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Banks are in a tight spot. They have short term liabilities (depositors might want to pull their funds out whenever) and primarily long term assets (loans), exc

Banks are in a tight spot. They have short term liabilities (depositors might want to pull their funds out whenever) and primarily long term assets (loans), except for the cash buffer they get overnight deposit rate for from central banks. Some of that long term debt interest is fixed at lower rates than current interest rates, so the banks can’t offer the same risk-free return on deposits as money market funds that collect the current rates from short term government bonds. The longer the high interest rates continue, the more deposits will flow out into money market funds and treasuries in search of higher risk-free yield. As time goes on, more and more banks are affected by this, potentially needing bail outs if they can’t cover the depositor outflows. They have higher cash reserves than before GFC, but if there are enough outflows, those reserves won’t be enough.

candiodari 3y ago
https://www.theguardian.com/commentisfree/2023/feb/21/banks-record-profits-windfall-tax https://www.theguardian.com/commentisfree/2023/feb/21/banks-... If this is your definition of a tight spot ... I'd love to be in that sort of tight spot.
- chrisco255 3y ago
  ^ this is a very thin piece, used to push a narrative. Cherry picking 5 particular banks and their Q4 2022 fiscal results does not tell you what is happening right now. Since that article was posted in February, we've had 3 major U.S. banks fail representing $532 billion in total assets and Credit Suisse collapsed in March, with Swiss government providing $108 billion to back a purchase by UBS. The banking system is in bad shape right now, and we don't really know how many more will fail.
- j-bos 3y ago
  Maybe the commenter is refering to small-midsized banks.
- dharma1 3y ago
  If Berkshire sold out of most of their bank holdings, that should tell you something. Large banks are broadly fine for now (cough Credit Suisse cough), but there are a lot of small/midsize banks that are more vulnerable, enough to have some contagion effect. If more start failing, spooked depositors with more small/midsize banks start pulling their money out and move it to large banks - possibly collapsing more of the smaller ones. And we haven't even started seeing bad commercial real estate loans hit banks. https://www.ft.com/content/da9f8230-2eb1-49c5-b63a-f1507936d01b https://www.ft.com/content/da9f8230-2eb1-49c5-b63a-f1507936d... The next one in line could be this https://twitter.com/elerianm/status/1654073420328452096 https://twitter.com/elerianm/status/1654073420328452096
massysett 3y ago
Do you mean an unusually tight spot? Because short-term liabilities and long-term assets is the very essence of banking.
- sdfghswe 3y ago
  It's the very essence of banking, and why "bank runs" are a thing.
- dharma1 3y ago
  yes in an unusually tight spot due to the rapid, significant increase in interest rates (risk-free yield elsewhere) vs what they can offer to depositors - risking bank runs, which previously have been rare. If we zoom out, we could say it's a fairly inevitable second order effect of the last ~15-20 years - large deficits, low rate environment and money printing. As debt builds up, the system becomes fragile over time, and events like pandemics or wars (supply shocks, huge fiscal/monetary pump) can surprise, with a sudden spike in inflation. This has forced central banks to swiftly reverse course and hike rates much faster and comparatively higher (from 0% starting point) than in a long while. Problem is, when economy participants are hooked to low rates over decades, these hikes will likely break things - starting with banks, then commercial real estate, then who knows what. Central banks can only hope inflation comes down fast before the dominos start falling - but it's not guaranteed it will, or that it will stay low, especially if central banks are forced to intervene with more easing in the event of some kind of crisis.

candiodari 3y ago

https://www.theguardian.com/commentisfree/2023/feb/21/banks-record-profits-windfall-tax https://www.theguardian.com/commentisfree/2023/feb/21/banks-... If this is your definition of a tight spot ... I'd love to be in that sort of tight spot.

chrisco255 3y ago
^ this is a very thin piece, used to push a narrative. Cherry picking 5 particular banks and their Q4 2022 fiscal results does not tell you what is happening right now. Since that article was posted in February, we've had 3 major U.S. banks fail representing $532 billion in total assets and Credit Suisse collapsed in March, with Swiss government providing $108 billion to back a purchase by UBS. The banking system is in bad shape right now, and we don't really know how many more will fail.
j-bos 3y ago
Maybe the commenter is refering to small-midsized banks.
dharma1 3y ago
If Berkshire sold out of most of their bank holdings, that should tell you something. Large banks are broadly fine for now (cough Credit Suisse cough), but there are a lot of small/midsize banks that are more vulnerable, enough to have some contagion effect. If more start failing, spooked depositors with more small/midsize banks start pulling their money out and move it to large banks - possibly collapsing more of the smaller ones. And we haven't even started seeing bad commercial real estate loans hit banks. https://www.ft.com/content/da9f8230-2eb1-49c5-b63a-f1507936d01b https://www.ft.com/content/da9f8230-2eb1-49c5-b63a-f1507936d... The next one in line could be this https://twitter.com/elerianm/status/1654073420328452096 https://twitter.com/elerianm/status/1654073420328452096

massysett 3y ago

Do you mean an unusually tight spot? Because short-term liabilities and long-term assets is the very essence of banking.

sdfghswe 3y ago
It's the very essence of banking, and why "bank runs" are a thing.
dharma1 3y ago
yes in an unusually tight spot due to the rapid, significant increase in interest rates (risk-free yield elsewhere) vs what they can offer to depositors - risking bank runs, which previously have been rare. If we zoom out, we could say it's a fairly inevitable second order effect of the last ~15-20 years - large deficits, low rate environment and money printing. As debt builds up, the system becomes fragile over time, and events like pandemics or wars (supply shocks, huge fiscal/monetary pump) can surprise, with a sudden spike in inflation. This has forced central banks to swiftly reverse course and hike rates much faster and comparatively higher (from 0% starting point) than in a long while. Problem is, when economy participants are hooked to low rates over decades, these hikes will likely break things - starting with banks, then commercial real estate, then who knows what. Central banks can only hope inflation comes down fast before the dominos start falling - but it's not guaranteed it will, or that it will stay low, especially if central banks are forced to intervene with more easing in the event of some kind of crisis.