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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 regulatio
by 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 agoWhat? How do depositor bailouts affect bank managers' incentives?
- jonhohle 4y agoIf there is no risk, nothing is risky.
- zamnos 4y agoThe 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 agoThe 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 agoThey'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 agoKeep 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 agoNew 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 agoSome 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 agoOne 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 agoBanks 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 agoThis is the answer that makes the most sense.
- dlisboa 4y agoFDIC 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 agoCash 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 agoThe 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 agoSVB 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 agoThe 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 agoOh 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 agoSure, I'm just pedantic :) Re: the risk of interest rate backed securities "I too like to live dangerously" as they say.
- hibikir 4y agoNot 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 agoI'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.