What I find interesting is that a lot of people are pointing to this and getting worried because these bank failures are the largest since the GFC. But aren't we actually so far seeing the opposite of what we should be worried about. In the GFC the problem that this all became a disorderly collapse. But so far this has seemed... pretty orderly? No depositors have been wiped out, no contagion has spread. Sure, equity holders got wiped out, but that's what equity holders are risking in return for their higher expected returns. It's difficult to celebrate "well things haven't completely blown up so far"... but, well, it's possible that this particular problem is actually being handled in a better way than last time.
> But so far this has seemed... pretty orderly? No depositors have been wiped out, no contagion has spread.
Making disorder the enemy is something of a distraction tactic. General rate of growth matters a lot more and much has been sacrificed in the name of trying to make the market look pretty at the cost of keeping the incentives properly aligned. Disorder is more of a code word for the wealthy and powerful being at risk of losing their social standing. The rest of us should be worried about general wealth and prosperity. Which, I might add, is maximised by the occasional dose of collapse in badly designed systems. Joseph Gentile has been given 2 goes now at wiping out his creditors; there was no need for that - the 2008 bailouts just gave him cover to go and get people wiped out a 2nd time.
The real question now is who is actually eating these losses? Is it old people with pensions? Because while it would be karmic justice to start wiping out elderly investors because they were the ones with political control ignoring all the problems building over the decades, but that would still be a huge problem.
They should have let 2000 or 2008 play out to their natural conclusions to minimise the overall damage. This one is a bunch of people going bankrupt in ways that could easily be predicted a decade ago. These losses have been created by Fed policy. And we'll probably find when the dust settles that they have once again stuffed everything up, there is no reason to believe this time is different. There have been bank crisises to safely assume that this time will not be different unless, miraculously, hindsight shows they changed tack.
I don't buy the argument that allowing maximal loss in 2008 would have been good in a practical sense. Yes, it would have been edifying to watch those bankers who screwed up face their comeuppance. But firstly, the bankers already got the bonuses during the good times and they don't personally own the assets that would go to zero. And secondly the process of unwinding all of that debt and those complex financial instruments in an uncontrolled open market would likely have seen plenty of perfectly good investments go to the wall simply because the market wasn't able to fairly value them. You can't just put the entire economy on hold for 12 months whilst an army of PhDs go through and re-value every single marketable instrument.
It's perfectly reasonable for the government to step in and say "We'll back stop this now, but we're going to examine this and put in rules to make sure this can't happen again"- and that's what happened here. The reason JPMorgan can step in is because they have stronger regulations on them that have made them safer than last time.
> It's perfectly reasonable for the government to step in and say "We'll back stop this now, but we're going to examine this and put in rules to make sure this can't happen again"- and that's what happened here
We've just witnessed several of the largest bank failures in history happening this year. In an unexpected turn of events, Bitcoin is proving to be more stable than institutions like First Republic Bank (and Credit Suisse). We'll probably see a few more interesting names before this is through.
Run me through this "can't happen again" part. We've had banks for 300 years now and there is a financial crisis every decade or so these days. What is "this"? It seems to be happening quite regularly for something that can't happen again. The government has been all but force-feeding credit into markets for the last decade, that is hardly a strategy to build strong institutions. The US is at serious risk of being overshadowed by nominal Communists. My money is on the pension system bearing the brunt of this crisis.
What are the signs of regulatory success that we're supposed to be looking at? They seem to have taken an era of unprecedented prosperity and technological progress and done their best to bring that back to neutral.
What are you comparing to though? Are you comparing bitcoin to an equity investment in a single regional bank? Because if so, yeah if you just so happened to pick First Republic Bank and compared it to Bitcoin, Bitcoin has been more stable in the last 6 months. But that's only because you've looked at what happened now, then gone back in time 6 months to select the worst outcome and compared that to bitcoin. If you picked a random regional bank or took an average of banks, they've been more stable than bitcoin - and even then you're talking about an equity investment that is known to have real risk.
If you're comparing to the depositors in FRB or CS or whichever bank, their money has been absolutely safe, way more stable than bitcoin - and government guaranteed.
>What are the signs of regulatory success that we're supposed to be looking at?
That in capitalism, individual companies are going to succeed or fail, and those that invest in them will take the gains or losses, but that the broader system still works. And that's basically what is happening so far.
To take your bitcoin example, whenever a crypto company fails, the question is always "Will retail customers get their deposits back" and the answer is... basically always no. That's not how we expect companies to work - the customer deposits are meant to be protected.
But over any time frame that includes the present and FRB, anyone who tried to store value in FRB has underperformed the people storing value in Bitcoin. Many quite badly. It isn't really cherry picking to note that one of the systems has imploded rather more significantly - the one that was regulated and had bad incentives.
What is the value add of all these regulations? We could arguably replicate the system, more stably, if everyone just owned bitcoin and the government bailed out anyone who lost their keys. The regulations aren't doing anything useful.
The role of the regulators here is destabilising the system. We're running a live experiment between lightly and heavily regulated systems here; turns out that less regulation is more stable even with the waste of Bitcoin mining. That says a lot about what the market thinks of the regulators and their regulations - substantial value destruction, and a significant cause of instability. They caused this crisis by loading up the system with debt and risk through 0 interest rate policies.
The regulators are overseeing a system that is underperforming your definition of regulatory success. The unregulated system sees individual companies succeeding and failing but the broader system carrying on. Where the regulators are involved it seems quite likely that the government is going to have to step in and prop up the regulated system again because it isn't sound. Odds are good the bank failures won't end here if it is anything like '08.
> whenever a crypto company fails, the question is always "Will retail customers get their deposits back" and the answer is... basically always no.
That is certainly true, but that is why the crypto ecosystem is outperforming the US dollar system here in terms of stability. People actually have to pay attention to what they do with their crypto.
A 6% raise in rates hasn't been accompanied by mass failures in crypto. Mainly because they deal with the problems by a string of small failures that wipe out an inconsequential number of people and keep the incentives correctly in place. The US regulators disrupted that natural market cleansing and look what it gets them - massive value destruction. And we aren't quite sure yet where the blow is going to hit.
Ok again, I want to draw a distinction, are we talking about equity investments in banks? In which case, yes, by definition any asset has outperformed FRB which went to 0, but no, that's not a reasonable way to value forward looking investments. Or are we talking about depositors.
Because we need to be clear. For depositors the value of the regulation is very clear - when crypto exchanges are unregulated when they blow up their depositors money isn't safe. When regulated banks blow up, the customer deposits stay safe thanks to regulations. The thing that caused instability isn't the regulations, it's rate changes.
The problem you have with crypto is very simple - you can't point at the value of bitcoin or FTT or ETH or Terra or Solana and say that it's safe, because alot of the time the people who were invested in it no longer have the asset! It's all well and good to say that BTC isn't down 100% but the people who had BTC on FTX don't have the bitcoin anymore so the nominal value of BTC is academic.
I'm talking about depositors - the regulations obviously didn't help because the regulators had to bail depositors out. If the regulators bailed out bitcoin institutions the people with crypto in those institutions would not lose any money either. Neither would be a planned action.
The regulations are so useless that the regulators have to roll in and start handing out money to fix their own mess. The system under low regulation is more stable - it works without intervention and rules changes. The regulated system the regulators keep having to make up new rules on the fly to cope with the fact that they are fundamentally destabilising the system and causing enormous losses of value to happen along the way by removing the feedback loops and protecting people from their actions at cost to the bystanders.
The regulations are net-negative value add and destabilising. The regulators are papering over that by unplanned cash infusions. Everyone in the regulated economy is assuming that the regulators fold and change the rules but they're all gambling on how the system will be broken. Nobody is behaving as though the regulations themselves are helping.
The point I'm making is if the rules are going to dissolve anyway, Bitcoin is a better system to go around bailing people out, because at least it is low-friction. It isn't exactly true, but superficially since Bitcoin can reliably preserve value in a way that the banks can't, we should bail out the bitcoin firms in preference to the banks. It is a more fundamentally sound system. We aren't see the sort of cascading failures that happen under the regulators. FTX goes bust and that is kinda it, whereas we've just had 3 huge banks go bust in a more regulated system - likely with more to come and high risk of a cascade of failures through the whole banking industry if the regulators follow the official playbook. Everyone agrees that following the regulations would result in systemic collapse in the event of a crisis. Compare and contrast to the Bitcoin ecosystem where something like Tether has survived at least 2 depegs and carries on like it is nothing. If the banks had that sort of resiliency against a run, this current crisis would not require a response. The reason they don't is because everyone is playing the regulators.
But regulators haven't really bailed out depositors. Firstly, the vast majority of the assets have just gone with the sale of FRB, along with that there is some cost, but the costs associated with this sale are estimated to only be around $13Bn and that's going to come out of FDIC - so it's funded by the banks anyway. The reason this is possible is because FRB only holds a very tightly regulated set of securities, so at worst there would only be a small shortfall and that's what the FDIC is there for anyway.
You say that the regulations are harming the system, but crypto gives us a perfect illustration of what happens without these regulations. You don't end up with companies that function better, you don't avoid duration mismatch, your exchanges go tits up and it turns out that the CEO was spending all the cash on his bahamian polycule. And you say FTX goes bust and that's it but that really only works because bitcoin is so tiny that when FTX goes bust it isn't all of our pensions and life savings on the line. And it wasn't just FTX, FTX was the last domino in a whole slew of failures over last summer - half of which it turns out were self-dealing and committing fraud.
The whole point is that the government can step in and backstop a system where it's tightly regulated what these banks are doing, they can't step in and backstop a system where your bank may literally just be taking your deposits and spending it all on bahamian parties.
There's just this massive disconnect between the unregulated world where a bank can be bust and pay back 99 cents on the dollar, and the deregulated world where a crypto exchange can be bust and it turns out it's only going to pay 10cents on the dollar, and it won't even do that because the CEO started siphoning off the remaining funds.
> it would be karmic justice to start wiping out elderly investors because they were the ones with political control ignoring all the problems building over the decades
Are you "ignoring all the problems" of today? Or do you just not have the "political control" to change things? What makes you think that "elderly investors" had more control during their lifetimes?
Baby boomers outnumber other generations, and they successfully used their numbers to bend our political systems to benefit themselves at as they progressed through life.
Which I suppose is fine, that's democracy. But as they reach their twilight years and reflect upon the world they're leaving behind, I do hope they take some responsibility for the plights they've created for the younger generations.
Those figures are from 2020 - it's probably gotten worse since.
... And those wealth holders aren't just ignoring the problems of today; they're exacerbating them.
Ageism won't solve our problems - all of this is still very much a class issue.
But let's not pretend that as a generation, the Boomers didn't fail like no generation has ever failed. And let's not pretend they aren't still blaming the victim.
This is incredibly stupid. Letting just Lehman fail sparked 08 and bankrupted millions of middle class Americans, and banks are always sold after bank failures.
The Fed had an extremely similar approach to what you propose in the late 20s, it was called liquidationism. It sparked the Great Depression, which was a terrible tragedy that destroyed millions of people’s lives, and through global aftereffects is arguably one of the main causes of Hitler’s rise to power.
> The broader concern is the privatization of profits while losses are absorbed by the government/public.
It seems like people just say this happened no matter what actually happens?
Equityholders are always wiped out when the government takes over a bank or business. Not sure about bondholders, but the point of backing up a bank is to prevent losses to the public of their bank accounts and payrolls.
For something like covid airline bailouts, equityholders got support but that's because the airlines have unions, not because the government loves airline shareholders.
Hyperinflation isn’t the cited issue above - it’s the deflationary period from 1929-1932, which aligns quite well with the rise of the Nazi party. Both the GFC and Great Depression were deflationary.
Yes, it correlates, but deflation is not really the cause behind the rise of the Nazi party. Did you ever wonder why Hitler hated jews so much? Why antisemitism became very popular? Let me give you a hint, it had to do with banks, who ran them, and who owned almost all the wealth, along with a decade of economic woes for most folks.
According to Arthur Bryant the British court historian writing in Unfinished Victory (1940 pp. 136-144):
"even in November 1938, after five years of anti-Semitic legislation and persecution, they still owned, according to the Times correspondent in Berlin, something like a third of the real property in the Reich. Most of it came into their hands during the inflation.."
How could a British journalist know, with any degree of credulity, what share of the national wealth was owned by Jewish people in Nazi Germany in 1938? The same government that massacred millions of Jews a few years later would have happily lied about Jewish wealth to justify their actions.
Anyway, here’s [0] an article that disagrees with Bryant’s stated claim.
SVB failed so quickly the Fed couldn't go through their usual process. The Fed had to throw out the rules and effectively stare that FDIC limits don't matter and all deposits are fully insured.
They were then so concerned about First Republic failing quickly after SVB that they in all likelyhood helped orchestrate a $30B deposit by major banks to help provide liquidity. That move is extremely odd and really looks a lot like market manipulation and collusion. They also must have known that was a short term measure to delay the failure until they could let the smoke clear and find a buyer, banks would have provided First Republic loans or invested in the bank if they had any faith in it's long term viability, depositing cash is just a show of force.
More explicitly, the Fed is so committed to destroying wage growth that it will happily blow up banks and throw all of its ostensible rules out the window.
Sure, inflation is a problem. But there are different causes for inflation, and different remedies based on those.
If inflation is caused by rapid wage growth, then pushing to cool that growth can help. If, on the other hand, inflation is caused by widespread corporate greed increasing prices to juice profits, trying to cool wage growth won't touch it, and will instead make the situation worse.
Fun fact - inflation was historically a measure primarily focused on increaseds in the money supply. The definition of inflation as an increase in prices is a modern take, starting in the 80s and 90s. [1]
Price changes are a potential side effect of inflation, but prices can be impacted by plenty of other factors including changes in supply and demand. Price changes alone are a pretty meaningless measure without context. Factor in how easily the inflation measures are manipulated and the numbers aren't even reliable measures.
Inflation can never be caused by wages, since wages are the last thing to increase in price, after everything else has increased. Wage-driven inflation is a propaganda myth.
They didn’t become greedy, an exogenous shock (COVID) caused real price spikes, which then subsided. Companies then decided the price spikes were a new floor, which they could get away with because of corporate concentration, resulting from lack of regulatory oversight and a congress that is asleep at the wheel/paid off by said corporations.
While much of wage growth is being driven by a plague-induced labor shortage and in response to the above. Cranking the interest rate dial to 11 solves very little besides impoverishing workers to preserve the dysfunctional status quo for the wealthy and business owners. This is quite obvious in how they’re handling all these bank failures.
The idea that raising interest rates actually causes inflation is called neo-Fisherism; it's currently being practiced in Türkiye[0] where it isn't working.
Raising interests rates doesn’t cause inflation, but it also doesn’t fix it when inflation is the result of corporate concentration and cartel like behavior around pricing.
Personally I think we should've used the low interest rate period to actually build some inflation-fighting housing and transit; instead we've just sort of noticed it's a problem now that it's too late.
100% agree. Sadly we were told the federal and state governments "couldn't afford to" borrow lots of money at near-0% to build such things. "The Debt" was just too big of a concern. eyeroll
Using the prime rate to control this specific type of inflation (mainly by corporations using "supply chain issues" to raise prices usuriously) is like using an AA gun on a mosquito swarm (mostly ineffective but causing massive collateral damage).
The FED has few other tools but the USG is more than the FED. Look up Nixon's price freeze. Legislative or executive branches could enact windfall profits acts. The list is quite long in fact, but requires either a working congress or sympathetic & unrepentant executive.
That is, unless, of course, the mosquito swarm is a useful excuse to actually do the collateral damage you want.
That's by design. When the economy is improving people are getting better off. Once it gets ahead of itself and inflation rises the only way it can slow back down is for people to feel more pain.
They've always said they do their best to recover all depositor funds. It's just not 100% guaranteed by the insurance fund, but that's no reason to wipe out everyone above that.
The loss of confidence (and people losing their jobs) would make that much worse for the economy than finding some more money somewhere else; because banks work on confidence, telling people you have their money stops them from withdrawing it, which means you don't need to actually give them it.
