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The model you describe is exactly why S&L happened. Small banks with highly correlated deposits holding their own loan books is a recipe for maximizing vulnera

The model you describe is exactly why S&L happened. Small banks with highly correlated deposits holding their own loan books is a recipe for maximizing vulnerability to economic shocks. Interest rates go up and the loan book loses value; the local housing market drops and the loans get foreclosed and lose value; a major local employer goes out of business and depositors all start pulling their money out instead of reliably depositing paychecks. Banks don't work that way any more because it's a really bad way to run a bank.

deleted 4y ago
[deleted]
photochemsyn 4y ago
This is a rather skewed perspective that ignores the fact that if you have FDIC insurance for depositors then that can be gamed unless you have strict regulation of the banks: > "The roots of the S&L crisis lay in excessive lending, speculation, and risk-taking driven by the moral hazard created by deregulation and taxpayer bailout guarantees." https://www.investopedia.com/terms/s/sl-crisis.asp https://www.investopedia.com/terms/s/sl-crisis.asp This is why a lot of people worry that Silicon Valley Bank, First Republic, etc. might be the tip of an iceberg. If they've all leveraged themselves on risky speculation bets in the hopes that they'll get bailouts if it all goes sour (even though depositors greatly exceeded FDIC insurance limits) then you could have a domino situation. Note also that it's a perfectly good way to run a bank as long as you don't get greedy and go for big risky bets, but the only way to ensure bank managers don't get the Las Vegas bug is to enforce the banking regulations in a fairly strict manner.
- SamReidHughes 4y ago
  What? How do depositor bailouts affect bank managers' incentives?
  - jonhohle 4y ago
    If there is no risk, nothing is risky.
  - zamnos 4y ago
    The bank manager can take more risks, knowing that the depositor's won't lose their money (over $250k if the bank they manage fails. Which is important because people tend to get mad when they lose large amounts of money. Thus, buy bailing out depositors to an unlimited amount, bank managers are then incentivized to take more risks investing the depositor's money because the more risks they take, the more likely it is that one will pay out, raising the bank manager's bonus, and what their stocks are worth. Of course, by taking more risks, they also increase the chances that one will fail catastrophically, but since the depositors are all covered, up to an unlimited amount, eh.
- cperciva 4y ago
  The S&L crisis started before the deregulation. In fact, the deregulation of S&Ls was an attempt to address the fact that many of them were already insolvent due to holding long-term fixed-rate mortgages in a rising-interest-rate environment.
- coliveira 4y ago
  They're just the tip of the iceberg. Pretty much all medium size banks have lots of underperforming assets, and they're just one minor mistake from going under, like these 3 banks. Also notice that there are still many shoes to drop: comercial real estate (a disaster waiting to happen), car loan defaults, etc.
  - SamReidHughes 4y ago
    Keep in mind that car loans get paid down pretty fast. For example, Capital One's <620 FICO customer segment has already paid off about half the auto loan principal from 2021. Their delinquency rate has flattened, quarter over quarter, as well.
    - coliveira 4y ago
      New car loans are not only longer (> 6 years) and also more expensive than previous loans. Also, people stop paying when they lose their job, so the trigger may be the start of a recession.
      - SamReidHughes 4y ago
        Some of them. A bit less than half of loans at Capital One are more than 5 years, for instance. (I'm just overly familiar with that company.) But a 6 year loan from June 2021 is still almost 1/3 paid off. The other question is if there's a recession, how much will used car prices, for cars that were new in 2021, drop.
- noduerme 4y ago
  One thing I don't understand, and perhaps you could explain, is why anyone in the US would ever keep more cash in any one bank account than what was covered by FDIC insurance. It's precisely the reason I don't e.g. take my savings to an offshore bank that offers much higher interest rates. Is this just a matter of people taking trust in a bank's solvency for granted?
