5 ms·

>I immediately think about a run-on-the-bank. If I had my money there, and I read a statement like that, I'd be discreetly moving it elsewhere. Congratulations

by RC_ITR 3y ago

>I immediately think about a run-on-the-bank. If I had my money there, and I read a statement like that, I'd be discreetly moving it elsewhere. Congratulations! Whether intentional or not, you're trying to start a bank run! Please don't! The reality of the matter is literally any bank could not survive a bank run. Even JPMorgan. The entire business model of a bank is to take deposits, hope people ask for them in a predictable way, and then lend them out to people (often as mortgages or Treasuries, but also as a lot of different things). It's a weird system, but it's what we got. What is happening here is that the resale value of treasuries fall as interest rates rise. This is due to the weird quirk of treasuries having a set payment schedule, which forces the face value to change in order to reach parity with market interest rates. The amount that the government owes BoA at maturity is still the exact same number. Nothing about those Treasuries has actually changed other than the fact that they earn less interest than a newly issued treasury and if BoA needed to sell them quickly, they would be worth less than what they were paid for. As you'd guess, this only becomes a problem when people run the bank and the bank needs to sell those Treasuries to meet deposit requirements. In reality, if BoA gets in trouble, since it is a GSIB, the US government would just spot the bank the original value of those Treasuries (since again, nothing about them has actually changed and the government still owes BoA the original price eventually), everyone would complain, and then we'd move on. Things will be a lot nicer if we don't have to do that, so please stop!

nemo44x 3y ago
> Nothing about those Treasuries has actually changed other than the fact that they earn less interest than a newly issued treasury and if BoA needed to sell them quickly, they would be worth less than what they were paid for. They bought them with money that isn't theirs and if they were to sell them all to return people's money then they would be bankrupt. So yes, a lot about those Treasuries has changed as the value of the asset is based on time and rate. Those Treasuries do in fact have a market price and although they'd return all their principal eventually, it isn't today and is actually a long time from today. It's completely disingenuous to say "nothing has changed". Nothing has changed other than the fact that the market value of the treasury is far less than what the bank could stand if forced liquidate them. Only a fool would keep any sort of serious money with BoA that isn't FDIC insured, etc.
- qaq 3y ago
  If BoA failed all US Banks and in turn all world banks would collapse. The chances that FED does not bail em out is 0.
- RandomLensman 3y ago
  BofA isn't just funding itself only with deposits (and how is that split between term and demand deposits). There is funding via bonds and repos, for example, and those bonds provide long-term funding.
- RC_ITR 3y ago
  >Those Treasuries do in fact have a market price and although they'd return all their principal eventually, it isn't today and is actually a long time from today. Yes, and if people don't run the bank, then they can hold on to those Treasuries until they mature? I agree if they have to sell today, that's bad, but again, that's also true of any bank selling through any type of illiquid assets. We just got used to interest rates going down for 40 years and this not being a problem (banks got run for different reasons back then).
nly 3y ago
> This is due to the weird quirk of treasuries What are you talking about? This is literally how all bonds work. It's not a "weird quirk"
- RC_ITR 3y ago
  Huh? There are plenty of adjustable rate bonds? That was a big part of why the LIBOR scandal was such a big deal?
  - nly 3y ago
    I'm not familiar with any adjustable rate bonds tbh. All corporate bonds and gilts I've ever seen have had fixed coupons to maturity. I just wouldn't call treasuries weird or quirky when fixed coupons are the textbook definition of a bond taught in school.
    - dmoy 3y ago
      There are some adjustable rate treasuries even (iBonds, and TIPS). So not technically "all". But yea the vast majority of bonds (treasuries or otherwise) are not variable rate. Close enough to "all" that it seems needlessly pedantic, I agree.
      - RC_ITR 3y ago
        It feels insane to me that people haven’t heard of floating rate bonds. I guess the debt guys are too busy to hang out here. Here’s a primer from 2011. The Treasury and Feddie call theirs FRNs. https://capitalmarkets.fanniemae.com/media/1456/display https://capitalmarkets.fanniemae.com/media/1456/display
    - SilasX 3y ago
      Everything in this ETF and similar has a floating interest rate: https://www.morningstar.com/etfs/bats/flot/quote https://www.morningstar.com/etfs/bats/flot/quote Please be careful about overconfidence.
    - 3y ago
nly 3y ago
Banks don't have to take in customer deposits in order to lend out money Deposits are just a cheap way for them to reduce the delta between what they owe other banks and what other banks owe them (settlement) When a bank writes a loan it simultaneously creates an asset (the loan, which has returning cash flows) and a cash deposit (in the borrowers account) The deposit is only a liability for the bank if it is paid to another bank or withdrawn in physical cash. Otherwise it's all make believe. If I borrow $1000 from BoA and spend it on a guitar, and the previous guitar owner puts that money in to their BoA account, then it's all just a complicated no-op. Even if the new deposit is withdrawn or transferred somewhere else, the bank can still borrow any deficit overnight from other banks at a daily rate that is lower than what they're earning on the loan.
- HDThoreaun 3y ago
  > at a daily rate that is lower than what they're earning on the loan. Well there's the rub. If the bank is holding loans written early pandemic at sub 3% they'd lose money on the overnight rate. If you're paying 2% on your guitar loan and the depositor is getting 3% the bank is actively losing money. BoA deposits down 8.5% yoy, meaning they need to take out more expensive loans from other banks. This actually is a legitimate problem for them.
  - nly 3y ago
    There's less pressure on banks to pay a decent % on deposits than you think. Many banks have hundreds of billions of $$$ sat in accounts paying close to zero interest. A very small % of people seek out good rates on their cash. Also, when rates rise, people tend to use their savings to pay down any debt (mortgage overpayments for instance)
    - landemva 3y ago
      > when rates rise, people tend to use their savings to pay down any debt Why would a rational actor with 2% mortgage (in USA fixed rate) pay it down early, when they can get 4%+ in a money market?
keep_reading 3y ago
> The reality of the matter is literally any bank could not survive a bank run Western banks. You keep thinking all banks are western banks. Islamic banks can weather a bank run because they're required to have ALL deposits fully backed.
frognumber 3y ago
There are many errors here. A core one is this: > As you'd guess, this only becomes a problem when people run the bank and the bank needs to sell those Treasuries to meet deposit requirements. Go through a though process: - If you can deposit your money into a bank with 5% returns and with 0.1% returns, where will you put it? - If a bank is locked into a long-term investment with subpar yields, what kinds of interest rates can it offer? - If other banks can trivially give higher yields, where will money go? BOA is holding securities with (1) a lower resale value if sold now (2) lower yields if held to maturity. It's almost the same thing. If I buy a 30-year bond with a 1% yield /on the expectation of being able to offer deposits at a 0.5% yield/, and suddenly /depositors expect a 5% yield/, I'm in deep trouble.
- RC_ITR 3y ago
  I am surprised you think that the deposit market is that liquid and yield-driven enough to claim I’m making errors! To answer your question, I along with most Americans will keep it in my checking account because I use it as a working capital account and not an investment account. The median consumer checking account balance is <$10k and hasn’t yielded anything above 1% in a generation. [0] I will keep a relatively flat balance in my checking account indefinitely - long enough for the Treasuries to cycle. Your argument works for banks like Schwab, but BoA’s deposits don’t look the way you think they do. Americans looking for yield never put their money into places like BoA anyway (it’s not like they ever competed on rates as long as anyone can remember). Besides, wouldn’t we have already seen the flight if that was going to happen? Why now are depositors going to wake up to higher yields at smaller institutions? To date, BoA’s deposits are roughly following the trend of all deposits [1] [0] https://www.jpmorganchase.com/institute/research/household-income-spending/household-pulse-cash-balances-at-year-end https://www.jpmorganchase.com/institute/research/household-i... [1] https://fred.stlouisfed.org/series/BOGZ1FL193020005Q https://fred.stlouisfed.org/series/BOGZ1FL193020005Q
  - frognumber 3y ago
    Good and valid points. However, I would argue, at the end of the day, it doesn't matter. At some point, whatever happens, BoA will have significantly lower returns than competitors. If that doesn't translate into returns on accounts anywhere, in even a relatively efficient market, that will translate into customer service, or some other place. Competitors will have a lot more money to work with both to keep customers happy, and for profits/avoiding losses. That's not sustainable.