This time they did in fact say all accounts would be made whole. My employer was banking at SVB, the Monday after the collapse we could login to our account and access all the funds as though nothing happened.
I do get why they did it, I was simply pointing out that they changed the rules in the middle of the game.
The FDIC had a rule that they were only allowed to guarantee 250k? As in, they were not allowed to guarantee more if they could or deemed it prudent? They had this rule and they threw it out? Do you have a citation or source for this?
Partly true. The FDIC guarantees account holders to $250k, but they are also responsible for unwinding the failed bank and returning that money to account holders. Because SVBs problems were primarily liquidity-induced, the FDIC was certain they could make account holders whole from the funds available after unwinding.
The FDIC didn't have time to go through the books thoroughly enough to be 100% sure all deposits would be covered by liquidating the bank's assets.
All accounts are whole on Monday as usual, the Fed simply backed everything and decided it was safer to figure it out later given concerns over contagion.
It's my understanding it's a little more complicated than that and still went through the FDIC.
Apparently the FDIC funds are not entirely liquid either so the fed extended them a short-term loan to provide the liquidity. At the end of the day the shortfall on the sale got covered by the FDIC funds and the loan from the FED came through on the basis of the FDICs fund and the fact that they then owned all of SVBs assets(they were named the receiver).
The FDIC managed the entire thing, backed all the maneuvers with their 128bn fund, is independent and reports to the POTUS, and is entirely funded by deposit insurance fees on the financial industry. The FED had its own opinions on the whole situation I'm sure, and provided a short-term liquidity loan to the FDIC, but it's a bit misleading IMHO they way their involvement is discussed.
> The FDIC managed the entire thing, backed all the maneuvers with their 128bn fund, is independent and reports to the POTUS, and is entirely funded by deposit insurance fees on the financial industry. The FED had its own opinions on the whole situation I’m sure, and provided a short-term liquidity loan to the FDIC, but it’s a bit misleading IMHO they way their involvement is discussed.
So you are saying that the decision to invoke the systemic risk exception and cover all depositor funds despite the least cost rule was an independent decision of the FDIC and not, as the law requires, a decision made by the Secretary of the Treasury, in consultation with the President, backed by supermajorities of both the Fed board and the FDIC board?
Strange that that’s not what the joint Treasury/FDIC/Fed press release said.
That makes a lot of sense, thanks! I had been wondering where the FDIC got the money to cover since the fund was already berks it's minimum required balance and didn't have the liquidity.
I hadn't seen any reports confirming a Fed loan but that seems like about the only way it could have worked.
Yeah, just like a bank won't leave 128bn sitting around doing nothing the FDIC also prob at least puts in to bonds and etc(I don't know the breakdown).
I wasn't aware of any of this until a few weeks ago had to research. As a disclaimer and promotion of independent research haha.
Yes I'm aware of the insurance guarantee but I'm not aware that the FDIC has some self-imposed rule preventing them from doing more. Honestly that would be a really bizarre self-imposed limitation to have given their mission statement, and given they could just "throw it out" as they see fit.
> Yes I’m aware of the insurance guarantee but I’m not aware that the FDIC has some self-imposed rule preventing them from doing more.
The “least-cost rule” is not a self-imposed FDIC rule, its a rule Congress imposed in 1991 after bank failures in the 1980s were felt to have been managed to expensively when the FDIC used funds to allow banks to stay open or otherwise protected uninsured depositors and creditors.
> and given they could just “throw it out” as they see fit.
They can’t. There is an exception available to the least cost rule, but that exception – the systemic risk exception – cannot be invoked by the FDIC, it can be invoked only by the Secretary of the Treasury, in consultation with the President, and with the support of 2/3 of the FDIC Board of Directors and 2/3 of the Federal Reserve Board.
It depends what do you call 'pretty orderly'. FRC was trading at 120$/share in January, 15$/share a week ago, and 1.5$/share on Friday after hours.
Pretty close to the Bear Stearns path if you ask me ! When Bear Stearns was bought by JPM, there wasn't an immediate collapse of everything - no contagion or anything. On the surface that is.
The underlying problems of this crisis are still there - JPM buying (or ... being forced to buy) FRC doesn't solve any of those problems. It's just buying time.
The difference is that in 2008 all the major banks had taken on exactly the same balance sheet risk as Bear Stearns. In this case, what brought down SVB was the risk they took on the left side of their balance sheet, and this was pretty unique. FRC was taken down in the resulting panic, not because they shared the risk of SVB. FRC went under because it has been a zombie since the SVB collapes collapse, and the final blow came because they had to publicly report the damage they took then. It's not because of any further deterioration since. That
s why there is no panic now. I don't expect there to be any additional casualties from this in the near term as the panic is over.
In the longer term, though, I expect additional consolidation because of the fact that the government has all but instructed CFOs to move to larger banks through their statement that only "systemically important" institutions will be bailed out.
Aren't all banks holding a bunch of low-yield 10-year Treasury bonds, like SVB and FRC were, and using somewhat questionable (even if required to by regulators) HtM accounting for them?
Wouldn't have mattered if they had normal businesses as clients. They deposit and withdraw cash regularly but their balances remain about the same on average. They banked for startups. Startups raise a ton of money at once and then start drawing it down. When VC funding shuts down, like it has recently, balances just drop and drop more. If the average startup raises 2 years of capital, and markets freeze, that means SVB loses 4% of its deposits every month. So just over normal operations they will lose a quarter of their deposits in 6 months. That's why they had to sell their HTM securities. Normal banks that bank normal industries don't face this, and won't need to sell their HTM securities at a loss.
Well, that depends on your depositors not starting a bank run as well.
You can't insure against a sure thing, so it's not actually possible to hedge everything. I don't think SVB necessarily could have done this; there might not've been a position without duration risk for them that actually made them any money.
Every time these banks fail, the value of your money gets a little less, and in aggregate the returns in your checking/savings accounts decrease.
We’ve also set a precedent for future recessions/shifts towards hawkish policy: if you’re a bank exec, be as reckless as possible while demand for loans is high and shift that value to yourself with stock incentivizes and bonuses. Markets are defined by activity at the margins so if it’s not you, it’ll be whichever other bank is ballsy or poorly managed enough to do it. You can even pass on some of the gains to consumers, who will know it’s unsustainable but that their deposits are protected, so you can write and hold as many unprofitable loans as possible on your books. When the music stops the only people screwed are shareholders and all the people whose money you devalued.
Or, the precedent is that the Fed gets scared of raising rates and basically ends up letting banks tell them if they’re allowed to raise rates. Which will mostly be answered with “no”
Is that even true? FDIC estimates it will have to come up with $13Bn, which will eventually be clawed back through insurance costs to big banks. Meanwhile FRC was worth $22Bn a few months ago and that's now gone to zero. So isn't it actually the case that the total money supply has gone down during this collapse, so the value of my money has actually gone up?
FRC having a market cap of X has nothing to do with the monetary supply. That is the value of a single transaction of a portion of the bank’s ownership between a buyer and seller at a certain price, divided by the number of shares, multiplied by all existing shares. During that transaction, the actual money was transferred from buyer to seller and was the same across both sides before, during, and after the tx and FRB going bankrupt - the monetary supply was the same the entire time.
The only way the monetary supply changes is when a bank loan begins or ends, or when the Fed buys or sells something, because those are the only cases in which a transaction occurs with more or less money across all parties after it completes. In all other transactions money is just moving from one account to another (but the Fed issues money, so their account is special in that it can create or destroy any quantity).
Reality is a bit more complicated than this, but when a bank gets a deposit for $100 that becomes both a bank asset ($100) and liability (they need to be able to pay out $100 on short notice). Loaning the money out to another account in the bank, you’ll notice that the bank now has $200 in liabilities, $100 in cash assets, and a loan for $100 paying some interest and principle over time. Those loans can be valued at some price between starting and ending based on risk, duration, and rates.
When the Fed raised rates, those previously issued loans at lower rates become less valuable. Now the bank has the same amount of liabilities but less valuable assets. Banks can lend from each other to make up for short term liquidity problems, but if the situation gets bad enough, nobody will lend to the bank anymore and they can only look at their balance sheet in terms of their current asset prices (which may have fallen a lot compared to the full value they were using for accounting) and liabilities. Shortly thereafter they become unable to meet liabilities and are considered to have failed and enter receivership (basically bankruptcy).
The monetary supply then changes in one of two ways: it decreases by any amount that depositors lose due to the bank not having it (they end up with an account with less dollars) or it increases by any new money loaned/printed to shore up the failed bank’s balance sheet so it can be sold off to other banks (since in aggregate it has negative value, it can’t completely sell off as-is). I don’t know exactly what financial trickery backs FDIC insurance but I suspect it’s not new-money. What is monetary supply inflation is when the failed bank exercises the new Fed backstop to cover losses past FDIC, because this lets them sell some debt-based-instruments at coupon value (amount ultimately due) rather than fair-market-value (amount if you tried to sell it right now) to the Fed (remember, them buying stuff means more money gets created). And that is why these bank failures are causing everybody with cash to be effectively bailing out depositors: https://www.reuters.com/business/finance/feds-new-banking-ba...
> it's possible that this particular problem is actually being handled in a better way than last time
It seems to be. Fingers crossed.
And we have solutions to keep it from happening again this way. I’ve seen smart proposals. One I like is banks get to choose: HTM securities are liquid and marked to market or inviolable in value, in which case they’re held at face but do not count as liquid. (One can also do something fancy in between, but that seems to invite trouble.)
One really important option that I've yet to see considered is rolling back a change from 2013 that allowed banks to buy securities directly from the central bank at any time.
Previously banks would only buy on the open market unless a specific lot of securities was put up for sale. The Fed was concerned that future increases in interest rates would be delayed if banks didn't immediately increase the cost/rates of securities to match so they wanted to be a direct player in the market. If the Fed can raise rates and then immediately start offering securities at the higher pricethe open market would have to follow suit.
Unfortunately that's exactly what banks did in 2020/2021 when they were handed piles of cash. Now those securities are a risk and here we are. Without that rule change banks would have found other places to park the cash, they wouldn't have been able to load their books with too many low yield government securities.
As I understand, that proposal is pretty much the decision banks already make when purchasing assets. Assets are either marked as HTM and assumed to be illiquid and at face value or they are not marked as HTM and assumed to fluctuate in value.
> Assets are either marked as HTM and assumed to be illiquid and at face value or they are not marked as HTM and assumed to fluctuate in value
No, the liquidity coverage ratio defers to GAAP for all asset values, and doesn’t discount Level 1 assets [1]. So a U.S. Treasury is considered comparable to unrestricted Federal Reserve balances [2].
My proposal is screw GAAP, for liquidity calculations, your assets are market valued every quarter. If there is legitimate concern about an asset not having a market, it isn’t a HQLA.
The HQLA assets in LCR calculation are priced at "fair value" (see your footnote 1 for example) which is the present market value. The haircut is not there to account for mark-to-market losses but for potential losses due to lower market depth.
You can be insolvent and still meet LCR because LCR is based on average 30 days outflow. So if you have 600B of liabilities and 300B of assets but all those assets are HQLA 1 and your net outflow for LCR is calculated at 100B you have a 300% LCR and yet are very much insolvent.
> HQLA assets in LCR calculation are priced at "fair value" (see your footnote 1 for example) which is the present market value
Held-to-maturity securities' fair value, under GAAP, is amortized cost [1][2]. From an accounting perspective, this sort of makes sense. From a liquidity perspective, it does not.
This is specific to the American implementation of Basel III because it incorporates GAAP.
>Held-to-maturity debt securities are reported at amortized cost. This is due to the securities being held to collect contractual cash flows. As such, it would not be appropriate for an investor to recognize interim fluctuations in fair value through a fair value model since those fluctuations will not be realized by the investor.
That is, HTM debt are not reported at fair value in GAAP. The fair value in that case would be the mark to market value (provided sufficient liquidity). The LCR requires HQLA be valued at fair value.
I think the confusion here is that HTM securities are in fact treated differently when calculating capital adequacy requirements, which are not the same as LCR! Your second link (which btw predates the start of LCR in the US) is about capital adequacy requirements.
>> slaw 51 minutes ago
>> only estimated $13 billion will be printed
> JumpCrisscross 46 minutes ago
> Not printed. FDIC would levy a special assessment on its
> member banks, including JPMorgan, if those costs are
> realised. (Note that up to $40bn of enterprise value [1]
> was also just destroyed.)
No depositors have been wiped out because we are changing the rules as we go. In the end it will be the little guy or the general tax payers that will get screwed while the ones that knowingly took dangerous risks got a defacto bailout by the rules being changed in their favor at the last minute.
FDIC isn't taxpayer funded though, right? It's funded by insurance paid by banks. Personally I haven't given a dime to a bank my whole adult life other than mortgage interest, so I'm confident saying I'm not bearing the cost of FDIC covering depositors.
> the ones that knowingly took dangerous risks got a defacto bailout
Depositors, the only ones who got "bailed out," were not informed of whatever investment choices were made by these banks. Occam's razor: Do you think they would have gotten any depositors at all if they'd advertised "There's a small chance our bank will fail and you'll lose everything if interest rates go up by about 400bps from their current all-time low"? Also these banks weren't paying like, insane 15% interest rates or something -- they may have been a bit better than average, but not in too-good-to-be-true territory.
I doubt depositors who at best got a bit more yield more on savings accounts benefitted nearly as much in aggregate as FRB employees (who got big bonuses) or the people who got extremely good terms on mortgages from FRB (I’ve heard sub-3% even for jumbo)
you should be worried about the case where inflation continues to rise and the unrealized losses from these bonds increases and may cause a much more consequential default now that the bond portfolios are becoming more and more concentrated. Basically the fed needs to slow the rate at which it is raising interest rates, even if inflation continues. The problem is it's going to take a long time to release this pressure, since the majority of the bonds that are in crisis have expirys in like 30 years. So we are looking at entrenched inflation for a decade long period or more, or an explosion of our banking system, or both!
> you should be worried about the case where inflation continues to rise and the unrealized losses from these bonds increases and may cause a much more consequential default
No, you shouldn’t. Duration is stress tested at the larger banks. The smaller banks lobbied to be exempted from liquidity coverage ratios in 2017 and got it, which is a large part of why we are in this mess. There is no evidence the Fed is constrained by bank balance sheets. (This could change, regionally, with CRE write downs. But again, money being destroyed.)
Short answer is we didn’t pay attention to it but we do now and we always measured it. That’s how SVB’s issues were flagged in 2021 [1]. (The systemic solution will be re-defining HQLAs in the LCR to reflect market value [2].)
Basically yes. All things being equal it's better that banks don't collapse but this far regulators have done an excellent job containing the fallout and preventing contagion.
In 2007 the failures were amongst investment banks and there was no statutory authority to do an orderly liquidation (there is now) and the Bush admin was seemingly disinterested in responding. Thus a panic ensued.
This time we're applying well-tested and reliable procedures and they're working as expected.
What? And how exactly would FRC have just gone on? They were insolvent.
The fed and regulators have to provide their current receivership terms (depositors will be made whole) to prevent banks runs and a liquidity collapse. Without these terms FRB would have collapsed long ago, as would have many other regional banks in the panic that would ensue as everybody takes their money to a TBTF bank.
The fed can only let you use those terms when you’ve failed, because otherwise they’d be massive money printers and accelerate inflation greatly (for the part that’s not funded by existing insurance terms, or bank fees, which btw are gonna have to go up each time this happens). And the Fed can’t let banks like FRC continue to operate after receivership because it’s essentially bailing out shareholders and execs with public money.
This is the gamble. With JPM getting them for free, the bonds pay out on a long enough time horizon OR if the federal reserve slows or changes direction.
> is contagion from FTX/Silvergate/SVB/Signature/Credit Suisse
SVB joined that party de novo. Silvergate and FTX were coupled. Signature was to both crypto and SVB. First Republic to SVB. I haven’t seen a great source for linking First Republic and Credit Suisse, though I could see some shared funding channel being shrapnelled.
Each of those bank failures taken individually did not cause the other banks to fail. They each failed due to their own issues in isolation. Thus it may be incorrect to say that there is a contagion.