  - tiedieconderoga 4y ago
    Banks can offer incentives for certain levels of deposits. Better interest rates, better cards, better loans. SVB offered perks to bank exclusively with them. https://www.cnbc.com/2023/03/12/silicon-valley-bank-signed-exclusive-banking-deals-with-some-clients.html https://www.cnbc.com/2023/03/12/silicon-valley-bank-signed-e... If you took that sort of agreement and bet on being bailed out in the event of a failure, you won your bet.
    - photochemsyn 4y ago
      This is the answer that makes the most sense.
  - dlisboa 4y ago
    FDIC limit is 250k per bank, so if you have 1 million you'd need 4 banks. If you have 10 million you'd need 40 banks. Having money spread out like that doesn't seem easy to manage. Also having 10 million in one bank gives you better interest rates and service at that bank than if you only had 250k.
    - zamnos 4y ago
      Cash sweep products are a thing. For example, Wealthfront will sweep your cash into a bunch of smaller banks, putting 250k in each, so on the off chance they fail, your money's not been disappeared.
      - lazide 4y ago
        The last time anything like that happened was what, over a decade ago? People forget (for real). Also, no one seems to have lost a dollars yet in this crisis (on the depositor side), so hard to say anyone ‘lost’ this time either.
- fisherjeff 4y ago
  SVB and FRC did not “leverage themselves on risky speculation bets.” They made lots of very safe investments but did not adequately hedge against large and rapid rate increases. Also not good but it’s a big difference, IMO.
  - foota 4y ago
    The only safe investment is a hedged investment, antthing else is up to your priors. While interest rates going up as much as they did may have seemed unlikely, it was still irresponsible not to hedge their risk.
    - fisherjeff 4y ago
      Oh absolutely. My point was just that if you truly wanted to make a big risky bet, you would definitely not be going out and buying a bunch of agency bonds.
      - foota 4y ago
        Sure, I'm just pedantic :) Re: the risk of interest rate backed securities "I too like to live dangerously" as they say.
    - hibikir 4y ago
      Not even most hedged investments at large scales. Hedging doesn't make risk disappear: It just shifts it somewhere else, either to someone even larger, or dispersed among many parties. When the risk is correlated with the risk from others, like the trillions in underperforming treasuries that the bing banks have in their balance sheets, who is the safe counterparty? Not the next bank, which also has a similar position. We saw this with the housing crisis and synthetic CDOs, and we see this on insurance against sufficiently large natural disasters. So sure, small banks failing to hedge is irresponsible, but at a large enough scale, someone holds the bag.
      - foota 4y ago
        I'm not an expert on interest rate securities, but with e.g., physical goods the bag holder has physical goods or contracts for supply that allows them to meet their obligations. Is something similar not possible with interest rates? I imagine for instance someone with lots of cash and little desire for risk could lend their money to the banks at overnight rates, collect the interest, and then offer swaps against that steam, no? Of course, no one's going to get their 10th mansion off of this. A little riskier, someone holding variable payment debts could do the same, as long as the loans are diverse the risk could stay low. In this way, the risk at least shifts from "we're screwed if interest rates change" to "we're screwed if interest rates change and many diverse loans start to fail to make payments" in which case you're probably screwed regardless.
CPLX 4y ago
Might be a bad way to run a bank, might not, but it's definitely not the cause of the S&L crisis. That was a story of deregulation leading to massive moral hazard, rampant speculation, and multiple high profile cases of outright fraud. Economic shocks and rising interest rates aren't usually the reason that financial institutions engaging in risky or fraudulent behavior get caught, they usually just make it so the clock runs out on their scheme to roll over the losses or otherwise avoid getting caught. The liquidity crisis of 2008 didn't cause Bernie Madoff's fund to collapse, the fact that it was a complete fraud from inception did. It just made it impossible to ignore.
llanowarelves 4y ago
