manage all authentication for everything in the entire world via mechanisms like OIDC." We apparently like to trade noticeably frequent (but still fairly infrequent) small failures for rare catastrophic failures. The key here is that these rare catastrophic failures are rare enough that we can pretend they won't happen. Enough time goes by between incidents that we have time to forget and claim ignorance. Eventually humanity will pool all risk in one basket so big that when it breaks we will go extinct. The end.

nologic01 4y ago
Gigantism has many "features" going for it: Like you say, it pushes risks to the tail (lower probability). Low probability - high impact events are easily mis-priced and thus this becomes a rent extraction channel. Removing competition by acquisitions means the market can be distorted more easily. Another source of non-earned profit. But there are also subtler benefits: Gigantism creates de-facto regulatory capture (how could a lowly government bureaucrat go against the "giant"?). Such leverage versus rule-makers can be tweaked to optimize... wait for it, further risk-less profit. Finally, "giants" can offer excess compensation and prestige to attract key talented individuals, essentially a scorched earth strategy to suppress any other actors. All-in-all a horrible pattern that doesn't really offer any benefit (besides to the few insiders in the top of the pyramid). Delivering innovative products or services requires a certain scale but that is typically an order of magnitude smaller than observed sectoral concentrations. Why is it happening if it is so toxic? Well, society is stupid. More stupid in fact than many (if not most) of its individuals. The hope is that there is a sufficient number of independently evolving societies so that low-IQ societies imbibing on toxic stuff go extinct (not physically, as a cultural pattern).

MuffinFlavored 4y ago

> This concerns such a basic aspect of bank risk management one wonders how this sector could even call it self banking I feel like message boards like reddit/HackerNews are notorious for over-simplifying any topic. It's "reductionist". "How could these paid professionals consider themselves qualified?! As somebody not in that field without any insider knowledge or specific details into why hard decisions with tradeoffs were made, I know better, it's taught in economics 101!"

300bps 4y ago
notorious for over-simplifying any topic My last employer we managed money for community banks. I actually created the system that generated interest rate shock reports that showed the impact to a portfolio of fixed income assets for interest rate shocks of -300 to +300 basis points. Nobody thought interest rates would go +300 bp in such a short amount of time, especially in the short end of the yield curve. Banks essentially have 2 portfolios. Their loan portfolio is where they take the risk and it goes up and down with the traditional business cycle. Their fixed income portfolio is supposed to be almost no risk. They were whipsawed by the fed that lowered interest rates so quickly that it forced banks to buy longer-duration securities to just find any kind of yield within the regulatory constraints they were allowed to buy. Then the fed raised interest rates even more quickly causing staggering losses in the "almost no risk" fixed income portfolios of banks. Expect a lot more banks to be taken over even with the emergency backstops the fed has put into place. Look what the Fed did: https://www.federalreserve.gov/monetarypolicy/bst_recenttrends.htm https://www.federalreserve.gov/monetarypolicy/bst_recenttren... In 2008 the Fed flooded the economy with $2 trillion. In 2020 the Fed jumped up and flooded the economy with an additional $7 trillion. In September 2022 they started taking that money back (which incidentally led to tech company layoffs). As of March 2023 they removed about $600 billion. Then they suddenly put over half of that right back into the economy when SVB failed. It's impossible to predict or even appropriately react to what the Federal Reserve is doing.
- berkeleyjunk 4y ago
  It maybe impossible to predict what the Fed would do but it is certainly possible to avoid a lot of the damage by duration matching of assets and liabilities. e.g. Do not take short term deposits in checking that are callable at any time and invest them in 10 year maturity instruments. No issues at all taking proceeds from 5 year CDs and putting them into 5 year maturity bonds.

jmyeet 4y ago

> the risk driver for these ongoing smaller bank failures is (reportedly) the rise in interest rates. Ultimately it's poor risk management. If you take depositor funds and buy 10-30 year bonds with them then you're exposed to a run on the bank and rising interest rates will devalue your bonds. The bank instead could've rolled 30-90 day Fed funds instead but they didn't. Why? Lower yield. Put another way: the bank took a risk with depositor funds and they get wiped out because of it while depositors are fine. > the solution seems to be to create ever larger banking behemoths Yes and no. At the heart of this is fractional reserve banking, which has been wildly successful. Like any kind of risk-spreading business (including insurance) bigger is generally better because variance is less and everything becomes more predictable. I understand (and agree with) concerns about consolidation creating an oligopoly. Ultimately though, what backstops the entire financial system is the government. This was true before and it's true now. The Federal Reserve is even called the lender of last resort.

indymike 4y ago

> In fact this aggregation only commingles all sort of risks inside a gigantic opaque pool, makes the private-public dependency (TBTF) and all its perverse incentives even more entrenched, and ultimately creates the conditions for systemic failure This is the real issue. Bigger institutions aggregate risk.

ineedasername 4y ago

The solution could also be to require banks to be more cautious, which was actually the case before 2018. But the US political system rolled back precautions that were put in place in the aftermath of the 2008 crisis.

hristov 4y ago

The difference was that the larger behemoths were required by law to manage risk better. They were subject to a stricter ongoing regulatory regime. The medium banks convinced the corrupt Trump administration and a bunch of corrupt law makers to pass a law that subjects them to a much lighter regulatory regime. Their reasoning was that if a bank with "only" 250 billion of deposits fails it will not have a systemic effect on the economy. That reasoning was really dumb and now that a couple of medium banks failed the stupidity of that reasoning is obvious for everyone to see. Of course wiping out 250 billion dollars of deposits will cause a bank panic and will have an overall negative effect on the economy, and the fed is working hard to make sure this does not happen. But generally speaking smaller banks are not by nature riskier. They only got riskier because they passed themselves this law that allowed them to get riskier. And now they will get a reputation for being riskier, and since in banking reputation is everything, they will become riskier.

iancmceachern 4y ago

And where is the accountability? The facts seem to point to poor management, but in the case of SVB all the leaders there were all over linkedin acting like they were the victim, not the perpetrators.

d_burfoot 4y ago

> People famously have the political systems that they deserve. This sentiment is widely expressed, but it seems absurd and offensive to me. Citizens of countries such as Finland, Switzerland and Singapore enjoy much superior quality of government to what we have in the US. Does that mean Americans are ethically or intellectually inferior to Finns, Swiss, and Singaporeans? The government of Pakistan is not very good: does that mean Pakistanis are less ethical or intelligent?

MichaelZuo 4y ago
I've always thought the implication of the saying is that in aggregate they are. I don't think that necessarily translates to the median individual.
nologic01 4y ago
Unless you believe in overlords or secret societies the quality of government is more or less a direct result of the ethical constitution of a society - at least for a sovereign nation. The difficulty is that it is a collective phenomenon - as you can establish fairly easily by picking somebody from society X and embedding them in society Y. Ofcourse there is no collective without individuals, so ultimately it is aspects of individually adopted ethical codes and behaviors that it is responsible for a poor collective organization. A standalone computer that operates reasonably but is connected to other computers via a broken API's will lead to overall broken network operations. There is also something we might call a society's "intellectual constitution", the collective ability to execute required changes, devise institutions and tools etc. But this is subordinated to the ethical dimension (where there is a will there is always a way).
slt2021 4y ago
in US its not people who have government they deserve. It is Corporations have the government they pay/lobby for. only in the US there are voters and political donors/lobbyist. Other developed countries only have voters decide on election outcome & policy.

blackoil 4y ago

One aspect is that these behemoths have more stringent regulations than the likes of svb