It's not entirely fair to compare bank failure sizes across times, even inflation adjusted [1]. The rate of asset price growth since 2008 far outstrips inflation.
IMO the frequency of bank failures is more worrying. They tend to come in waves [2].
> Most banks hold more assets than deposits. So in theory, depositors should always be made whole.
No such theory is established; it's the central bank's money printing ability that can always make depositors whole. In the US, the Federal Reserve implicitly backs the Federal Deposit Insurance Corporation.
I get that the money goes brrrr attitude, but it's kind of silly.
The FDIC holds an adequate deposit insurance fund, financed by banks who must buy FDIC insurance. It's over $100 billion dollars, which is enough to weather some major failures. With large failures, the FDIC may issue special assessments to maintain the fund at a safe level (they did this with SVB).
If you’re looking for a list, the eleven regional lenders Moody’s downgraded last week are good place start [1]. Given we have de facto uncapped the FDIC’s insurance limit, I’m not sure it’s a good place to stew unless out of personal interest.
You know those analogies that compare a normal person's charity to a rich person's charity? So a billionaire giving $1m is like me giving someone a 100% tip on a $10 meal.
$4T in debt for the US is bearable. Between a $23T GDP and being constitutionally obligated to pay those debts as they come due, it's not really an issue. There's probably a lot of fraud in government programs, but that money still gets spent in the economy that financed the loan.
The issue is deficits. Those can go up in times of crisis, but end up bolstering the nation's ability to pay, so it's not all bad. I have near complete contempt for what passes for political parties in the US but, historically speaking, the way to go if you care about reducing the debt is Democrats. They consistently wipe out the deficit and set us on a path to paying it down just in time for Republicans to take over and flip it back to red with tax cuts and set the stage for crisis with deregulation. Democrats might raise the debt, but it's usually to deal with a crisis.
See that slide down after most people got checks and businesses got PPP loans they didn't have to pay back when the pandemic was at its worst? That's investment paying off. And that's with supply issues that continue to this day.
Watch that space for when supply catches up and we start figuring out better pandemic management after the next killer wave. The road ahead is bumpy, but I see wise investments paying off as long as some idiot doesn't get into power and start cutting taxes for people who don't need them again.
The people who keep loaning money to the government at least don't seem worried because they keep doing it.
> limit can be as high as the FDIC's feeling that particular day
Technically, the FDIC has to find the failure to be systemically important. Legally, nobody defined what that process should be, so you are in practice correct.
> All depositors of First Republic Bank will become depositors of JPMorgan Chase Bank, National Association, and will have full access to all of their deposits.
Indeed - the government isn't taking responsibility, they've leaned on the private sector to sort this out among themselves.
(Matt Levine et al have argued that the SV VC community should have taken over more, or indeed any, of the rescue role, since they were responsible for overweighting SVB and then bankrunning it. But that hasn't happened)
Ish. The loss-sharing transaction does involve the FDIC taking risk [1]. They claim they will settle up actual losses with special assessments on their members. And there may be no losses at all. But there is definitely risk being assumed by the FDIC, an entity backed by the full faith and credit of the United States.
It also looks like the FDIC is providing JPMorgan with a $50bn term loan [2]. (Shout out to snake_doc [3].)
* the risk driver for these ongoing smaller bank failures is (reportedly) the rise in interest rates. This concerns such a basic aspect of bank risk management one wonders how this sector could even call it self banking
* the solution seems to be to create ever larger banking behemoths (on the premise that they they can better manage risks) - as if we don't have enough examples (Lehman, Credit Suisse that this is not so). In fact this aggregation only commingles all sort of risks inside a gigantic opaque pool, makes the private-public dependency (TBTF) and all its perverse incentives even more entrenched, and ultimately creates the conditions for systemic failure
It is all so egregiously non-sensical and sub-optimal. People famously have the political systems that they deserve. In turn this perpetuates the banking systems that they deserve.
Ironically banks are some of the least shareholder friendly businesses, they direct a lot of profits to their own bonuses during good times rather than expanding their balance sheet or returning the profits to shareholders. I wonder how much this paradigm contributes to bad outcomes as it could easily incentivize short-termism and recklessness. Poisoning the books with bad choices that won’t take effect for multiple years or a decade, or comes with individually asymmetric risk less than the business’ asymmetric risk (10% of bank failure just means 10% I retire early) seems really tempting when it means years of big bonuses.
Given that banks seem to have an uncanny ability to destroy themselves in spite of an ever increasing set of regulations trying to stop them from doing so, and the current trend indicates in the future we’ll be left with just a few blessed TBTF banks, I think we ought to consider a system where the Government or Fed provides the core functionality of “let me put $X in an account so I can use $X in the future” for free and banks compete based on value added. It’s the least-worst outcome, because otherwise people are going to turn to crypto to avoid the for-profit oligopoly subsidized by repeated debasement and access to Fed lending/liquidity tools unavailable to the public.
> I think we ought to consider a system where the Government or Fed provides the core functionality of “let me put $X in an account so I can use $X in the future” for free and banks compete based on value added
This is simple, straightforward, and disintermediatory, so I imagine everyone involved will fight to the death to prevent it happening.
There is a real trade-off there when the government has direct access to and control of citizens' bank accounts. The idea that the government would know specifically how much we spend, where we spend it, and could deny transactions sounds pretty distopian to me.
With that said, as closely tied our government and the major banks are there might not be much functional difference from power they have today.
> The idea that the government would know specifically how much we spend, where we spend it, and could deny transactions sounds pretty distopian to me.
Non American here.
They already know and/or could trivially find out. There's no more barrier to them finding out now then there would be if there was some new, nominally independent government entity involved. That is to say a very thin wall preventing what you describe.
I sometimes get the feeling we oftentimes allow for market absurdities to supposedly prevent the government from doing something that it regularly already does today, just as long as there's a 'business' somewhere in the chain.
Americans seem willing to pay more to private business and thus actually part with more of their money than they otherwise would, as long as on paper they're not giving the money to 'the government' see i.e. healthcare.
> They already know and/or could trivially find out.
100% agree here. Today the US goverment, I won't attempt to speak towards any other government, has way too much power and ability to collect inflammation in it's citizens. We've allowed the government to assume that powers but we could also take that power away. If the government owns the bank there's literally no way to do that.
Healthcare here is a whole other massively broken system. In general yes I think it's a fair generalization that we would prefer to pay extra to avoid large governments, historically at least since we've done a really poor job keeping our federal government small for the last 80 years. It makes sense given our country's history though, and personally I'd rather pay a little more to a corporation than save a few bucks at the expense of living under a much more powerful centralized authority.
Those corporations are already powerful centralized authorities! The difference is that they don't even have to pretend to be beholden to the public like the government is.
Exactly! If the government starts doing things to you there are legal recourses. If your bank decides you can’t have an account anymore, there’s not much you can do.
As long as they are technically separate we have the chance to separate the two again, removing corruption and capture.
If the industries are moved into the government officially we really have given up that fight and have to accept whatever they give us. I assume it will be cake.
It's hardly "a little more" though. We're spending almost twice as much and get almost half as little back. Objectively speaking the capitalist market has failed in this area. We have to first accept this fact before we can find any solutions. If we keep thinking "government is bad" and "private industry is good" we're only allowing further exploitation and pain; and for what? We need to be data/solution driven.
Ford twice as much I assume you're referencing healthcare specifically. Or healthcare system is horribly broken and in a terrible middle ground of government overreach and corruption while still technically being a private system. That's just about the worst example we could look at at which point twice as much doesn't sound nearly as bad for a worst case.
> Objectively speaking the capitalist market has failed in this area
Objectively speaking the non-capitalist systems have failed in this area too. The UK’s NHS is not capitalist and it is surely isn’t succeeding better than the US healthcare system.
You can find countries where “socialist” healthcare works, but you can also find capitalist healthcare that works.
> Objectively speaking the non-capitalist systems have failed in this area too. The UK’s NHS is not capitalist and it is surely isn’t succeeding better than the US healthcare system.
The NHS has been effectively privatized as much as the Conservatives could get away with. It is constantly underfunded. It is not an example of a system the government wants to make work. In fact making it not work is the goal.
Yet when a family member of mine needed a life saving operation, they got it promptly and it didn't send them into any debt, whereas in contrast there's something like 50k preventable deaths a year in the U.S. due to lack of healthcare and people of poor means actively avoid visiting the hospital, so the NHS still works better for the vast majority.
Yes, for us in the tech industry and for elective procedures it's not so great, but that also perhaps isn't what regular people need.
I love that term. If you prevent death one day, only for them to die the next, is that one preventable death? What if you do that five days in a row? Death is not preventable.
Extra years of quality life, I can get on board with. Especially because it sounds more manipulable, so you are more wary about it’s meaning.
To put 50k/annum in perspective, 3.5 million people died in the USA in 2021.
Don’t poor people get some free healthcare in the US - although relatively how good that care is compared with other countries I don’t know. I thought it was the middle class that lose everything.
the banking industry has been heavily subsidized by FDIC, the Fed, and bailouts. This corporate socialization is certainly worse than either fully capitalist or fully centralized.
The healthcare marketplace is hardly capitalist. It's deeply influenced by government policy and spending, as most healthcare expenditure is for the old, and it goes through Medicare.
If the US healthcare market isn't capitalist, then no country's healthcare system is.
It's rare to find a way to "no true Scotsman" as hard as communists, but you've managed it.
But to address your point: contrary to what you're implying, Medicare spending is actually lower on average relative to spending on 65+'s in other countries; in e.g. the NHS, they're 18% of the population and 40% of the spending[1]. i.e. per-person spending is much higher in retirees. Contrast this with the US where per-medicare-enrollee spending (13k) is almost the same as the average spending (12.5k), because the non-socialized (capitalist) part of the market pays so much more than in other developed countries, that it doesn't bring down the average despite the younger cohorts having many fewer health problems.
> If the US healthcare market isn't capitalist, then no country's healthcare system is.
Yes.
That said, developing countries are most likely to have one. If the government caps the number of doctors and hospitals in the country, like the US does with residencies and certificate of need laws, it's not very market-driven.
The government does not cap the number of doctors. There's no law that you can only have X doctors. What it caps is the amount of social help it's willing to subsidize. This is like complaining that the government is not "socialist" enough and therefore socialism is bad.
No, the US government caps the number of doctors because Medicare funds residency slots, and you have to get through one of those to get a license to be a doctor.
> There's no law that you can only have X doctors.
We have tons of these laws. All occupational licensing requirements are this law; that's the whole point of them.
The US government caps the number of residencies it is paying/subsidizing. Yes, you have to go through residency, but there's nothing stopping the private sector from taking on this cost (well, other than greed)
> Point me to one law that says you are not allowed to have more than X doctors.
Why can't we have doctors that other countries have agreed are qualified to be doctors?
Also, do you know how certificate of need laws work? It literally says you can't have a hospital unless the other nearby hospitals agree you can have it.
Taxi medallions are truly a "there can only be X many people doing this" system, but even if they're not written that way, these other laws are still intended to restrict the supply of healthcare.
nb my issue isn't whether the healthcare system is "socialist" or not, it's that it's bad. I don't think "just make the government pay for everything" is a solution to things costing too much though; if an ambulance ride costs $9000 the solution is to make it not cost that, not to share paying for it.
Your original argument was the government caps the number of doctors (not taxi drivers). I am not finding anything that would show this. There is a cap on the total amount the gov is subsidizing (should be increased, but that's a different topic).
If an individual is willing/able to pay for the cost of residency that the gov covers there's nothing to prevent one to do so. Of course, this is not a practical solution for most, but that's another story.
> nb my issue isn't whether the healthcare system is "socialist" or not, it's that it's bad.
Agree, no argument there
> I don't think "just make the government pay for everything" is a solution to things costing too much though
Of course not, but if the capitalistic / private market has failed, I'd rather try a more gov-focused approach (or something else) than let it fester and cause more and more pain.
> if an ambulance ride costs $9000 the solution is to make it not cost that, not to share paying for it.
Agree, but how do you do that when the "ambulance lobby" owns the politicians and media who then try to convince the population that this is "the best system in the world"? You can't find a better system when you already think you have the best one (not saying you do) or that the "other" system is worse because it starts with an "s".
No. There is a big difference to "they already know" and/or they "could trivially find out". Even if the latter may be true, the former is not. The government does not have direct access to personal bank account ledgers.
"They already know" is a red herring; there is no "they". "Government" as a single entity has no brain, so the best you can do is ask about individual actors. So let's talk instead about a person: Merrick Garland.[1]
Pretend for a moment that Merrick receives a piece of memo from a subordinate that incriminates you in some form of bank fraud. Of course Merrick personally doesn't know anything about your bank account. Nobody has both the information and a brain big enough to store it. Hell, I have to check my own bank account regularly because I keep forgetting exactly how much is in there and it's my own money!
If something came across Merrick's desk and it convinced _him_ that it was worthwhile to investigate, do you really expect other than delays waiting for signed papers before he got the information he wanted? Do you really think there's a difference to Merrick whether he gets that information in 60 seconds by logging into your bank "as you" and looking at it, or whether he waits a few days and gets hand delivered a piece of paper by a bank's legal team?
[1] U.S. Attorney General and current chief law enforcement officer for the nation
Yes it matters, because there will be a court involved in this process as opposed to if the government “owned” your bank account nothing would stop it from knowing exactly what was in there at all times.
I'm sorry, but courts have lost most of their credibility in recent years. There was an HN thread recently[1] about a person arrested and extradited from one state to another without what appears to be any oversight. Pretending the courts are magic isn't actually very helpful here. If any single person in power wanted this information, they could have it. If any single person not in power wanted this information, they would have to work really hard to get it.
No one is pretending anything. It's still an extra step that adds transparency even if it is not a huge barrier. But in reality, that is a lot larger barrier than just direct access 24/7.
> because there will be a court involved in this process as opposed to if the government “owned” your bank account nothing would stop it from knowing exactly what was in there at all times
There's some decentralization within the government also, if one branch wants something from another it (ideally) has to go the courts route too, it's not that every federal employee can just access any government records on a person, (at least in theory). If there's someone powerful enough taking interest in you to override that, I doubt a private bank is going to be a major obstacle.
I mean courts themselves are technically part of that system too. I am as cynical as the next person regarding government overreach, but I see little protection from a multi-national banking entity entangled with the government for decades in all sorts of ways.
If it was as 'easy' to start a bank as an ISP in the 90s, I could see it.
> "Government" as a single entity has no brain, so the best you can do is ask about individual actors.
I don't think the Fed is "government" in the 4th amendment sense that it can just get information about you without a warrant, is it?
In an unrelated law, this is the reason child abuse reports from ISPs go to a private company called NCMEC. It's so law enforcement won't have automatically have access to private data in the reports without legal process.
Anyone who has worked in data knows this difference instinctively.
There’s a massive difference between the data being theoretically available somewhere in your organization and “trivially” accessible vs actually being able to run a query (let alone the work to actually run the query).
With that said the unbanked crisis is severe and there are big societal benefits to insuring everyone has a checking and savings account. There’s no reason robust safeguards can’t be built into the law establishing the Bank of the United States (Third time is the charm!).
You don't need a federal bank to solve that problem. A simple regulation would suffice requiring private banks to service these customers in some fashion.
That's the entire purpose of a bank. The point of a bank is that the customers think they're putting their money in a box, but it's actually loaned out to businesses.
If you don't do this, the money supply gets a lot smaller.
>Americans seem willing to pay more to private business and thus actually part with more of their money than they otherwise would, as long as on paper they're not giving the money to 'the government' see i.e. healthcare.
Americans reject public healthcare because your average American has incredibly narrow view of the world, and many people buy lies about public health care in other places.
They simply buy the lie that propagandist are paid to spread that public health care includes 'death panels' or insanely long ER waits, or that you can't pick your doctor (can you now?).
The larger problem is that the government deals with things that are sufficiently complicated that they require dedicated time to understanding them and Americans aren't willing to do that on a scale that impacts government policy.
