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They absolutely are useful analysis. The fact that under fractional reserve banking, banks do not have enough cash on hand to pay out all their deposits at once
by makomk 3y ago
They absolutely are useful analysis. The fact that under fractional reserve banking, banks do not have enough cash on hand to pay out all their deposits at once does not make them insolvent. Every time a bank writes a loan they create an asset (the loan) and a matching liability (the bank deposit created when that money was loaned out). Their inability to pay everyone out at once is a liquidity problem, not one of solvency; they have the assets to cover their liabilities so long as their loans are still good. (The banking system isn't actually fractional reserve anyway, but the exact details of why that's wrong aren't particularly important here.)
The problems that've been happening recently - duration mismatches on ultra-safe assets like treasuries together with record rates of interest rate rises from record low levels - do actually make banks insolvent. The actual present-day market value of their assets is less than their liabilities to depositors because the fact that investors can get higher interest rates elsewhere means they'll only buy those assets at a discount that reflects the lower interest rate. Alternatively, the banks would have to pay more in interest to convince depositors to keep their money there until the assets reach maturity than they'd receive in interest themselves. Either way they're in deep trouble.
- candiodari 3y agoHow is this different from what the parent poster said? If banks cannot match their liabilities at any time that makes them insolvent (granted, some reasonable period might be useful. But we're talking days/a week, no more). The fact that they may be able to match those liabilities in the future does not matter.
- makomk 3y agoIt's different because banks with liquidity issues can be unwound and the depositors made whole using the proceeds, but that's not possible with these insolvent banks no matter how much time they're given. Sure, maybe they could pay out the face value of their deposits in a few decades when their treasuries mature, but that'd actually be a worse deal for depositors than just receiving whatever fraction of their deposits can be paid out from the fair market value of those treasuries right now - if they're willing to wait they can just invest in the same treasuries themselves, but they can also invest the money or spend it in other ways if they'd prefer. In more concrete terms, the Fed has a funding scheme in place right now that lends banks money to smooth over any liquidity problems they're having and ensure they can process withdrawals. That funding scheme lets them borrow against assets based on their face value ignoring losses due to interest rates, but it still charges current market interest rates, which means they're bleeding out money that way. It didn't save First Republic Bank and neither would any other solution that didn't involve either depositors taking a loss or the FDIC making up that loss using its own funds, because they were insolvent, not just lacking liquidity. The very real gap between assets and liabilities to depositors had to be filled from somewhere.
- candiodari 3y agoI doubt depositors will consider themselves made whole if they have to wait 2 to 10 years on their money. Plus waiting comes with interest. Those depositors deposited money in the bank because of the expectation they could spend it, all of it, at any time they wanted. So if it isn't insolvency, what is it? "Breach of trust"? Plus the depositors may need that money for reasons. Pushing the loans to make up for it on depositors is eventually the same as taking a haircut on the deposit. I mean, I get that this plays into the FED's hand. They want to take money out of the economy, that's what high interest rates are for, and this certainly does that. But ...