7 ms·

A stable banking system is very much in regular people's interest.

toomuchtodo 3y ago
So is not arriving it at by rewarding excessive risk taking (ie no shareholder or exec clawbacks of comp) by taking it out of the pockets of regular people by way of the additional costs incurred upon them by their US GSIB, after smaller banks went to Congress and complained they were "excessively regulated." [1] It seems the party line is that it's totally fine for the Fed to reject Narrow Banking [2] (which is as close to zero risk as you can get in developed world finance at the cost of fractional reserve banking), but hand wringing across them, FDIC, OCC, and the executive branch when JPM needs to save the banking system again [3] [4]. Who could ever foresee the cyclic crises of our own making /s. EDIT: We could have an inherently stable banking system. Regulators collectively choose a lesser alternative. [1] https://www.usatoday.com/story/news/politics/2023/04/13/svb-lobbying-bank-regulations/11555491002/ https://www.usatoday.com/story/news/politics/2023/04/13/svb-... [2] https://www.chicagobooth.edu/review/safest-bank-fed-wont-sanction https://www.chicagobooth.edu/review/safest-bank-fed-wont-san... [3] https://en.wikipedia.org/wiki/Panic_of_1907 https://en.wikipedia.org/wiki/Panic_of_1907 [4] https://www.nytimes.com/2023/05/01/business/first-republic-jpmorgan-fdic.html https://www.nytimes.com/2023/05/01/business/first-republic-j... | https://archive.is/IFBW7 https://archive.is/IFBW7 (jpm customer)
- maxbond 3y ago
  Genuinely curious, if our banks only received interest from the Fed: 1. How are loans originated? If they can only deposit at the Fed, how is anyone supposed to get a mortgage? 2. What value does the bank provide at that point? Why wouldn't the Fed just give people bank accounts?
  - toomuchtodo 3y ago
    1. Bond issuance and securitization, as happens today for most mortgages. The existing capital markets, broadly speaking. 2. Exactly [1]. Similarly to airlines, it’s a utility masquerading as a business. Everyone gets a demand deposit account, no fees, and instant payment functionality. Everyone else in the ecosystem is then either a lender or some sort of value add financial services provider. Good questions! [1] https://www.congress.gov/bill/116th-congress/senate-bill/3571 https://www.congress.gov/bill/116th-congress/senate-bill/357...
    - toomuchtodo 3y ago
      It appears Matt Levine covers #1 in much more depth than I in a recent money stuff piece. https://www.bloomberg.com/opinion/articles/2023-05-11/blackstone-can-be-the-bank https://www.bloomberg.com/opinion/articles/2023-05-11/blacks... | https://archive.is/SrzgL https://archive.is/SrzgL
- bagacrap 3y ago
  Shareholders of SVB are getting nothing. Also jpm is generally coming out ahead on this because they bought FRC on discount and because of the increased amount of deposits.
gjsman-1000 3y ago
> A stable banking system is very much in regular people's interest. Everyone and everything responds to incentives. The message that FDIC just sent out is that you can make mistakes, you can mismanage your liquidity, and everyone else will pay to clean up your bill. What does that incentivize banks to do? It just encourages repeat behavior until there's nobody large enough to pay the difference. Not a recipe for stability. Whereas, let's say SVB fell. Painful, yes. Lessons learned? Oh yes, nobody's going to let that happen again anytime soon; be it depositors or bankers. Long-term stability or short-term stability, pick one.
- creato 3y ago
  Anyone actually involved with decisions managing the bank was not bailed out. The people who were bailed out are depositors. If you want to make this argument, the correct version is that depositors are incentivized to find the bank paying the highest interest regardless of risk. But I think this argument is very weak.
  - deleted 3y ago
    [deleted]
  - chippiewill 3y ago
    > But I think this argument is very weak. It's particularly weak given that depositors are deliberately not given clear information on the liquidity and balance sheets of their banks to avoid bank runs. The FDIC said that SVB was stable and in good shape a day before it failed.
  - unyttigfjelltol 3y ago
    The event illustrates that banking is an inherently unstable business. Depositors must have the illusion of being able to withdraw everything anytime on demand, because it's their "money". Banks have a huge incentive to invest the deposits in things that can't necessarily be liquidated on demand, because what in the world other than a bank account can be? The choice then is a) to accept some bank failures and depositor wipeouts, or b) inexorable pressure to centralize the risk structure until you have something remarkably like Gosbank[1] or 1 bank for everyone. We tried the FDIC scheme, it was nice, but when the deposit limit is overtopped these days the bank is not stable. [1] https://en.m.wikipedia.org/wiki/Gosbank https://en.m.wikipedia.org/wiki/Gosbank