As a Canadian, right next door, I'm continually amazed that we can have two polar takes on healthcare and both get it so wrong. In Canada it is an incredibly expensive way to pay for a universal public system in case you personally need it, at which point it's pretty poor quality, especially for new approaches or preventative, non-emergent care. Then in the States you have so many with absolutely zero safety net or primary care, at which we do a better (but still bad IMO) job of, while the well-insured or very wealthy have the most amazing health options in the world. We should both be able to come up with a solution that prevents rural mothers from dying related to childbirth AND gets someone a hip replacement in less than a year so they don't irreversibly deteriorate. Governments on both sides of the border just dig in their heels for political motivations, actual health outcomes not a consideration.
Canadian health care is relatively inexpensive though. Canadians spent $8,563 Canadian Dollars per capita on health care in 2022, which is currently equivalent to $6,320 US dollars per capita.
Americans spent $12,914 American dollars per capita in 2021 for health care costs. We pay over double per capita what Canadians pay.
Canada could increase the quality of the health care system by buying more services and paying more for services to increase quality.
And as the poster above you mentioned American health care is the most advanced in the world. So even if it is “double” the types of treatments available here are much better.
>And as the poster above you mentioned American health care is the most advanced in the world. So even if it is “double” the types of treatments available here are much better.
Most medical services are routine treatments that are the same wherever you go.People travel for special services, but special services don't represent most of that cost difference.
IMO more interstate competition on services is the right way forward. We should make it cheaper for competitive providers to expand to neighboring states.
People with money are basically cutting the line. This is acceptable because generally nobody really cares about the poor- they don't vote or influence society very much. Don't have lawyers and they rarely call a senator.
You will see a backlash against public healthcare because it would mean a rich man is treated according to his medical needs.
You're on the waiting list BECAUSE SOMEBODY ELSE NEEDED IT MORE.
But I'm a Google developer I'm worth more to society!
Who decides that? A death panel.
The stupidest thing about this argument is that WE DON'T GET INSTANT ACCESS NOW! Even with the literally twice as expensive healthcare we have, and personally having good insurance, if I call my doctor to get an appointment for something non-emergency, it takes at least a month.
This is already happening. Banks report all transactions above a very low threshold under various justifications and laws, plus the government is always going to be the front-of-the-line creditor and can trivially find out your entire net worth at will. We could at least look to cut out rent seekers on the baseline services and make banks compete on performance and value-add. As a customer and shareholder of banks I feel like I'm getting ripped off on both ends.
"The government" already has this level of access. Not only that, but its control extends beyond the country's borders too; the government can seize, freeze or otherwise access the accounts of Americans (and non-Americans) in almost any bank across the globe. The only bank accounts that it can't do this to would be under the control of an even more repressive government (Russia, China, Iran).
> The idea that the government would know specifically how much we spend, where we spend it, and could deny transactions sounds pretty distopian to me.
That boat has sailed. Private enterprises collect spending information[0], associate it with your identity and sell the aggregated data to anyone willing to pay. The FBI is on the record as willing to be pay for this data. This dystopia has the "free market/small government" seal of approval.
0. Which is why every retailer badgers you into joining their rewards program based or your phone number and/or email.
I’m not certain it’s being done for 100% of bills, but it would be easy to track any single bill between being withdrawn from an atm/bank and re-entering one by noting the serial number and account number as it comes and goes. Exchanges will certainly happen between withdrawals and deposits, but still your privacy is only preserved when neither of your counterparties withdraw/deposit the bill
I always just assumed that somewhere in the banknotes lifecycle those serial numbers are all getting written into a database… I kind of assumed that based on examples where the government was able to trace where large amounts of cash had come from and what it got spent on when doing major crime investigations or things like DB Cooper and how confidently they proclaim that none of the cash (that wasn’t “lost” and then found by various searches or the public over the years) was ever spent. I assumed it was probably part of obligatory regulations to do with money laundering or something equivalent and thus they all had to do it.
For cash transactions, I believe anything over $600 is supposed to be reported now. The limit used to be $10k but was raised recently.
With credit cards, the government shouldn't know as they shouldn't be involved, but they almost certainly do because overreach. Congress could always pass a law to block that or an individual could sue and claim something similar to illegal search. As soon as the government is the bank there's no way to bifricate the two, the deal is done.
Government knows your credit card transactions not necessarily just due to generic overreach but also specifically "Third party doctrine". Various companies sell your near-realtime transaction data and it's generally available to data brokers and it's not clear why the government shouldn't be able to buy your data from data brokers.
>Congress could always pass a law to block that or an individual could sue and claim something similar to illegal search.
Nah, we'd see any lawsuits over violations of such a law get blocked due to standing issues or state secrets privilege, much like the lawsuits over the illegal and unconstitutional surveillance performed by the NSA.
Whether the system would allow a new law to protect our rights is a bit of a different issue. Structurally such a law could only exist if the government doesn't already own the bank.
At least in the US, a state-owned bank is a very different animal from a federally owned bank.
States don't have the power to control the currency itself, don't control the collection of three-letter agencies, and in general are meant to have more leeway to try new things than the federal government.
There's also the very one-sided action to kill the post office entirely. Even with zero bribes, republicans want public services gutted and turned into private profits.
It requires re-working the financial system from the ground up, and commitment to that new vision, because there isn't a graceful way to ease from fractional reserve to narrow banking or public accounts at the Fed, and there isn't a simple way back to our status quo from it.
For money storage that existed in some large countries up until the end of the GFC (e.g., German Bundesbank offered some deposits to retail). I don't think that would need much retooling rather than a change in risks for banks to manage.
Edit: I think technically the deposits where with the federal finance agency, i.e., lending to the federal republic. Don't think that matters for the discussion here.
> don't think that would need much retooling rather than a change in risks for banks to manage
In a crisis, it would make the narrow/public bank the natural place to drain deposits. (Similar to our SIFIs today.) As such, narrow banking would mean the end of commercial checking. That means we need to find non-bank providers of all the asset-side services, from lending to trade finance, banks currently provide. That's the re-tooling.
It didn't work like that in 2007/8 in Germany. Deposits didn't just all go to the Bundesbank/Finanzagentur. Maybe you need different banks in the mix, e.g., more coops. For lending, some alternatives exist already, same for trade finance. I think the delta to the current state would be surprisingly small.
I didn't say checking accounts, but money storage with the respective sovereign (and daily liquidity).
Was actually the German finance agency (same thing for our purposes really, as only daily risk is sovereign Germany). There were claims that lobbying by banks killed it, but it was also not very attractive in a low yield environment. Ostensibly, it was created to broaden the funding base of the Federal Republic, I think.
We once had postal banking in America [1]. I could see a bridge to narrow banking working if it’s restricted to natural person depositors and prohibited from paying interest or something. (And by extension, their reserves wouldn’t earn as much as their risk-taking peers.)
> money storage with the respective sovereign (and daily liquidity)
> Wouldn't the graceful way be to... simply allow narrow banks to have fed accounts?
No. As the Fed details, in a crisis, deposits would drain into the narrow bank. Permitting a narrow bank by itself is de-stabilising. (There are a myriad of solutions to the issues introduced. From paying a lower return on non-risk taking reserves to limiting accounts to natural persons. But the point is the systemic effects have to be thought out in advance.)
It's not that simple for The Fed or the Federal Government, as they have to take over all the tedious affairs in banking (like KYC, among many smaller tasks), so I suspect they'll be reluctant. But that doesn't mean it would be a bad thing to talk them into it.
There have been attempts to start a bank that would just do this. The FED refused to give those banks a banking license.
If they would give that license, then the 'narrow bank' gets the job of KYC, customer service, and everything else. But the funds remain safe at the FED.
Problem is, this takes a lot of money out of the economy if it catches on. That likely will reduce investment, and damage the economy. So regulators dislike narrow banking.
This sounds to me pretty close to a treasury money market fund, doesn't it? Money market funds are not insured for some nominal amount, but among the most common in practice have significant repurchase agreements with The Fed and hold short-dated treasury debt, but this plus your brokerage it's pretty close to the narrow bank idea.
I suppose the Fed could try to make the circle slightly rounder here, but they may look at the hundreds of billions of dollars in such funds, which are by nature extremely "narrow" quasi-banking devices (because they only support a tiny form of maturity transformation, in asset type and term length), and decide "good enough, economic needs of this kind met"
The Fed and Gov already have stuff like this (TreasuryDirect), and like some fintech are just thin UX wrappers around ugly consumer bank interfaces or even I-bonds, you could have the same with these accounts.
There is no profit motive and it’s a very technically simple offering that the Fed already supports or will soon support with FedNow: I have a table of people and balances, and I only support transactions between the two.
If a bank can’t figure out how to compete with 0% interest with no value add to attract deposits, IMO they shouldn’t exist.
The important social function that modern banks perform isn’t attracting depositors, it’s creating deposits AKA originating loans.
Regional and local banks are far more likely to originate loans to local residents, especially for unique purposes. If somebody in flyover country wants a loan to start a business, it basically has to be a cookie cutter franchise or a large existing customer for a big coastal syndicate bank to even look at it. This is one reason, although not the only one, why outfits like Dollar General are eating the downscale retail market when it used to be local general stores.
Yes, I know that, but why should I as an individual risk my deposits in a bank? Before digital payments took off it was entirely feasible for a regular person to be what we’d now call unbanked or underbanked. I’m pretty sure my grandfather was greatly underbanked well into the 90s and aughts. I’m sure many banked because they didn’t want to keep track of all their cash physically hanging around, but banks had to actually compete against “stuff it under your mattress” by passing on rates and other ways of providing value.
The advent of online banking and digital payments added enough value that there was really no reason to continue to be unbanked or underbanked for most people. But IMO banks have begun to take depositors for granted by offering poor interest rates and exposing us to more risk than necessary (certainly more than justifies checking or savings rates). With the recent spat of bank failures roughly coinciding with crypto, which also provides online banking and digital payment functionality, the Fed/banks need to recognize that there is a real risk that depositors will opt back out of traditional banking.
I think a shift off the dollar and onto crypto would be much worse (personally, but also for banking) than the Fed offering a path to digital mattress stuffing of the USD, because at least with that they can still influence monetary policy and keep people on the dollar. I also suspect, but have no data, that our shift towards structurally low rates and high asset prices over the last half century was partially influenced by banks’ relative share of the monetary supply increasing so much that too many deposits are stuck chasing yield/credit is too accessible for activities perceived as low risk: so if some deposits shift onto a Fed narrow bank, banks will at least find it easier to loan and offer interest at higher rates. But even beside that, I as an individual should not be obligated to deposit my money into a banking system that gives me poor risk:reward - and when better options exist, I might not. So the banks and Fed better figure out something better than crypto or a fireproof safe.
Well if you go aback 6 years bank regulation decreased, make it 15 years and regulation has increased dramatically.
Really you could stretch that back out to 100 years and bank regulation has trended higher, so it'd seem only a very short time scale has regulation decreasing.
That seems way too long to reasonably be considered relevant to modern banking in the US. At one end, it pre-dates this country, and the other still pre-dates the start of the gold standard, let alone its end.
100 years seems reasonable. That would include the gold standard change, some significant monetary changes, and the great depression. I disagree that banking regulation is too much, but I do think the Federal government has an obligation to make regulation implementation easier to implement. We also have some non-sensical banking regulations that continue to victimize sex workers for the sake of it, so I think it's a mixed bag.
By what measure has it been decreasing? I never heard of laws being removed or sunsetted just new legislation added on top of existing framework. Maybe some of it counteracts existing laws but the complexity is the problem. Or maybe number of regulators? What was the last time a regulatory agency was disbanded rather than a new one added (e.g. consumer protection bureau). Or number of employees in regulatory bodies, or budgets. Its tough to find a metric that says regulations have decreased.
I think the regulations add a false sense of security. If it's highly regulated like the financial industry people just follow the regulations and think that's enough. Investors don't care and assume correctly any mess up at the bank with be bailed out. Less regulated industries tend the have more savvy buyers because you know there won't be a backstop
The Economic Growth, Regulatory Relief, and Consumer Protection Act exempted banks with less than $250 billion in assets from most of the Dodd-Frank Act. They no longer had to have stress tests and it lowered liquidity levels. Under Dodd-Frank, the level was $50 billion.
So far all four bank failures that have made headlines recently (Silvergate, Silicon Valley, Signature and now First Republic) were all under the new threshold. I think Silvergate was under the old threshold as well, but that still leaves 3 out of 4 that could have been prevented if Dodd-Frank were left in place.
Also: "new legislation added on top of existing framework" can result in less regulation if the new legislation nullifies or repeals or (in this case) exempts some participants from current regulations.
You are mostly correct. The largest retail banks in China are SOEs, so called State Owned Enterprises. However while these banks are the backbone of the retail banking sector the rural banks and investment banks are increasingly more relevant when doing business in China because the state owned banks are very risk adverse and operate with gigantic capital reserves. It's an interesting system because it basically insulates the retail banking sector from any and all shenanigans however has led to explosion of risk in the private sector. China has been trying to pare back this risk and leverage of the financial sector for over 10 years but every time they start some global crisis starts and they have to stop.
State enabled would be a better way of looking at it. The state (well more correctly the provinces) have been incentivised to perpetuate this real estate bubble because they derive a ton of their funding through the sale of land.
Actually -funding- the developers is an entirely different matter however. They are partially funded through pre-purchases of off-the-plan apartments, this is then leveraged mostly through bonds, primarily sold to said private banking sector but largely to off-shore buyers seeking high yield corporate paper.
The SOEs and large Chinese banks like ICBC, BOC, HSBC and insurance/finance provides like Ping An have largely kept their distance for the last decade - in part because of that risk adversity and very large safety capital requirements that prevent them from owning such high risk debt. China -did- learn their lessons from 2008, unfortunately they have fallen victim to other ways of generating extreme financial leverage.
Right now the de-leveraging is still happening, the Three Red Lines stipulations have been relaxed somewhat in the last few months to try ease up pressure on the real-estate market during global downturn but are still limiting debt expansion in the sector.
I would say they have successfully staved off a crash/collapse but I would expect the real-estate market in China to enter a long period of stagnation at this point.
I don’t want the government to get into lending because there is a lot of opportunity for corruption or really destructive populist policies. I think regular banks should do that, that’s what they’re supposed to be for, they take your deposit and lend it out so you get a nice little return.
What I’m proposing is less like a full service bank and more like a lockbox or mattress where you can stuff dollars for later. You wouldn’t get interest (or if you did it would be tiny) in this system, because the money would not be lent or otherwise put to work like it is in normal banking
When you consider the % of people globally, or even country by country, most just need a safe place to keep their money to participate in institutions. Most don't have enough money to place bets on the stock market.
When most folks(US and China) don't have spare cash to bet with, safe retail banking is incredibly important. In the US, tons of service workers take their paycheck with cashapp because so many retail offerings for low earners are notorious sharks with punishing overdraft fees and account minimums.
If people in a society are required to participate in an institution, there should be options for people that are not profit motivated. Anything profit motivated will also be motivated by increased profit which in turn will cannibalize their userbase when rate of profit declines, which almost always sends many people into the woodchipper until it is corrected. This should not be the default.
> Ironically banks are some of the least shareholder friendly businesses, they direct a lot of profits to their own bonuses during good times rather than expanding their balance sheet or returning the profits to shareholders.
From what I can see, private equity firms are actually even worse. It’s curious that no major shareholder has sued any of those for breach of fiduciary duty.
It’s extremely hard to do shareholder lawsuits around fiduciary duty because of the business judgment rule. Companies can basically do anything as long as it could theoretically make shareholders richer.
> […] I think we ought to consider a system where the Government or Fed provides the core functionality of “let me put $X in an account so I can use $X in the future” for free […]
The Odd Lots podcast recently had an episode "Is It Time For Public Checking Accounts at the Fed?":
> When Silicon Valley Bank failed, the government stepped in and guaranteed that all accounts — even those well above the FDIC threshold for deposit insurance — would be made whole. So now people are wondering whether all accounts at every bank are implicitly guaranteed, regardless of their size. But if they are, then what is the point of private, for-profit retail banking? On this episode of the podcast, we speak with Saule Omarova, a professor at Cornell Law School. She had been nominated by President Biden to head the Office of the Comptroller of the Currency, but was forced to withdraw due to fierce opposition from the banking lobby. That opposition was based, in part, on her endorsement of public checking accounts at the Federal Reserve. But what was a seemingly "out there" view a year ago, is now firmly within the Overton Window of political possibilities. On this episode, we discuss the SVB disaster, what it means for banking, and the case for a public option.