Evidently, the best way to run a bank is a 0% cash reserve minimum (as was granted to US banks starting during COVID), so you can make money off of literally every last penny, and then discourage and prevent customers from taking their money out, then [externalizing all costs]/[socialize losses] onto government (taxpayer) via bailout or customer via bail-in, while privatizing all profits in the meantime. And charge poor people $30 every time they dip under $0 even by a penny. Doesn't mean it's a good idea for the rest of us non-banks.
- dimitrios1 4y ago
  > And charge poor people $30 every time they dip under $0 even by a penny. The list of large corporate banks that charge NSF fees and overdrafts is vanishingly small. OTOH, I know of plenty of credit unions that still do both.
  - cde-v 4y ago
    > The list of large corporate banks that charge NSF fees and overdrafts is vanishingly small. True for NSF fees, absolutely false for overdraft fees. https://files.consumerfinance.gov/f/documents/cfpb_overdraft-chart_2023-02.pdf https://files.consumerfinance.gov/f/documents/cfpb_overdraft...
    - dimitrios1 4y ago
      I would need to see 2022 as well. Many banks announced changes middle of 2021 and 2022.
      - cde-v 3y ago
        Fair, not sure when the new data comes out.
NoMoreNicksLeft 4y ago
> Banks don't work that way any more because it's a really bad way to run a bank. As compared to what we have now? With dubious financial instruments so opaque I'd have to spend 30 years lurking underneath desks on Wall Street eavesdropping on conversations just to have any clue at all how the fuck those work? I'm almost comforted when there's a Bernie Madoff, because at least I can wrap my head around how a Ponzi scheme works (ignoring the ethics, obviously). I'm (irrationally?) worried that some of what's been going on the last few years actually makes plain Ponzi schemes look legitimate by comparison. Not 25 years ago, we used to laugh about the stupid books with titles like "Dow Jones 100,000!" and whatnot, I think it was a Slashdot post way back when. And while we haven't quite reached that pinnacle of absurdity, it did hit 37,000 not so long ago. None of us may be able to pick the queen of hearts, but some of us have caught on to the fact that it's three card monte. When it all falls down, should we console ourselves with "well at least the banks weren't small and local and vulnerable to economic shocks"?
- kortilla 4y ago
  > And while we haven't quite reached that pinnacle of absurdity, it did hit 37,000 not so long ago. Why do you think this is absurd? You know inflation means we’ll get there even without ridiculous multiples, right?
  - NoMoreNicksLeft 4y ago
    What sort of inflation would take it from 2700 to 37,000 since 1987? How close to the CPI is that, exactly? It seems a little off.
    - tpxl 4y ago
      > What sort of inflation would take it from 2700 to 37,000 since 1987? 7.5%. Doesn't seem that unbelievable.
      - NoMoreNicksLeft 4y ago
        Well, it doesn't seem bizarrely implausible. It has spiked even higher than that in my lifetime (not even counting recently). The trouble is that I've been told that it was far lower. By official government sources. It would be interesting to include the DJIA into CPI though. I bet some people would lose their shit over that.
opportune 4y ago
It’s more complex than that. The ideal situation for a bank is when all its depositors are customers of each other. The deposits never leave the bank so the bank has very stable liabilities. So a local bank will be great when a community transacts mostly with itself. SL happens right around when multinationals and corporate centralization started becoming more of a thing.. We live in the era of trillion dollar corporations, fintech, and the internet so a community bank ends up more like a small big bank. Its depositors are getting paid by corporations from way outside the community, and they’re spending money on the internet or at giant multinational retailers and thus shifting deposits outside the community. In this paradigm, it’s actually better to be huge and have a diversified customer base because the best way to keep your liabilities stable is to have the largest market share possible. You’ll notice, banks usually have generous incentives for setting up direct deposit. Direct deposit is the best way for them to have a predictable measure of incoming deposits when there isn’t a high likelihood of one particular account transaction with another.