by RC_ITR 3y ago

nemo44x 3y ago

> Nothing about those Treasuries has actually changed other than the fact that they earn less interest than a newly issued treasury and if BoA needed to sell them quickly, they would be worth less than what they were paid for. They bought them with money that isn't theirs and if they were to sell them all to return people's money then they would be bankrupt. So yes, a lot about those Treasuries has changed as the value of the asset is based on time and rate. Those Treasuries do in fact have a market price and although they'd return all their principal eventually, it isn't today and is actually a long time from today. It's completely disingenuous to say "nothing has changed". Nothing has changed other than the fact that the market value of the treasury is far less than what the bank could stand if forced liquidate them. Only a fool would keep any sort of serious money with BoA that isn't FDIC insured, etc.

qaq 3y ago
If BoA failed all US Banks and in turn all world banks would collapse. The chances that FED does not bail em out is 0.
RandomLensman 3y ago
BofA isn't just funding itself only with deposits (and how is that split between term and demand deposits). There is funding via bonds and repos, for example, and those bonds provide long-term funding.
RC_ITR 3y ago
>Those Treasuries do in fact have a market price and although they'd return all their principal eventually, it isn't today and is actually a long time from today. Yes, and if people don't run the bank, then they can hold on to those Treasuries until they mature? I agree if they have to sell today, that's bad, but again, that's also true of any bank selling through any type of illiquid assets. We just got used to interest rates going down for 40 years and this not being a problem (banks got run for different reasons back then).

nly 3y ago

> This is due to the weird quirk of treasuries What are you talking about? This is literally how all bonds work. It's not a "weird quirk"