> I think we ought to consider a system where the Government or Fed provides the core functionality of “let me put $X in an account so I can use $X in the future” for free and banks compete based on value added.
> I think we ought to consider a system where the Government or Fed provides the core functionality of “let me put $X in an account so I can use $X in the future” for free and banks compete based on value added.
A balance sheet is one of the four main financial statements that businesses have to produce. It describes how much stuff you've got (assets) and how much money you owe others (liabilities).
To expand your balance sheet means to load up on assets. In the parent comment's specific example, it means that the bank could simply hold onto the money it makes, rather than paying that money out as bonuses to the executives or dividends to the shareholders. This would give the bank a better cash cushion to weather a storm (e.g. interest rates rising unexpectedly, account holders pulling out their deposits, etc.)
It's worth noting that you can also expand your balance sheet by buying any assets: spending the money on real estate, government bonds, or even using the money to buy your own company stock would also expand the balance sheet, as long as the company retains ownership of those assets.
But for people familiar with basic business terminology, it communicates something else, too.
In business, there's a core belief that money at rest is money wasted. You generally want to use your money to buy something rather than letting it pile up. Saying that you're using the money to "expand your balance sheet" implies that we shouldn't think of that money as merely idle, undeployed capital - in fact, it's being used for a very specific purpose: to make the business healthier. Companies with healthier balance sheets are better prepared to handle unexpected scenarios, and their stock is more attractive to investors.
A closer layman's translation might be, "keeping the profits, to make the business healthier."
There's too much money in the finance industry, creating very strong incentives for the players to resort to shady tactics. A strong government can enforce regulations, but given the current political situation in the US that's not very likely.
This is pretty much the main reason BitCoin and many other coins were created - remove the corruption and the unfair advantage some actors in the finance industry enjoy. Why do you think that people resorting to crypto is a bad scenario?
The US government providing basic bank accounts is never going to pass in Congress - the republicans are going to be against it based on their small government ideas and many democrats are depending on the money from sponsors in the finance industry. The Fed is owned by the banks anyway.
Crypto is a mess of scammers and criminals. There’s occasionally actual uses, like nfts. But we only need to check the nft marketplace to see how that actual use cases has died. Pushing ordinary people into crypto with no recourse for their funds is asinine. Modern societies are built around the fact that goods and services are exchanged for money that will clawed back if the deliverables are unacceptable. Crypto makes it impossible for unilateral or third party refunds.
Sure, there are problems with crypto. But the stuff you mentioned has nothing to do with using say BitCoin as virtual gold - as a long term store of value, instead of say a savings account.
I would not personally put my savings in BitCoin. The price is far too volatile [1] and storage of BitCoin revolves around problematic centralized wallets or keeping your wallet offline which is similarly problematic for lay people. You might be able to create a fund that amortizes risk across various coins to get what our existing popular savings funds are, but you'd need some anchor coins that are mostly stable to do that.
You can't store value in something whose only purpose is to store value.
Insofar as you can save an asset, it's because you're defecting in a game where other people are actively using it to provide the future value you want to claim later. If everyone only ever saved Bitcoin, then who's going to buy it when you want to sell it later? Someone else who wants to store it forever?
The reason saving currency in a bank works for the economy is because they're loaning out the back to productive businesses and then giving you some of the interest. This doesn't work if you keep it under your bed/in a crypto wallet.
(Maybe you could solve it by paying people more to take risk, but I don't think interest is that attractive to people?)
If bitcoin is only a long term store of value it really needs to be paired with a separate currency for daily transactions. What should we consider using as a checking account if bitcoin is mainly savings?
Those second layers seen to lose the benefits behind bitcoin if I'm not mistaken. Most layer solutions act more like PayPal than anything else, with a trusted mediator taking offish transactions in their own system.
No more immutable ledger, traceability, fungibility, or censorship protections.
You are not mistaken but interacting directly with traditional on-chain transactions is there if you want, possibly a little slower and/or more expensive.
I see traditional (haha, talking about crypto having traditions already) on-chain transactions for high value, low volume movements of coins. And Lightning (and BitPay, etc) solutions for low value, high volume.
Unless it's changed drastically over the last couple years, the lightning network attempts to effectively buffer transactions outside the ledger. Transactions are "deposited" into the network and passed around similar to marked bills. The bitcoin block chain is only involved when a transaction is initially moved to the lightning network and when one of more transactions chained into that are written back to the ledger when moved back out of the network.
This design has nothing to do with bitcoin other than the input and output formats. You depends solely on the lightning network itself and have given up all benefits from using a public ledger-based system. There is literally no way a layer two solution can offer faster transactions than bitcoin block times without requiring off-ledger transactions that aren't protected by the consensus protocol.
The protocol consists of passing signed multisig transactions back and forth through a network of payment channels. Every single one is a first class bitcoin transaction than can be redeemed by broadcasting to the base layer, enforced by consensus.
You have misunderstood since the beginning, because this is how it’s worked since the initial spec was proposed in 2015, years before it was actually implemented.
Right, so we are describing the same thing here. Transactions in the lightning network happen off chain and don't provoke any of the benefits of bitcoin's public ledger.
It's impressive that you could say I was completely wrong then proceed to describe the same system in slightly different wording.
When you say LN transactions “don’t provoke any of the benefits of bitcoin’s public ledger” what does that even mean? What benefits do you perceive are being lost?
Your initial description seems accurate, but then you erroneously claim this has nothing to do with bitcoin.
I don't view LN as having anything to do with bitcoin because it all happened off chain. The benefit of the consensus protocol is lost entirely since consensus is only reached once LN transaction chains are sent back to the bitcoin network and eventually make it into the blockchain. LN transactions rely on am entirely different network of transactions, validators, and (de)centralization tactics.
What are the benefits you see in LN that are worth the tradeoffs of abandoning bicoin's main chain consensus protocol?
The main chain is not abandoned, it’s used as a settlement layer.
If I hand you a paper bitcoin wallet worth a certain amount of satoshis, that’s still bitcoin. You rightly shouldn’t accept it because I know the private key and could rugpull those funds from your control. If there were cryptographic assurance to prevent that rugpull, owning that key becomes as valuable as the underlying asset.
Your flawed explanation is like saying the dollars spent on a Visa card aren’t using US currency because the transaction isn’t immediately settled in the eyes of central banks.
Edit: To be clear, there’s no credit involved in the LN transaction. I only used the analogy as a layman’s example. All LN transactions are fully collateralized and can be settled to the base layer at any time by either participant.
Upon re-reading this I think I identified the gap in your mental model:
There’s no such thing as “LN transaction chains.”
Every LN transaction is literally a bitcoin transaction. Usually these are not broadcast to peers for settlement on the base layer, but the latest transaction always can be broadcast, just like any other Bitcoin transaction.
I don’t follow other L2s closely, so maybe this differs from Ethereum and its derivatives. But the Bitcoin Lightning Network is 100% Bitcoin.
> ruled by algorithms, not by well connected people.
the earlier coiners gets a lot more. Just like today's financial institutions have gotten there by just being around early enough to have captured a lot more.
All i see in bitcoin (and etherium) are just people who wish they were those old bankers.
You could also argue that the main reason bitcoin was adopted by those who bought it was to get in on the ground floor and have the unfair advantage themselves.
Bitcoin hasn't solved corruption or unfair advantage, it just moves it out of the hands of the few politicians and bank executives in charge to the few running a handful of mining pools.
There are still people pulling the strings that can, and have, changed the rules along the way. Even the magic number of how many bitcoins will ever be produced can be changed, that limit is no more real than the gold standard that was killed with the stroke of a pen.
I can envision some future well polished crypto ecosystem being good for banking, but even if it were just Bitcoin (I prefer monero but it wouldn’t work for other reasons), it has some properties that could make collapses or crises spectacularly bad. Fundamentally it’s not that different from wildcat banking which we moved on from because it led to lots of fraud and collapses. Anyway, for just Bitcoin:
Bitcoin isn’t ideal for payments still and, speaking personally, I don’t want to ever be in the situation where I have tens of thousands of dollars that could permanently evaporate just because I forgot a code. So in practice I think most people would want custodians to facilitate payments or larger deposits. And it’s still possible for those custodians to make a purely technical fuck up and permanently lose funds in a way that is unrecoverable and irreversible but not possible in the current banking system.
Any coin with a fixed supply will be very deflationary which will make lending very difficult. Ever since we made it really hard to build new buildings and decided most early stage businesses are too risky for banks, it kinda seems like this isn’t as bad as it sounds. But, people are gonna want to do it sometimes and it will be hard. And you can’t rely on a basal protocol for a real world lending system because most real world loans can’t be fully/overcollateralized like with crypto (there is only a market for this because of tax avoidance that AFAIU is not even tested in court) and there is a real risk someone will not be able to pay it back, you need an oldschool system for stopping fraud and handling bankruptcies up to and including a guy with a gun taking away your toys.
If we’re gonna have custodians and a market for loans, I got bad news for you, some custodians will combine the two and pass on those benefits to consumers. If done with CD-like instruments this won’t change things much, until some bank gets this genius idea: if a lender and lendee make most of their payments within the same bank, you don’t actually need to debit the lender the full loan because most of that money will stay within the bank. And if lender-custodians all partner up they can fully debit all such loans. And then because lenders don’t get their accounts locked up, whether or not their balance is loaned and for how much can be completely abstracted and presented as a shared flat yield across all lenders at the bank… (this is a simplified version of modern banking)
Maybe it won’t be exactly like that, but I guarantee you, something banking-like will happen. And eventually a bank will fail because of bad risk management or a bank run. With crypto, it actually is feasible to do a huge bank run of all your money even if it’s millions of dollars, so it’ll be quick and sharp. Anybody who isn’t fast enough loses everything with no Fed to help them, we hit an extremely severe and instant deflationary depression where credit is completely unavailable, and there is no Fed to pass centralized monetary policy measures to fix it.
Instead of speedrunning digital Black Friday, I’d rather the Fed just let any individual meeting whatever reserve/audit/whatever requirements use any special facility available to member banks (or remove a facility if it cannot be offered as such). So rather than replace the system due to an unfair advantage, let everybody play by the same rules. If a bank can’t compete with that, they’re not a viable business. As a consumer I can better manage my risk within what is (to me) a very similar system. Ultimately, I want the Fed to be able to buy treasuries (print money) and raise/lower rates to control inflation because I’ve tried to learn as much as I can about banking history, economics, and crypto and this still seems like the most solid way to control inflation and prevent depressions.
> the core functionality of “let me put $X in an account so I can use $X in the future”
> Note that this is exactly the core functionality that Bitcoin provides.
People who bought BTC 1 year ago would love to use that functionality today, but that's not actually on offer. The actual offering is a lot more like buying an equity... you might be able to get $X out in the future, or a lot more, or a lot less. Maybe there's a reliable stablecoin that could provide that though (and maybe that's what you're eluding to).
You get X BTC out, you don't get $X. If prices were stably denominated in BTC it'd be worth the same amount of goods. But then, prices aren't exactly stably denominated in $USD these days, as a lot of savers have found out to their chagrin.
"Price stability" is one of those value-adds to a currency that's pretty important, and it's also one that's been bolted on repeatedly (stablecoins) to cryptocurrency. IMHO a more interesting property would be algorithmically pegging a cryptocurrency to a basket of goods rather than to the USD, though, because the USD has had a pretty shitty peg to that basket of goods over time. There are actually cryptocurrencies that do this, but they rely on centralized oracles that have the same problem as the Fed and the CPI - it'd be interesting if a cryptocurrency could embed price stability into the protocol itself.
> This concerns such a basic aspect of bank risk management one wonders how this sector could even call it self banking
I feel like message boards like reddit/HackerNews are notorious for over-simplifying any topic. It's "reductionist".
"How could these paid professionals consider themselves qualified?! As somebody not in that field without any insider knowledge or specific details into why hard decisions with tradeoffs were made, I know better, it's taught in economics 101!"
My last employer we managed money for community banks. I actually created the system that generated interest rate shock reports that showed the impact to a portfolio of fixed income assets for interest rate shocks of -300 to +300 basis points.
Nobody thought interest rates would go +300 bp in such a short amount of time, especially in the short end of the yield curve.
Banks essentially have 2 portfolios. Their loan portfolio is where they take the risk and it goes up and down with the traditional business cycle. Their fixed income portfolio is supposed to be almost no risk.
They were whipsawed by the fed that lowered interest rates so quickly that it forced banks to buy longer-duration securities to just find any kind of yield within the regulatory constraints they were allowed to buy. Then the fed raised interest rates even more quickly causing staggering losses in the "almost no risk" fixed income portfolios of banks.
Expect a lot more banks to be taken over even with the emergency backstops the fed has put into place. Look what the Fed did:
In 2008 the Fed flooded the economy with $2 trillion. In 2020 the Fed jumped up and flooded the economy with an additional $7 trillion. In September 2022 they started taking that money back (which incidentally led to tech company layoffs). As of March 2023 they removed about $600 billion. Then they suddenly put over half of that right back into the economy when SVB failed.
It's impossible to predict or even appropriately react to what the Federal Reserve is doing.
It maybe impossible to predict what the Fed would do but it is certainly possible to avoid a lot of the damage by duration matching of assets and liabilities. e.g. Do not take short term deposits in checking that are callable at any time and invest them in 10 year maturity instruments. No issues at all taking proceeds from 5 year CDs and putting them into 5 year maturity bonds.
avoid a lot of the damage by duration matching of assets and liabilities
Respectfully, you have misunderstood the situation.
This has almost nothing to do with duration matching assets and liabilities. That's how it works on the loan portfolio side of a bank. This has to do with how bonds work.
If you buy $10MM of a bond with a 3% coupon and rates for the same duration bond go to 5% then you have a significant capital loss. Depending on how you classified the investment under FASB 115 rules (HTM, AFS, Trading) you can telegraph to the market that your capital situation is dire which can then cause a run on the bank as we've seen multiple times in the last several weeks.
Well, as somebody who is currently coding a calculation service that will handle a 500 billions portfolio, I can tell you this: the specs require the data to be interpolated + extrapolated left and right. And they use that to estimate risks and take huge decisions. And when they don't have enough data to interpolate from, they create a synthetic instrument from other instruments that have enough data, and use that to estimate risks and take decisions.
The only thing that makes the whole jenga tower stable is the fact it's all interdependent. E.G: to diminish your exposure, you take a swap with some other entity, and if everybody do that enough, the risk is averaged on the entire economy.
So from the inside, it's worse than it looks from the outside.
And mind you, the client I do that for is one of the most serious in the business. They are extremely risk adverse, and they have been acting nothing but honestly, at least at the level I can observe.
They are so by-the-book we have once found an error in $FAMOUS_DATA_PROVIDER calculations, because we thought we made a mistake, and we looked for it until we realized the data we compared ourselves to was wrong.
So if they manage half a trillion by using excel FORECAST.LINEAR and Matlab interp, imagine what is done by JP Morgan.
Well that's precisely what we were doing until 2018 when lobbyists and the Trump Administration carved out exceptions for banks with less than (or equal to) $250 Billion in assets (see link above). So a more pertinent question from my perspective is: "Who's brilliant idea was this anyway? /s"
But if "the answer" you are referring to is to prevent consolidation in banking, then I think it's not quite as cut-and-dry. Regulation, especially risk-management regulations, can act as barriers to entry and create an environment that favors larger/established institutions leading to market consolidation. As an over simplification by a layman, it could look something like:
- Higher regulation constrains profitability and raises fixed costs of running a bank (compliance burden).
- This means that the amount of assets under control by a bank has to be higher in order for the bank to be profitable.