deleted 4y ago

[deleted]

photochemsyn 4y ago

This is a rather skewed perspective that ignores the fact that if you have FDIC insurance for depositors then that can be gamed unless you have strict regulation of the banks: > "The roots of the S&L crisis lay in excessive lending, speculation, and risk-taking driven by the moral hazard created by deregulation and taxpayer bailout guarantees." https://www.investopedia.com/terms/s/sl-crisis.asp https://www.investopedia.com/terms/s/sl-crisis.asp This is why a lot of people worry that Silicon Valley Bank, First Republic, etc. might be the tip of an iceberg. If they've all leveraged themselves on risky speculation bets in the hopes that they'll get bailouts if it all goes sour (even though depositors greatly exceeded FDIC insurance limits) then you could have a domino situation. Note also that it's a perfectly good way to run a bank as long as you don't get greedy and go for big risky bets, but the only way to ensure bank managers don't get the Las Vegas bug is to enforce the banking regulations in a fairly strict manner.

SamReidHughes 4y ago
What? How do depositor bailouts affect bank managers' incentives?
- jonhohle 4y ago
  If there is no risk, nothing is risky.
- zamnos 4y ago
  The bank manager can take more risks, knowing that the depositor's won't lose their money (over $250k if the bank they manage fails. Which is important because people tend to get mad when they lose large amounts of money. Thus, buy bailing out depositors to an unlimited amount, bank managers are then incentivized to take more risks investing the depositor's money because the more risks they take, the more likely it is that one will pay out, raising the bank manager's bonus, and what their stocks are worth. Of course, by taking more risks, they also increase the chances that one will fail catastrophically, but since the depositors are all covered, up to an unlimited amount, eh.
cperciva 4y ago
The S&L crisis started before the deregulation. In fact, the deregulation of S&Ls was an attempt to address the fact that many of them were already insolvent due to holding long-term fixed-rate mortgages in a rising-interest-rate environment.
coliveira 4y ago
They're just the tip of the iceberg. Pretty much all medium size banks have lots of underperforming assets, and they're just one minor mistake from going under, like these 3 banks. Also notice that there are still many shoes to drop: comercial real estate (a disaster waiting to happen), car loan defaults, etc.
- SamReidHughes 4y ago
  Keep in mind that car loans get paid down pretty fast. For example, Capital One's <620 FICO customer segment has already paid off about half the auto loan principal from 2021. Their delinquency rate has flattened, quarter over quarter, as well.
  - coliveira 4y ago
    New car loans are not only longer (> 6 years) and also more expensive than previous loans. Also, people stop paying when they lose their job, so the trigger may be the start of a recession.
    - SamReidHughes 4y ago
      Some of them. A bit less than half of loans at Capital One are more than 5 years, for instance. (I'm just overly familiar with that company.) But a 6 year loan from June 2021 is still almost 1/3 paid off. The other question is if there's a recession, how much will used car prices, for cars that were new in 2021, drop.
noduerme 4y ago
One thing I don't understand, and perhaps you could explain, is why anyone in the US would ever keep more cash in any one bank account than what was covered by FDIC insurance. It's precisely the reason I don't e.g. take my savings to an offshore bank that offers much higher interest rates. Is this just a matter of people taking trust in a bank's solvency for granted?
- tiedieconderoga 4y ago
  Banks can offer incentives for certain levels of deposits. Better interest rates, better cards, better loans. SVB offered perks to bank exclusively with them. https://www.cnbc.com/2023/03/12/silicon-valley-bank-signed-exclusive-banking-deals-with-some-clients.html https://www.cnbc.com/2023/03/12/silicon-valley-bank-signed-e... If you took that sort of agreement and bet on being bailed out in the event of a failure, you won your bet.
  - photochemsyn 4y ago
    This is the answer that makes the most sense.
- dlisboa 4y ago
  FDIC limit is 250k per bank, so if you have 1 million you'd need 4 banks. If you have 10 million you'd need 40 banks. Having money spread out like that doesn't seem easy to manage. Also having 10 million in one bank gives you better interest rates and service at that bank than if you only had 250k.
  - zamnos 4y ago
    Cash sweep products are a thing. For example, Wealthfront will sweep your cash into a bunch of smaller banks, putting 250k in each, so on the off chance they fail, your money's not been disappeared.
    - lazide 4y ago
      The last time anything like that happened was what, over a decade ago? People forget (for real). Also, no one seems to have lost a dollars yet in this crisis (on the depositor side), so hard to say anyone ‘lost’ this time either.
fisherjeff 4y ago
SVB and FRC did not “leverage themselves on risky speculation bets.” They made lots of very safe investments but did not adequately hedge against large and rapid rate increases. Also not good but it’s a big difference, IMO.
- foota 4y ago
  The only safe investment is a hedged investment, antthing else is up to your priors. While interest rates going up as much as they did may have seemed unlikely, it was still irresponsible not to hedge their risk.
  - fisherjeff 4y ago
    Oh absolutely. My point was just that if you truly wanted to make a big risky bet, you would definitely not be going out and buying a bunch of agency bonds.
    - foota 4y ago
      Sure, I'm just pedantic :) Re: the risk of interest rate backed securities "I too like to live dangerously" as they say.
  - hibikir 4y ago
    Not even most hedged investments at large scales. Hedging doesn't make risk disappear: It just shifts it somewhere else, either to someone even larger, or dispersed among many parties. When the risk is correlated with the risk from others, like the trillions in underperforming treasuries that the bing banks have in their balance sheets, who is the safe counterparty? Not the next bank, which also has a similar position. We saw this with the housing crisis and synthetic CDOs, and we see this on insurance against sufficiently large natural disasters. So sure, small banks failing to hedge is irresponsible, but at a large enough scale, someone holds the bag.
    - foota 4y ago
      I'm not an expert on interest rate securities, but with e.g., physical goods the bag holder has physical goods or contracts for supply that allows them to meet their obligations. Is something similar not possible with interest rates? I imagine for instance someone with lots of cash and little desire for risk could lend their money to the banks at overnight rates, collect the interest, and then offer swaps against that steam, no? Of course, no one's going to get their 10th mansion off of this. A little riskier, someone holding variable payment debts could do the same, as long as the loans are diverse the risk could stay low. In this way, the risk at least shifts from "we're screwed if interest rates change" to "we're screwed if interest rates change and many diverse loans start to fail to make payments" in which case you're probably screwed regardless.