RC_ITR 3y ago
Huh? There are plenty of adjustable rate bonds? That was a big part of why the LIBOR scandal was such a big deal?
- nly 3y ago
  I'm not familiar with any adjustable rate bonds tbh. All corporate bonds and gilts I've ever seen have had fixed coupons to maturity. I just wouldn't call treasuries weird or quirky when fixed coupons are the textbook definition of a bond taught in school.
  - dmoy 3y ago
    There are some adjustable rate treasuries even (iBonds, and TIPS). So not technically "all". But yea the vast majority of bonds (treasuries or otherwise) are not variable rate. Close enough to "all" that it seems needlessly pedantic, I agree.
    - RC_ITR 3y ago
      It feels insane to me that people haven’t heard of floating rate bonds. I guess the debt guys are too busy to hang out here. Here’s a primer from 2011. The Treasury and Feddie call theirs FRNs. https://capitalmarkets.fanniemae.com/media/1456/display https://capitalmarkets.fanniemae.com/media/1456/display
  - SilasX 3y ago
    Everything in this ETF and similar has a floating interest rate: https://www.morningstar.com/etfs/bats/flot/quote https://www.morningstar.com/etfs/bats/flot/quote Please be careful about overconfidence.
  - 3y ago

nly 3y ago

Banks don't have to take in customer deposits in order to lend out money Deposits are just a cheap way for them to reduce the delta between what they owe other banks and what other banks owe them (settlement) When a bank writes a loan it simultaneously creates an asset (the loan, which has returning cash flows) and a cash deposit (in the borrowers account) The deposit is only a liability for the bank if it is paid to another bank or withdrawn in physical cash. Otherwise it's all make believe. If I borrow $1000 from BoA and spend it on a guitar, and the previous guitar owner puts that money in to their BoA account, then it's all just a complicated no-op. Even if the new deposit is withdrawn or transferred somewhere else, the bank can still borrow any deficit overnight from other banks at a daily rate that is lower than what they're earning on the loan.

HDThoreaun 3y ago
> at a daily rate that is lower than what they're earning on the loan. Well there's the rub. If the bank is holding loans written early pandemic at sub 3% they'd lose money on the overnight rate. If you're paying 2% on your guitar loan and the depositor is getting 3% the bank is actively losing money. BoA deposits down 8.5% yoy, meaning they need to take out more expensive loans from other banks. This actually is a legitimate problem for them.
- nly 3y ago
  There's less pressure on banks to pay a decent % on deposits than you think. Many banks have hundreds of billions of $$$ sat in accounts paying close to zero interest. A very small % of people seek out good rates on their cash. Also, when rates rise, people tend to use their savings to pay down any debt (mortgage overpayments for instance)
  - landemva 3y ago
    > when rates rise, people tend to use their savings to pay down any debt Why would a rational actor with 2% mortgage (in USA fixed rate) pay it down early, when they can get 4%+ in a money market?

keep_reading 3y ago

> The reality of the matter is literally any bank could not survive a bank run Western banks. You keep thinking all banks are western banks. Islamic banks can weather a bank run because they're required to have ALL deposits fully backed.

frognumber 3y ago

There are many errors here. A core one is this: > As you'd guess, this only becomes a problem when people run the bank and the bank needs to sell those Treasuries to meet deposit requirements. Go through a though process: - If you can deposit your money into a bank with 5% returns and with 0.1% returns, where will you put it? - If a bank is locked into a long-term investment with subpar yields, what kinds of interest rates can it offer? - If other banks can trivially give higher yields, where will money go? BOA is holding securities with (1) a lower resale value if sold now (2) lower yields if held to maturity. It's almost the same thing. If I buy a 30-year bond with a 1% yield /on the expectation of being able to offer deposits at a 0.5% yield/, and suddenly /depositors expect a 5% yield/, I'm in deep trouble.

RC_ITR 3y ago
I am surprised you think that the deposit market is that liquid and yield-driven enough to claim I’m making errors! To answer your question, I along with most Americans will keep it in my checking account because I use it as a working capital account and not an investment account. The median consumer checking account balance is <$10k and hasn’t yielded anything above 1% in a generation. [0] I will keep a relatively flat balance in my checking account indefinitely - long enough for the Treasuries to cycle. Your argument works for banks like Schwab, but BoA’s deposits don’t look the way you think they do. Americans looking for yield never put their money into places like BoA anyway (it’s not like they ever competed on rates as long as anyone can remember). Besides, wouldn’t we have already seen the flight if that was going to happen? Why now are depositors going to wake up to higher yields at smaller institutions? To date, BoA’s deposits are roughly following the trend of all deposits [1] [0] https://www.jpmorganchase.com/institute/research/household-income-spending/household-pulse-cash-balances-at-year-end https://www.jpmorganchase.com/institute/research/household-i... [1] https://fred.stlouisfed.org/series/BOGZ1FL193020005Q https://fred.stlouisfed.org/series/BOGZ1FL193020005Q
- frognumber 3y ago
  Good and valid points. However, I would argue, at the end of the day, it doesn't matter. At some point, whatever happens, BoA will have significantly lower returns than competitors. If that doesn't translate into returns on accounts anywhere, in even a relatively efficient market, that will translate into customer service, or some other place. Competitors will have a lot more money to work with both to keep customers happy, and for profits/avoiding losses. That's not sustainable.