- This higher floor reduces the likelihood new banks start (since the asset requirements to be profitable are higher).
- Existing banks, in an effort to increase profits, acquire and merge with other banks.
These final two trends (less banks starting, more MnA's) are what could drive market consolidation. In a lot of ways Airlines are an example of this in a different industry.
I am definitely _not_ suggesting small banks should be exempted from Dodd-Frank like they were. I actually found the 2018 deregulation disturbing and disappointing. I am only trying to illustrate that even if 2018 hadn't happened, I don't know for sure if there would be more competition in the banking industry. (Only that the banks we do have would be less risky)
That would still result in tbtf banks since smaller banks will find it harder to comply with onerous regulations. I'm talking about community banks and the like, which don't really do the fancy investment banking stuff.
Well I agree with your two asterisks. The thing that gives rise to it is that people who are deciding on what to do about the rising rates are all incentivized the same way: write new loans or lose your job. Each bank has its own set of customers, strengths in marketing, and so on. The loan officers then choose the best of that pool. If that means firms that are at greater risk to rising rates, they still pick the better credits out of the ones they are presented with. It's basically a mugs game.
Gathering everything in a big bad bucket is indeed just hiding it until the next crisis. Gotta wonder what size of crisis this will eventually cause, not sure if I want to be around when it happens.
But:
> People famously have the political systems that they deserve.
I'm not sure most people through history or right now really have had much say in what political system they live under.
I struggle to understand why there is no "deposit banks" category which would include heavy regulation, with full reserves required.
There is certainly a significant number of people who just want to keep their money safe. They would happily pay 50 or 100 USD per month for an actual bank service where your money is just stored and not lend out to someone else.
I think you're describing "narrow banking". It doesn't exist in the US because the government doesn't allow it. As I understand it, they don't allow it because it would be obviously better for deposits individually, but would slow down the economy as a whole by driving up the price of loans, since all of the deposit money would suddenly be unavailable for lending.
Specifically, the Federal Reserve doesn’t allow it. They are explicitly stoking fractional reserve banking by preventing narrow banking, leading to this performative art (deposits backing fractional reserve lending, FDIC oversight, etc).
“Can we have narrow banking?” “No!” “Okay, how about not taking actions that cause massive consolidation in the banking industry and systemic issues?” “Also no.”
Spot on about cheap deposits funding lending and bank ops.
Before digital payments or online banking, it was common for an average Joe to keep much of what would otherwise go into a checking account in physical cash. In modern amounts maybe $5k at the high end or $500-2k on average. It didn’t seem to prevent the system from functioning; I certainly can’t seem to draw a direct conclusion between shifting to a cashless economy and the living standards of an average personal directly improving as a result of lower cost of capital, unless they had assets that would benefit from easy/low-rate credit access like a house.
If the Fed keeps trying to fix failed banks through indirect money printing (covering uninsured deposits by overpaying for treasuries/MBS) they could lose control of inflation and be unable to further raise rates. That seems like a worse outcome for the average person than a slightly higher cost of capital from banks having to compete with narrow banking. And the Fed should hope for narrow banking at that point because it would be the easiest to manage compared to the other options like physical cash, crypto, and other currencies.
Yeah, the amounts they're worried about are a few orders of magnitude larger than that. I don't think that's a compelling counter-example.
> If the Fed keeps trying to fix failed banks through indirect money printing (covering uninsured deposits by overpaying for treasuries/MBS)
Is this happening? The uninsured deposits are being covered by the FDIC insurance fund, which is funded by the banks. None of it is coming from the fed.
Yep, same concept. Wish I had a link to the article handy, but there was actually a bank (TNB if I'm not mistaken) trying to do exactly this that got blocked by regulators.
They gave very little explanation for why the application took dramatically longer than normal before eventually being rejected. I believe the reason effectively boiled down to "we don't like your business model"
> There is certainly a significant number of people who just want to keep their money safe. They would happily pay 50 or 100 USD per month for an actual bank service where your money is just stored and not lend out to someone else.
Realistically, who would these people be?
$50-$100/mo is quite a substantial amount for just a banking fee, so it would have to be people rich enough that it's not a showstopper. But people that rich have no problem moving their money to investment accounts where they can do much better on return, so they wouldn't be customers of this.
The vast majority of society doesn't have 250k+ on their bank account. Hell for most this is barely news as long as the US government keeps their FDIC insurance promise.
People cannot wait for the aristocracy to surrender power to them. Throughout history there is exactly one way to make some say in the political system.
So the big problem was the Fed increasing rates quite dramatically, signaling this, and the banks not properly having a t-bill ladder (ie, buying a mix of short&long term securities instead of just long-term treasuries)?
Adding lots of high-value accounts & making lots of loans is one thing, but diversifying the investment appropriately should be mission #1 for funds.
More centralization would mean more government interventions and bailouts. That means socializing the losses.
If the excrements hit the atmospheric propulsion devices, governments can always re-institute a gold standard, but that just moves the pain from the haves to the have-nots.
Big banks are better risk hedged! In this case because the government requires them to be as a result of post-2008 laws. SVB lobbied successfully to get the burden for complying with those regulations not to apply to small under 250-billion dollar banks when coincidentally they were just under that number a few years ago.
> SVB lobbied successfully to get the burden for complying with those regulations not to apply to small under 250-billion dollar banks when coincidentally they were just under that number a few years ago
To be clear, the rules they lobbied out of wouldn’t have forced them to hedge. They would have drawn attention to the problem much earlier.
Our industry is the same. Example: "Individual authentication systems are often insecure, so lets pool all our permission management under the umbrella of two or three huge companies that manage all authentication for everything in the entire world via mechanisms like OIDC."
We apparently like to trade noticeably frequent (but still fairly infrequent) small failures for rare catastrophic failures. The key here is that these rare catastrophic failures are rare enough that we can pretend they won't happen. Enough time goes by between incidents that we have time to forget and claim ignorance.
Eventually humanity will pool all risk in one basket so big that when it breaks we will go extinct. The end.
Like you say, it pushes risks to the tail (lower probability). Low probability - high impact events are easily mis-priced and thus this becomes a rent extraction channel.
Removing competition by acquisitions means the market can be distorted more easily. Another source of non-earned profit.
But there are also subtler benefits:
Gigantism creates de-facto regulatory capture (how could a lowly government bureaucrat go against the "giant"?). Such leverage versus rule-makers can be tweaked to optimize... wait for it, further risk-less profit.
Finally, "giants" can offer excess compensation and prestige to attract key talented individuals, essentially a scorched earth strategy to suppress any other actors.
All-in-all a horrible pattern that doesn't really offer any benefit (besides to the few insiders in the top of the pyramid). Delivering innovative products or services requires a certain scale but that is typically an order of magnitude smaller than observed sectoral concentrations.
Why is it happening if it is so toxic? Well, society is stupid. More stupid in fact than many (if not most) of its individuals.
The hope is that there is a sufficient number of independently evolving societies so that low-IQ societies imbibing on toxic stuff go extinct (not physically, as a cultural pattern).
The banks know that all they need to do is become too big to fail. I.e. if I owe a thousand dollars it's my problem, if I owe a billion dollars it's the other guy's problem.
A billion dollars is an absorbable loss by a lot of entities. Even winding it down, Meta is reported to have lost $4 billion in VR this quarter, Blue Origins is deficit funded by Bezos to the tune of 1 billion a quarter.
To make sure large corporations don't exist, we would need a strong government that is not controlled by large corporations, which almost sounds like ________
> the risk driver for these ongoing smaller bank failures is (reportedly) the rise in interest rates.
Ultimately it's poor risk management. If you take depositor funds and buy 10-30 year bonds with them then you're exposed to a run on the bank and rising interest rates will devalue your bonds. The bank instead could've rolled 30-90 day Fed funds instead but they didn't. Why? Lower yield.
Put another way: the bank took a risk with depositor funds and they get wiped out because of it while depositors are fine.
> the solution seems to be to create ever larger banking behemoths
Yes and no. At the heart of this is fractional reserve banking, which has been wildly successful. Like any kind of risk-spreading business (including insurance) bigger is generally better because variance is less and everything becomes more predictable.
I understand (and agree with) concerns about consolidation creating an oligopoly.
Ultimately though, what backstops the entire financial system is the government. This was true before and it's true now. The Federal Reserve is even called the lender of last resort.
And where is the accountability? The facts seem to point to poor management, but in the case of SVB all the leaders there were all over linkedin acting like they were the victim, not the perpetrators.
> People famously have the political systems that they deserve.
This sentiment is widely expressed, but it seems absurd and offensive to me. Citizens of countries such as Finland, Switzerland and Singapore enjoy much superior quality of government to what we have in the US. Does that mean Americans are ethically or intellectually inferior to Finns, Swiss, and Singaporeans? The government of Pakistan is not very good: does that mean Pakistanis are less ethical or intelligent?
Unless you believe in overlords or secret societies the quality of government is more or less a direct result of the ethical constitution of a society - at least for a sovereign nation.
The difficulty is that it is a collective phenomenon - as you can establish fairly easily by picking somebody from society X and embedding them in society Y.
Ofcourse there is no collective without individuals, so ultimately it is aspects of individually adopted ethical codes and behaviors that it is responsible for a poor collective organization.
A standalone computer that operates reasonably but is connected to other computers via a broken API's will lead to overall broken network operations.
There is also something we might call a society's "intellectual constitution", the collective ability to execute required changes, devise institutions and tools etc. But this is subordinated to the ethical dimension (where there is a will there is always a way).
Yes, concentrating all the power and all the risk in a few giant banks that also tend to do risky investments as well seems like a terrible idea for both customers and stability.
Canada has a system like this, although it is very well regulated and hasn’t so far blown up. What it does do though is give very little competition or choice to the consumer. The Canadian bank oligopoly is only slightly less horrible than the Canadian telecom oligopoly. Both are as anti free market competition as you get. It looks like the U.S. banking system is headed the same way.
That and the nearly unchecked power of the Canadian executive branch. I think without the oligopoly of banks it would have been too difficult to pull off on short notice. The Canadian prime minister may not rule over much compared to the U.S. President, but he is the king if he has a majority government. The courts are there, as in the U.S. to uphold the constitution, but they’re slow. You can get away with a lot before they catch up.
This was a last minute effort to avoid the bank to become bankrupt and the FDIC stepping in and using their reserves and paying out to the depositors.
I agree with you that the solution could have been just the FDIC assuming control of the bank which would have put pressure on the FDIC's reserves but, large banks generally have been buying out smaller banks to become larger and this has been going on for decades. What could have been going on behind the scenes is that large banks were being pressured to buy it out similar to 2008.
JPMorgan is actually prohibited from buying other banks in general due to their size. The FDIC gave them an exemption in the process of soliciting bids for First Republic over the weekend and maybe last week.
> In fact this aggregation only commingles all sort of risks inside a gigantic opaque pool, makes the private-public dependency (TBTF) and all its perverse incentives even more entrenched, and ultimately creates the conditions for systemic failure
This is the real issue. Bigger institutions aggregate risk.
I agree we should not have gotten here, but given the situation we are in, I'm not sure there was a better outcome possible. Let FR fail to teach uninsured investors a lesson? That has some moral appeal but not sure it would be a better long term outcome.
I'm pretty sure the companies and people who held their money in First Republic would survive losing the money they had with them (in most cases it's only a part of their assets). I'm also quite sure the owners of the First Republic stock could afford losing the value of those stocks.
It might have been a little tough for some of them, but most would just shrug it off. I do not understand why government and other banks are so anxious about a bank or two failing? Is it because all other banks are also rotten and leveraged?
It would likely cause people and companies with uninsured money in other banks to pull their funds out, quite possibly leading to cascading failures even for banks that are perfectly smart and healthy today.
The simple fact is that no bank can survive a run. Not a single one. Because that's how the business works.
IMO the best offramp from the systemic problem is to announce a schedule to phase out any protection for uninsured deposits. Say, 100% insurance for the next 6 months, declining by 1% per month after that, phased out completely in 8ish years.
Slow enough to avoid panic and dramatic swings while allowing the industry to create new products and address the market need.
Yes, and there needs to be some kind of restriction on how much one can expect to be allowed to withdraw in a certain amount of time. If too many want to pull out, there should be an automatic stop and everybody should know about this. The bank should maybe even be required to pay out a little extra interest as compensation.
Better this kind of limited draw out than having to rescue banks left and right and having huge amounts of regulation which can never fully stop these kind of events.
> I'm pretty sure the companies and people who held their money in First Republic would survive losing the money they had with them
Depositors shouldn't have to do due-dilligence on their bank. It might be something worth doing if you're going to park a large amount of money in the bank about the $250k insurance cap, but otherwise it shouldn't be necessary.
The investors should be doing this. And if they get wiped out, too bad.
There are also ways to spread money over $250k so it stays insured. What we have here is essentially making the $250k cap meaningless for these "too big to fail" banks. The problem is nobody really knows if their bank is considered a "systemic risk" or not. Nor should they have to care.
Sure, but the ones with less than $250k will still get their money even if the bank goes down.
The thing is I wonder if there really is a bank "too big to fail". The rich people who have their money in that bank will not go hungry if the money is gone. Most companies will not go bankrupt if the cash they have in the bank is gone. They might have a rough time, but the company could issue new shares or lend from another bank or sell a building they own and rent it back of whatever, but all the clients of a bank will not disappear just because their bank and some of their cash in that bank does disappear.
In my opinion it's worse with all the hoolabaloo when things like this happens and central banks and governments start to talk it's "too big to fail" and they want to rescue banks, lower interest rates, print money etc like in 2008 and the stock market tanks 50%. Just because some loud rich people at banks would lose their money. Most companies in the world would do just fine without JP Morgan and Goldman Sachs.
How do you think your bank would fare if everyone who has uninsured money in it pulled it all out tomorrow?
The proven with the "let the people who made poor decisions lie in the bed they made" is that it creates a panic where they lght our beds on fire. Maybe we "deserve" it too, but that doesn't seem like great public policy.
I never suggested that the depositors should lose their money.
They should have known about the 250k limit and not exceeded it in the first place, but I didn't say they should lose their money.
I said the cap is irrelevant. Everyone with SVB got all their money back. Even if you had $20 million in the account at SVB, you got it back. When, technically, you are only supposed to get back $250k.
So the rule is applied arbitrarily, depending on what is or is not a "systemic risk".
If a rural bank fails and people have more than 250k in their accounts, they will lose it.
If SVB or First Republic fails, they won't.
This case is a little different in that JP Morgan bought the whole thing. Which is just leading to further consolidation in the really TBTF banks.
Short term actions are constrained by realities on the ground. Long term actions are only constrained by ideology, vested interests and disregard for collective welfare.
The solution could also be to require banks to be more cautious, which was actually the case before 2018. But the US political system rolled back precautions that were put in place in the aftermath of the 2008 crisis.
"Larger banking behemoths" is NOT the solution - it's the result of deregulation and gutting of oversight - also referred to by libertarians here as "small government".
These banks should have been aggressively audited and diversification should have been enforced, as it used to be. We just keep going in this "deregulate-collapse-regulate" cycle.
Peter Schiff tried to run a full reserve bank and was shut down by the regulators. So it is just how the banking system works, but it is by fighting the free market all the way through.
I don't like to recommend podcasts, but in of his podcast [0] he had a really interesting walkthrough of his perspective on the regulators working to shut down his bank. For me it was the most powerful advertisement for cryptocurrency I've heard to date. An opinion that would probably annoy Schiff.
Even if you don't believe in any particular bank, in a 0 interest rate environment a full reserve bank would have been competitive. If you don't get money anyway, avoiding the inevitable crash when rates rose would have been a nice selling point.
Matt Levine has explained the Fed's disdain for narrow banking. Fed payments are a subsidy for regular banks, and regular banks are effectively public/private partnerships that make loans, enforce regulations, and generally satisfy the goals of the government. A narrow bank would capture the entire subsidy and not satisfy any of the other goals.
It doesn't quite make sense why the Feds don't want narrow banks, except that they might compete with traditional banks (and those banks' deep reaches into the Fed's policy decision makers are forcing out potential competition before they take root).