CPLX 4y ago

Might be a bad way to run a bank, might not, but it's definitely not the cause of the S&L crisis. That was a story of deregulation leading to massive moral hazard, rampant speculation, and multiple high profile cases of outright fraud. Economic shocks and rising interest rates aren't usually the reason that financial institutions engaging in risky or fraudulent behavior get caught, they usually just make it so the clock runs out on their scheme to roll over the losses or otherwise avoid getting caught. The liquidity crisis of 2008 didn't cause Bernie Madoff's fund to collapse, the fact that it was a complete fraud from inception did. It just made it impossible to ignore.

llanowarelves 4y ago

Evidently, the best way to run a bank is a 0% cash reserve minimum (as was granted to US banks starting during COVID), so you can make money off of literally every last penny, and then discourage and prevent customers from taking their money out, then [externalizing all costs]/[socialize losses] onto government (taxpayer) via bailout or customer via bail-in, while privatizing all profits in the meantime. And charge poor people $30 every time they dip under $0 even by a penny. Doesn't mean it's a good idea for the rest of us non-banks.

dimitrios1 4y ago
> And charge poor people $30 every time they dip under $0 even by a penny. The list of large corporate banks that charge NSF fees and overdrafts is vanishingly small. OTOH, I know of plenty of credit unions that still do both.
- cde-v 4y ago
  > The list of large corporate banks that charge NSF fees and overdrafts is vanishingly small. True for NSF fees, absolutely false for overdraft fees. https://files.consumerfinance.gov/f/documents/cfpb_overdraft-chart_2023-02.pdf https://files.consumerfinance.gov/f/documents/cfpb_overdraft...
  - dimitrios1 4y ago
    I would need to see 2022 as well. Many banks announced changes middle of 2021 and 2022.
    - cde-v 3y ago
      Fair, not sure when the new data comes out.

NoMoreNicksLeft 4y ago

> Banks don't work that way any more because it's a really bad way to run a bank. As compared to what we have now? With dubious financial instruments so opaque I'd have to spend 30 years lurking underneath desks on Wall Street eavesdropping on conversations just to have any clue at all how the fuck those work? I'm almost comforted when there's a Bernie Madoff, because at least I can wrap my head around how a Ponzi scheme works (ignoring the ethics, obviously). I'm (irrationally?) worried that some of what's been going on the last few years actually makes plain Ponzi schemes look legitimate by comparison. Not 25 years ago, we used to laugh about the stupid books with titles like "Dow Jones 100,000!" and whatnot, I think it was a Slashdot post way back when. And while we haven't quite reached that pinnacle of absurdity, it did hit 37,000 not so long ago. None of us may be able to pick the queen of hearts, but some of us have caught on to the fact that it's three card monte. When it all falls down, should we console ourselves with "well at least the banks weren't small and local and vulnerable to economic shocks"?

kortilla 4y ago
> And while we haven't quite reached that pinnacle of absurdity, it did hit 37,000 not so long ago. Why do you think this is absurd? You know inflation means we’ll get there even without ridiculous multiples, right?
- NoMoreNicksLeft 4y ago
  What sort of inflation would take it from 2700 to 37,000 since 1987? How close to the CPI is that, exactly? It seems a little off.
  - tpxl 4y ago
    > What sort of inflation would take it from 2700 to 37,000 since 1987? 7.5%. Doesn't seem that unbelievable.
    - NoMoreNicksLeft 4y ago
      Well, it doesn't seem bizarrely implausible. It has spiked even higher than that in my lifetime (not even counting recently). The trouble is that I've been told that it was far lower. By official government sources. It would be interesting to include the DJIA into CPI though. I bet some people would lose their shit over that.

opportune 4y ago

It’s more complex than that. The ideal situation for a bank is when all its depositors are customers of each other. The deposits never leave the bank so the bank has very stable liabilities. So a local bank will be great when a community transacts mostly with itself. SL happens right around when multinationals and corporate centralization started becoming more of a thing.. We live in the era of trillion dollar corporations, fintech, and the internet so a community bank ends up more like a small big bank. Its depositors are getting paid by corporations from way outside the community, and they’re spending money on the internet or at giant multinational retailers and thus shifting deposits outside the community. In this paradigm, it’s actually better to be huge and have a diversified customer base because the best way to keep your liabilities stable is to have the largest market share possible. You’ll notice, banks usually have generous incentives for setting up direct deposit. Direct deposit is the best way for them to have a predictable measure of incoming deposits when there isn’t a high likelihood of one particular account transaction with another.