So is not arriving it at by rewarding excessive risk taking (ie no shareholder or exec clawbacks of comp) by taking it out of the pockets of regular people by way of the additional costs incurred upon them by their US GSIB, after smaller banks went to Congress and complained they were "excessively regulated." [1] It seems the party line is that it's totally fine for the Fed to reject Narrow Banking [2] (which is as close to zero risk as you can get in developed world finance at the cost of fractional reserve banking), but hand wringing across them, FDIC, OCC, and the executive branch when JPM needs to save the banking system again [3] [4]. Who could ever foresee the cyclic crises of our own making /s. EDIT: We could have an inherently stable banking system. Regulators collectively choose a lesser alternative. [1] https://www.usatoday.com/story/news/politics/2023/04/13/svb-lobbying-bank-regulations/11555491002/ https://www.usatoday.com/story/news/politics/2023/04/13/svb-... [2] https://www.chicagobooth.edu/review/safest-bank-fed-wont-sanction https://www.chicagobooth.edu/review/safest-bank-fed-wont-san... [3] https://en.wikipedia.org/wiki/Panic_of_1907 https://en.wikipedia.org/wiki/Panic_of_1907 [4] https://www.nytimes.com/2023/05/01/business/first-republic-jpmorgan-fdic.html https://www.nytimes.com/2023/05/01/business/first-republic-j... | https://archive.is/IFBW7 https://archive.is/IFBW7 (jpm customer)

maxbond 3y ago
Genuinely curious, if our banks only received interest from the Fed: 1. How are loans originated? If they can only deposit at the Fed, how is anyone supposed to get a mortgage? 2. What value does the bank provide at that point? Why wouldn't the Fed just give people bank accounts?
- toomuchtodo 3y ago
  1. Bond issuance and securitization, as happens today for most mortgages. The existing capital markets, broadly speaking. 2. Exactly [1]. Similarly to airlines, it’s a utility masquerading as a business. Everyone gets a demand deposit account, no fees, and instant payment functionality. Everyone else in the ecosystem is then either a lender or some sort of value add financial services provider. Good questions! [1] https://www.congress.gov/bill/116th-congress/senate-bill/3571 https://www.congress.gov/bill/116th-congress/senate-bill/357...
  - toomuchtodo 3y ago
    It appears Matt Levine covers #1 in much more depth than I in a recent money stuff piece. https://www.bloomberg.com/opinion/articles/2023-05-11/blackstone-can-be-the-bank https://www.bloomberg.com/opinion/articles/2023-05-11/blacks... | https://archive.is/SrzgL https://archive.is/SrzgL
bagacrap 3y ago
Shareholders of SVB are getting nothing. Also jpm is generally coming out ahead on this because they bought FRC on discount and because of the increased amount of deposits.

gjsman-1000 3y ago

> A stable banking system is very much in regular people's interest. Everyone and everything responds to incentives. The message that FDIC just sent out is that you can make mistakes, you can mismanage your liquidity, and everyone else will pay to clean up your bill. What does that incentivize banks to do? It just encourages repeat behavior until there's nobody large enough to pay the difference. Not a recipe for stability. Whereas, let's say SVB fell. Painful, yes. Lessons learned? Oh yes, nobody's going to let that happen again anytime soon; be it depositors or bankers. Long-term stability or short-term stability, pick one.

creato 3y ago
Anyone actually involved with decisions managing the bank was not bailed out. The people who were bailed out are depositors. If you want to make this argument, the correct version is that depositors are incentivized to find the bank paying the highest interest regardless of risk. But I think this argument is very weak.
- deleted 3y ago
  [deleted]
- chippiewill 3y ago
  > But I think this argument is very weak. It's particularly weak given that depositors are deliberately not given clear information on the liquidity and balance sheets of their banks to avoid bank runs. The FDIC said that SVB was stable and in good shape a day before it failed.
- unyttigfjelltol 3y ago
  The event illustrates that banking is an inherently unstable business. Depositors must have the illusion of being able to withdraw everything anytime on demand, because it's their "money". Banks have a huge incentive to invest the deposits in things that can't necessarily be liquidated on demand, because what in the world other than a bank account can be? The choice then is a) to accept some bank failures and depositor wipeouts, or b) inexorable pressure to centralize the risk structure until you have something remarkably like Gosbank[1] or 1 bank for everyone. We tried the FDIC scheme, it was nice, but when the deposit limit is overtopped these days the bank is not stable. [1] https://en.m.wikipedia.org/wiki/Gosbank https://en.m.wikipedia.org/wiki/Gosbank