Well, I wouldn't say it was shut down per-say and more of it was never allowed to start. They never got a banking license.
IIUC, the regulator's argument is that people are incredibly interested at putting their money in a narrow bank (aka Pass-Through Investment Entities) such that few people would want to store money not at a PTIE and it would screw over liquidity in the financial market.
I mean, banks are allowed to curtail the egress of funds through rules limiting the velocity of funds. I see this in some of the recent high-interest yield offerings.
Of course, then the super-rich and their millions might stay away. But perhaps that's the most stable course after you have too many "over the FDIC limit" account balances.
A 40% withdrawal in a short time isn't survivable. Can't really fix that in a bank that does bank things. But the underlying situation that made depositors nervous could be addressed by regulation. Some ideas, not necessarily good or thought out, would include: mark assets to market, so the present value is reported accurately, but also report on expected future values at some intervals; an on the record increase of deposit insurance maximums would also help confidence, although there's lots of details there.
WHY did they take the hit? Because the word was out these banks were putting all of their eggs in one bond basket at the time of increasing interest rates. I am a just a simple country 401K investor, and even I knew not to do that.
Your 401k is presumably mostly invested in shares. Banks aren't allowed to structure their investments like that (it's considered too risky). In general they have limited options for investment which are generally bad in times of increasing interest rates with the remaining ones being bad during recessions, not to mention the impact of the current collapse in commercial real estate demand. As far as I can tell there's no way for the government and the Fed to pursue the policies they have been without blowing up the banking system as a consequence.
those people fled because they were told to by the financial press
this really feels like a setup to let a big bank buy a little bank for nothing
if we are really talking about people fleeing banks in "trouble", they would all close tomorrow...and don't tell me about stress-tests, those don't incorporate things like a broad collapse in commercial RE (which ALL the banks will be hit by)
> those people fled because they were told to by the financial press
…reporting First Republic’s balance sheet losses and falling stock and bond prices.
> feels like a setup to let a big bank buy a little bank for nothing
It’s not. That JPMorgan wound up buying it means literally nobody else submitted a valid bid, because the OCC and FDIC would have much preferred to not waive rules in making this happen. (Remember, too, the $30bn the big guys deposited with First Republic in March [1].)
I think financial regulators are a bit too soft-touched, but they aren't so incompetent that they would neglect real estate, of all things, in stress test scenarios in this post GFC world.
> * the risk driver for these ongoing smaller bank failures is (reportedly) the rise in interest rates.
It's a failure to diversify investments and adequately respond to a changing interest rate environment.
> * the solution seems to be to create ever larger banking behemoths (on the premise that they they can better manage risks)
Regulation alone can fix it. Just place further controls on how banks can invest their funds (ie. recommended allocation percentages per instrument and risk type), require stringent reporting, and perform stress tests to verify compliance.
The scary thing now is that banks with depreciated assets know they're in this zombie state. They just haven't been pushed over yet.
It'd be easy to find out which banks these are.
Might make for a questionably ethical opportunity to short banking stocks...
And it's not a risk-free investment either. They might be able to stumble along, long enough for interest rates to turn around, and come out ok on the other side.
My tinfoil hat view of this is that it's part of a creeping state takeover of banking in everything but name.
1. assume the liabilities of the banking system (complete in 2008)
2. induce consolidation of the industry into a few megabanks with the "systemically important" designation making small banks dangerous (in progress)
3. use the government protection as leverage to make these few remaining banks obey government priorities without ever having to pass a law. e.g. effective censorship of entities the government doesn't like by cutting off from the banking system entirely (the goal)
Dunno how you can see the problem of massive corporate consolidation and yet miss the entire mark so badly.
The regulatory toothlessness of the government means that the businesses can de facto write their own laws.
Same thing is happening in healthcare with the takeover there by a few religiously affiliated corporations, which will affect everyone's choices about their own healthcare.
We've been screaming about how the government is horrible since Reagan in the 1980s and we're on the cusp of really bearing the fruits of that decades long shift of power to completely unaccountable corporations.
But yeah, its the government which is still obviously the problem.
This is dumb because step (3) is already the state of the world. Banks are essentially extensions of the government. It's a public-private partnership. Yes, the government absolutely wants to cut off some entities from the banking system (terrorists, criminal cartels, etc). This is "censorship" only in some extremely naive and reductive sense.
Now perhaps you don’t care if a gun dealer can’t get a bank account but every 4 years there’s a presidential election and maybe the next person wants to cut off abortion clinics from the banking system.
When there are thousands of banks, it's a near certainty that at least one will decide to bank the unpopular but perfectly legal industry, and say "come at me bro, we'll win in court" to the government. With 4 megabanks, not so much.
Step 3 doesn't make sense. All banks have government protections (eg FDIC). The government already has KYC and AML laws that apply to all banks. Consolidation doesn't make the banks more susceptible to government influence. Big banks can afford to outspend the government on lawyers pushing back, it's small banks that just agree to do what the government says.
The idea that you can outspend someone on lawyers and beat them in court is nonsense that only works on the scale of <$1 million. And, yes, of course the government can make banks crack down on people who are breaking the law, but I'm talking about people who aren't.
Money is an excellent proxy for legal muscle. the argument was that bigger banks are more susceptible to informal extra legal influence, but expensive lawyers make enforcing your rights easier to do. See also SEC enforcements and IRS actions, both of which are harsher on smaller actors. Heck, look at the Disney vs DeSantis history.
The only way you can beat someone in a lawsuit with money alone (jurisdictions where you can bribe judges excepted), is by preventing the case from ever getting in front of a judge. It costs a certain amount of money to take a case to trial, and that can be a lot depending on the complexity of the case. But that's a lot to an individual, not to a corporation. Once you can spend that much, you actually have to go in front of a judge and win on merit.
The reason that IRS and SEC enforcement actions are harsher on small actors is because they break the law in much more obvious and stupid ways. e.g. not declaring taxable income and writing off obviously personal expenses. Large companies do not do this because the IRS splits penalties with whistleblowers, and any major company hiding income this way would be snitched out in a millisecond by their employees looking for the multi million dollar payout. Large companies do things that exploit loopholes and gray areas in the law, and the IRS is much more inclined to settle when their is a chance they may lose in court if they take it all the way.
There are other ways of using money to beat someone instead of delaying the trial. For instance, by making the cost of participating in the trial more than the cost of capitulating. See, for example, SLAPP suits.
But my point, which I keep making and you keep missing is that the incredible legal muscle of big banks means they don't have to worry about giving in on gray areas because they can effectively fight back. Whereas smaller companies will find it a lot simpler to give in to government pressure on the edge cases.
It's effectively the same. Monarchy isn't a king ruling over lords, it's a king balancing the interests of the lords so that they continue to grant him his kingship. A king who fails to balance this properly can easily lose his head. Monarchies are just disguised oligarchies, and e.g. Fascist Germany was no different - Hitler had to balance the interests of the various groups against each other enough so as not to lose his head, which in the end completely failed at the toll of millions dead.
A government "controlling" megacorps also need to balance these megacorps & other mega-influencers so that no one group becomes too powerful and too dissatisfied enough to overturn the current ruling system. Megacorps like Google obviously have plenty of tools at their disposal even in a democracy with "fair & free & secure elections" via shadow-banning, increasing prices/costs, curtailing suggestions, labeling disinformation, decreasing visibility, etc., to attempt to sway public opinion sufficiently to cause a desirable election outcome. This is before even attempting to actually sway elections via election rigging, ballot stuffing, etc., or bypass elections entirely through some sort of pseudo-paramilitary action (e.g. coup).
Of course, the more blatant these actions become, the more the interests of the other important influences can come into play (e.g. if Google ever did attempt a paramilitary coup, they would need heavy support elsewhere to ensure the military or the States didn't stop it), whereas Google shadow-banning certain political views can go largely ignored if it's not perceived by the public to matter much.
The difference was that the larger behemoths were required by law to manage risk better. They were subject to a stricter ongoing regulatory regime. The medium banks convinced the corrupt Trump administration and a bunch of corrupt law makers to pass a law that subjects them to a much lighter regulatory regime.
Their reasoning was that if a bank with "only" 250 billion of deposits fails it will not have a systemic effect on the economy. That reasoning was really dumb and now that a couple of medium banks failed the stupidity of that reasoning is obvious for everyone to see. Of course wiping out 250 billion dollars of deposits will cause a bank panic and will have an overall negative effect on the economy, and the fed is working hard to make sure this does not happen.
But generally speaking smaller banks are not by nature riskier. They only got riskier because they passed themselves this law that allowed them to get riskier. And now they will get a reputation for being riskier, and since in banking reputation is everything, they will become riskier.
the book says there is no technological progress because the bad capitalists are living off their rents, or something like this. However we have seen some technological progress since 1916... (and the planned economies used to be stagnant)
There are all kinds of differences between 2008 and now, but setting those aside - I think the genie was out of the bottle well before 2008 - it's just in 2008 everyone noticed. After all, it doesn't sound like many experts find it plausible that non intervention in 2008 was a realistic option assuming you want to avoid much worse consequences. At best, earlier intervention might have reduced the visibility and impact of symptoms.
The underlying issue is that even uninsured risks in banks must de-facto be largely covered by some central authority (whether FDIC or otherwise) otherwise the whole system is at serious risk of pretty catastrophic failure. The interaction of the lack of (formal) insurance for large deposits and the fluidity of those deposits make bank runs at the first sign of serious risk inevitable.
How important that problem is - I'm not informed enough to have an opinion on. But that problem didn't start in 2008, that's for sure. I am curious as to what actual subject matter experts think ideal solutions would be, and what haphazard lobbyist inspired patch-job we'll actually get.
> are all kinds of differences between 2008 and now
One huge, positive difference between 2008 and now: owners aren’t being bailed out. Stock and bondholders in 2008 got rescued. Not this time.
In February, First Republic had a $40bn enterprise value [1]. That is largely, if not entirely, gone. (JPMorgan acquired “substantially all of the assets of First Republic Bank,” so there will still be scraps to fight over.)
That's mostly just a consequence of those banks being "too big to fail". In 2008, allowing the largest banks to fail and shareholders lose everything could have seriously crippled our currency itself.
Shares of those banks play a much larger role in index funds, retirement accounts, etc than First Republic or SVB. The major banks are so tightly coupled that if one fell most of the others would have, and the very debt that created our currency in the first place would have disappeared.
Whether bailing out the banks in 2008 was a net positive won't be known for a while. We're still dealing with the blowback from 2008 and we can't know whether the bailouts saved us from further pain or pushed it under the rug and made the pain worse later.
IIRC, in 2008 shareholders got wiped out at least at some institutions.
It's 15 years later, and I don't recall the details, but I'm pretty sure that at least one of the big players went down in a way that the stockholders got zero.
The risk of contagion is a systemic flaw that can and should should be fixed with a change to the system. Depositors do not have any real visibility, notice, consent, etc. to what happens with their money. Rational consumers would not put their money in a back that was A) lending it out, and B) Lending it out in a risky manner.
Just like cookies on a website, banks should be required to give depositors a clear and easy way to choose whether their money will be lent out.
Will that mean less lending overall? Yes. Will that be good for the economy? Yes, because it’ll couple inputs and outputs more closely.
Moreover, depositors who do use banks to lend should be given a prospectus and information comparable to stocks.
Deposit insurance is a moral hazard. It encourages people to be reckless with where they put their money.
Backing up a little, the primary role of banks in a fractional reserve system is to increase the amount of money in circulation by lending. The “opt-out” is “just hold your own money”. Signing up for a bank account while being in opposition to them lending your money is like getting a job and being upset that they expect you to work; it’s not just part of the deal, it’s the primary part of the deal.
I like the idea of banks giving consumers a prospectus, but I should point out that publicly traded banks do, every three months, in the form of a quarterly earnings statement. How many people use it as such, I’m not sure.
The primary role of a bank for me is to make my money available via a debit card virtually vs. carrying physical bills which can be more easily lost or stolen.
I understand what you're saying. It's worth noting that the needs of the depositor are below the needs of the system itself.
This is one of the selling points for crypto. As a consumer, digitization of the money is about the only service most consumers care about (or accruing interest). Banking seems to me a very outdated and nearly obsoleted technology.
I think you'll find that consumers care a lot about the lending side of the business. A lot of people have mortgages, lines of credit, personal loans and credit cards!
This comment made me think. Is the presence of lending an example of supply leading demand, rather than the other way around? I’ll have to read more on the history of the situation, but I don’t think anyone wants, e.g., a mortgage. They want a house and can’t afford it any other way.
In a system where mortgages didn’t exist, maybe houses would be more affordable for people.
It isn't but it's cheaper. People may not care very much about the 2% interest rates they get on their savings account, but I think they do care about having access to cheap credit.
To back up a little further, the purpose of a bank before fractional reserve banking was to store gold and other valuables safe from theft…
Fractional reserve banking began when the banks started converting the deposits to issue loans without the depositor’s knowledge or consent… and that’s largely the way it remains.
Deposit insurance is a moral hazard. It encourages people to be reckless with where they put their money.
The vast majority of the population would not have the time or ability to digest and perform a comparative analysis between countless pages of bank prospectuses. We put that effort into stocks now. Most use some variety of funds, often suggested by general guidance from 401k plans based on a vague risk tolerance and retirement goals.
Yes, but what’s the problem? Ignorance is not a better solution. People could digest a few basic statistics like the reserve ratio of the bank. We do this with Energy Star appliances.
Ultimately I don’t care if people change their behavior, but I’m offended by the fact that I’ve opened several accounts in my life and none have clearly indicated that they don’t keep most of my money. I’ve even read a couple sets of the papers that come with an account and they didn’t seem to say anything about it.
As far as I’m concerned banking is fraud / conversion.
I'm curious - would you be willing to check that box if it meant a $15 fee each month? Banking services are currently largely paid for out of the interest rate differential on your account, and need to be paid for somehow. I personally would much rather have my FDIC-insured deposits get lent out than having to pay even a nominal fee.
It's a question of terminology - if you deposit a dollar in a bank, that adds to its reserves (the dollar), and its liabilites (the future dollar and potential interest). The bank wants to make a profit, and legal requirements mean it can invest in risky bets (such as loans) only to a certain degree - but that's still well in excess of 1-1.
In effect, your deposit is directly, causally linked to the ability of the bank to keep more interest _earning_ loans on the books; i.e. your deposit helps back those loans, and were it not for deposit insurance (assuming your account is below the limit) you would be on the hook for risks the bank took.
Your deposits are thus both necessary, and (barring FDIC) risk-carrying when it comes to the loans the bank makes. Isn't that in essence "your" deposit being lent out? If not in a literal sense; then at least what's the value in emphasizing the distinction?
But banks are not in practice limited by reserve availability. A central plank of modern central bank dogma is control of interest rates which is significantly exercised through liquidity loans to banks in order to satisfy their Basel III obligations. That policy goal necessitates free provision of such loans. The reason deposits are desirable is because it's cheaper for the banks to borrow their liquidity from punters than from the inter bank market or from the CB. I guess in some very roundabout way what you say holds some water, but deposits certainly do not limit the ability of the bank to make loans, which is in truth limited by the availability of credit worthy borrowers.
> amount of $ measured in terms of US GDP (also in $)
It’s convention because it cancels out a lot of noise. (Both nominal.) And there are practical reasons for a larger economy needing more money to work than a smaller one. But if you prefer, it can be calculated in various ways, all of which tell a similar story: we’ve been in a different regime for the last 1 to 3 years in which there is less money, and a regime before that since 2008 when there was a lot more money.
Comparing the monetary base to average temperatures makes no sense. We expect the latter to be stable long term (human-wise). We want the former to track GDP, more or less [1]. In that metric, too, the anomalous period was 2008 - 2020, with a phase change towards less money per unit of GDP since.
There are many reasonable issues with this purchase and sale. But “money printer go brr” isn’t a particularly insightful nor relevant one.
"We want" ... not sure if a vote would really turn out that way.
I think for most people having something like the gold standard seems much more plausible.
