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How 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

How 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 ago
It'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 ago
  I 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 ...

makomk 3y ago

It'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 ago
I 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 ...