Having a flexible supply of the settlement currency is a pretty new experiment. Not even 100 years old. And it has ended in desasters around the world multiple times already.
> not sure if a vote would really turn out that way
We don’t vote on individual drug approvals, either.
Some people have a broad vendetta against the Fed and fiat currency. That is fine. But shoehorning it into every discussion, even when it isn’t relevant, doesn’t advance anything. This is a bank failure being resolved with public-private participation within the FDIC’s framework with support from the OCC. There are smart things one can say about the FHLBs, TBTF and liquidity ratios. (You pointed out centralisation. That’s a smart thing to discuss!) There isn’t much relevance to the monetary base, however, unless we’re speculating on the next rate rise.
The man in the street might find it plausible that asbestos and cigarettes are safe and that global warming isn't real. "Plausible" is not the same as "true", a problem which the AI people are grappling with.
Not having a flexible currency supply causes separate problems as people run out of specie. Furthermore the counterfactuals for 2008 and 2020 look .. bad.
> And it has ended in desasters around the world multiple times already.
Well the global economy and most national ones were in a permanent boom and bust cycle between at least the mid to late 18th century and the Great Depression.
Just instead of steadily (well prior to 2020 anyway) going up all the time like now the worth of currencies was swinging up and down in a wildly volatile and unpredictable manner every few years..
The chart you linked to has downward movement as well. So it's not all 'more money printing'.
Btw, the expansion of the monetary base has a lot more to do with the Fed paying interest on excess reserves than on rescuing a few banks here and there.
Depends on your definition of "now". (Related: "How Long Is the Coast of Britain?")
The printing of unprecedented amounts of money from 2008 to now created those low yields the banks are seeing. And now there was a tiny increase in yields the banks go under.
This would not have happened with a stable supply of the base currency.
> would not have happened with a stable supply of the base currency
We spent millennia with examples of stable, metal currencies and bank failures. Then, like now, bankers chased risks. First Republic financed long-term Treasuries. Romans financed eastern fineries [1]. Many others blew capital on kings’ failed wars.
Booms and busts are inherent to money and credit, this is a foundational learning every industrialised non-Malthusian society learned fast and, in many cases, including our own, the hard way.
The counter-swings just created an illusion of longterm stability. But it definitely didn't feel that way for people living on the ground (of course a lot of that is down to unstable food supply and not just the monetary system. Not that it was avoidable, you can't really have a fiat currency without a stable and somewhat reliable government anyway).
> This just balloons up giants which are too big to fail
This is good. We need to get everything down to a sufficiently small number of big banks so that "too big to fail" also means "so big that even the most ardent small-government anti-regulation leave everything up to the market people in Congress are afraid to deregulate them".
This means the feds did decide to make an exception to the rule that bans banks that have more than 10% of nationwide deposits from acquiring another bank.
Also this is the second largest bank failure in US history.
“As a result of this transaction, JPMorgan Chase expects to:
Recognize an upfront, one-time, post-tax gain of approximately $2.6 billion, which does not reflect the approximately $2.0 billion dollars of post-tax restructuring costs anticipated over the next 18 months
[…]
The transaction is expected to be modestly EPS accretive and generate more than $500 million of incremental net income per year, not including the approximately $2.6 billion one-time post-tax gain or approximately $2.0 billion of post-tax restructuring costs expected over the course of 2023 and 2024.”
People acting like the world is ending when the reality is this is a classic run on banks. There's still a ton of outstanding loans that will be now paying Chase for the next 20-30 years. Larger banks can more easily accommodate depositor withdrawals.
It's not like the subprime mortgage crises at all but even that turned out a net profit for the feds when all was said and done.
Seems like yet another example of a disaster that (might) have been avoided if congress, in 2018, hadn't rolled back pieces of Dodd-Frank. Before that, banks with > $50B had to take stronger precautions, but that limit was raised in 2018 to $250B. FRB had assets around $220B.
No bank in existence could handle losing 40% of their deposits in a few days. You can't possibly protect against that while also operating the business of being a bank as we think of it.
Would people panic & withdraw their deposits if the bank had been more cautious? That's the main question. It can't really be proven either way, but it seems fairly plausible that a bank with much less risk would have far fewer panicked depositors.
Doubtful, as 99% of people aren't taking a detailed look at the bank's risk profile when they're deciding to withdraw their cash. It's a knee-jerk reaction to keep their money safe. After all, FR was actually safe, had their not been a run.
It is also amazing that is you look at the deposit numbers, almost none of the FDIC protected money moved, whereas almost all of the non-FDIC money went elsewhere.
Maybe they erred in allowing all that FDIC uninsured money, but somebody would have to!
Sounds like the people that could, stayed, while the ones who couldn't take the risk left. I'm a FR client and kept my money in because I'm under the limit. I wouldn't blame anyone who was over the limit for leaving.
JPM has just released a press release with more details [0]
- Acquisition of the substantial majority of First Republic Bank’s assets, including approximately $173 billion of loans and approximately $30 billion of securities
- Assumption of approximately $92 billion of deposits, including $30 billion of large bank deposits, which will be repaid post-close or eliminated in consolidation
- FDIC will provide loss share agreements covering acquired single-family residential mortgage loans and commercial loans, as well as $50 billion of five-year, fixed-rate term financing
- JPMorgan Chase is not assuming First Republic’s corporate debt or preferred stock
RIP First Republic - I hope something of their customer service culture stays on. Unsure that's realistic, but maybe JPM could have kind of "private business banking" or something?
I was a customer there for ~12 years through multiple companies. Hope everyone I've worked with is okay.
JPMC will give you arbitrarily special treatment depending on your assets. They have Private Client products for larger depositors, but obviously it goes up from there.
Does anyone have a clear picture of how this affects the employees and office footprint of FRB in the short and long term?
FRB had announced 25% layoffs last week. Is that still on the table? Does it go higher?
FRB is one of the largest leasers of commercial office space in SF at 150,000 sqft*. Is it expected that there will be significant reduction here? Or business as usual?
Correct. JPMorgan “is not assuming First Republic’s corporate debt or preferred stock” [1]. Including that debt, the total value vaporised could be up to $40bn [2].
That said, JPMorgan acquired “substantially all of the assets of First Republic Bank,” so there will be scraps to fight over.
I'm surprised the debt got totally wiped out too on $220B in (HTM) assets vs $100B in deposits. Those assets have to be severely discounted to arrive at JPMorgan's $2.6B windfall figure. Just last week Levine was saying:
> First Republic estimated as of Dec. 31 that its assets were worth about $27 billion less than their carrying value. So figure its assets are worth something like $206 billion on a good day.
So I'm wondering where the gap is.
> Meanwhile it has ... about $105 billion of secured borrowing from the Federal Reserve and Federal Home Loan Bank system.
Presumably JPMorgan is assuming FR's debt to the these central banks?
Bank deposit is a debt owed by the bank to the customer. So by assuming the deposits they assumed this debt. On the other hand they will also have assumed the assets of the bank (including these problematic bonds).
Yes. From the perspective of the bank, the deposit is the liability and the loan is the asset. People online always get this wrong because they look at it from the perspective of the individual/business on the other end of the transaction.
They claim a net windfall of $2.6B, with projected $2B in future costs associated with the takeover. So in some sense it cost them negative $2.6B; in some other sense (if those cost projections are accurate), negative $600M.
> They claim a net windfall of $2.6B, with projected $2B in future costs associated with the takeover. So in some sense it cost them negative $2.6B; in some other sense (if those cost projections are accurate), negative $600M.
Additionally their own slides on the transaction highlight an "IRR > 20%." Who knows how they calculated that. Either way, JPM is definitely not losing money on this.
The important thing to the people who deposited money is that they get made whole, but the shareholders will still get nothing (or a nominal sum) so they still have an incentive to hold the bank executives accountable in the future.
If anyone wanted to keep on top of these bank failures and be alerted when it happens, I built a very simple bank failure API/RSS feed from the data coming off of the FDIC website: https://benbrougher.tech/projects/bank-failures/ It's nothing fancy, just a for fun project
Or it will work out since at this point large national banks are regulated to the point of de facto control by the government where failing stops having the same meaning.
It's one of the dominoes, the attention of the market is going to turn to the next target now, and this will keep going until there's a general government/ market solution to the regional bank problem. The same people saving the bank are going to be the same people pushing the next bank to crisis.
Actually there are two blue ones and two red ones! So you can keep the colour you like and still switch to a competitor! All you have to do is book an appointment in advance to go in person to a branch between 9 and 5pm on a work day to close your account.
Meaning JPM was also granted a new exemption to the 10% deposit cap in this acquisition? There are regulations[0] preventing banks with >=10% of US deposits to grow larger in size by acquiring other banks. Another win for TBTF theorists.
so will it now be harder to get credit? What do the experts say?
One of the problems of the last bank run: the remaining banks were unwilling to grant any new loans - because they were afraid to take up any new risks. Is it possible that we will we see something similar?
> as of April 13, 2023, First Republic Bank had approximately $229.1 billion in total assets and $103.9 billion in total deposits
It seems a bit laughable that funny money accounting is allowed to be reported as facts. The loaf of bread I bought 4 weeks ago for $1 that is now stale and mouldy is neither worth $1 nor should be on my balance sheet as worth $1.
Long-term treasury bonds aren’t like stale bread because the bread doesn’t suddenly spring back to its original edible state after ten years have passed, but the treasuries will eventually repay your capital in full.
The problem is that this full repayment is a decade or more away, and in the meantime you’re receiving a pittance of interest compared to investments you could make today. So if you can’t afford to wait, the bonds you’re holding aren’t worth their full value to anyone you could sell them to.
> So if you can’t afford to wait, the bonds you’re holding aren’t worth their full value to anyone you could sell them to.
Bonds are easy to value if you assume full timely repayment, take the net present value of each payment, and that's what it's worth. (You may disagree about the NPV, if you disagree about the interest rate to use, but the shape of the calculation is clear) Sure, at redemption, it will be worth something else, but USD today and USD in a year are not the same unit, you need a conversion.
The problem is that this full repayment is just objectively not a full repayment. In a standard economic environment with a positive rate of inflation, if I gave you $10 yesterday, and you returned me $10 today, I _lost_ money even though the numeraire suggests that I didn’t.
If you own a building that could sell for $10m to the right buyer after a few months on the market or $2m if you had to fire sell it tomorrow, then that building is worth $10m, not $2m.
Unless you did have a fire sale and it went for $2M - that's what it's worth at that moment in time. Sure it could be worth $10M in the future, but it isn't right now.
This isn't a liquidity problem though - the actual fair market value of the assets that they can realistically expect to get has dropped due to interest rates rising. Someone with $10 million to invest in long-duration government bonds won't pay face value for bonds that pay out $10 million at maturity plus a small amount of annual interest when the government has issued newer bonds with much higher interest payments, they'll expect a discount that accounts for the lower amount of interest paid over the term, but banks have a bunch of bonds like that that are still on their books at face value and haven't been marked to market.
Given the cost is estimated to be $13bn, after the assets are wound down "to the right buyer after a few months on the market" the $229.1 billion is pure fantasy
There were no fire sales of Treasuries. They’re actually just worth less. The problem is we treat HTM securities as both inviolable in value and liquid.
That’s not correct. Assuming the $10MM sale is a certainty then the building is worth just slightly less than that, accounting for six months of interest at the prevailing rate.
Assuming the interest rate is around 4-5% as it is now, that means the building is worth a couple hundred thousand less than $10MM. That’s the definition of “slightly less” in the exact scenario you set up.
If you think a couple hundred grand doesn’t matter you are free to wire it to me at your leisure.
Now make six months into six years or sixteen years and you understand the problem better.
All these recent bank failures due to lack of oversight by the Fed. As we learned in 2008, you can’t just blame financial institutions because they’re going to take the easiest route every single time. The Fed is there for a reason. They completely failed to do their job with Powell leading that organization. They internally knew what they intended to do with their rate policy but did not do any stress tests for banks. I find that incredibly incompetent.
Yeah. I was surprised to learn Powell is older than Bernanke. Some of Yellen’s comments around SVB weren’t very confidence-inspiring either. I don’t think the Powell-Yellen duo is up to the task.
This is the fault of of one person: Jerome Powell. That man has done more damage to the US and the world than any of the biggest calamities that come to mind (9/11, Katrina, Trump/Biden/Fauci depending on your politics).
The last 3 years of monetary policy have been the biggest destructive f-up ever imaginable. Printing endless money causing the collapse of the value of the dollar, causing serious inflation, to an insane raise in rates to try to undo the damage which (1) not only destroys the entire banking sector and tech industry, and (2) did absolutely nothing to fix the destruction of the USD.
Americans worry about the dollar going to zero, meanwhile it was recently at a 20-year high against the euro, the pound, and the yen.
Inflation has dipped to 5% and unemployment is lower than in decades.
For all its faults, American monetary policy has been better than that of most other developed countries. The ECB went 11 years without raising interest rates.
You will never have ongoing stability, at least not in the way you're looking for. It's a dynamic system; it's never going to hold still. You can't have static stability in the economy. It's like driving a car. You're only a few seconds away from crashing most of the time. But you don't crash, because you keep steering. In the same way, the economy is as stable as it is because the Fed keeps steering, not because there's some condition where it will be statically stable forever after.
After each adjustment, people change their behavior to fit the new conditions. That changes the conditions and sows the seeds of the next problem. So there always has to be a next adjustment coming. Those periodic adjustments are what keeps the system stable - but they don't feel like stability, because the system isn't statically stable.
We could have a lot more stability than we've had. The last president screamed for zero interest rates and tax cuts while the economy was already booming and got his wish. Current admin did different kinds of helicopter money for votes, even though it was likely to end in inflation. Much instability is due to politicians serving their own interests instead of ours without consequence.
> This is the fault of of one person: Jerome Powell.
The Fed chair is nominated by the president. The last president used his bully pulpit repeatedly to strongly criticize Powell for not lowering rates to zero like other countries. I suspect there was other behind the scenes influence taking place too. The current president and Congress basically doubled down on inflationary activity, helicoptering even more money to individuals and corporations. Powell was probably not operating independently as the Fed is supposed to.
Raising the rates does help control inflation, e.g. Volcker. It's still negative real rates though (that is, interest rate minus inflation). Only just starting to become positive. The rates needed to follow inflation or you'd have a runaway unstable situation of inflation causing real rates to become more and more negative, feeding back into more inflation.
The best part is we’re gonna hear his praise from a certain political party and their media cronies (aka NPR specifically planet money, CNN, MSNBC, NYT) for the next 3 months. They’re gonna explain how this is all good and he’s doing a fantastic job. As if a bunch of banks failing under your watch is what’s supposed to happen.
So much for fixing the TBTF problem. More and more centralization is not the answer. In fact, decentralization is the answer, and letting poor money managers, investors, woke companies, cities, states, countries etc. go broke. The capital will get reallocated into the hands of more capable people and companies, as it should be.
Well maybe you're not interested in it so downvote away. Like many people I'm at least mildly interested in news that affects a lot of people, even if it doesn't affect me personally today.
I haven't researched this thoroughly, but I think the banking sector (like many other sectors) has been concentrating a lot over the years. So in the 80s we had many small bank failures, and in 2008-2010 we had many many small+medium bank failures (+WaMu, the largest in US history), and today we have a few large bank failures (so far).
Right, but the concentration isn't a bad thing just because it is concentrated. It might just be a reflection of the changing nature of the world (globalization, finance changes, etc).
I checked, and currently, there are 4,844 banks in the USA. There are also 4,759 credit unions, but I am not sure if that is also included in the bank numbers.
A tight credit market affects valley companies. If there's a liquidity squeeze/crisis then startups may have to face real world challenges like actually making money.
If you ask yourself why the banks were buying what most people would consider the least risky asset ever and somehow ended up failing you’d understand why this was really a failure of regulation and not cowboys avoiding responsibility
I just don't think you understand the banking industry... they failed to manage the change in interest yields and lost consumer confidence. The SVB report is damning in terms of poor management and excessive risk-taking that then back fired when the interest rate environment changed.
The FED created this environment and did it for a good reason to head off inflation.
The whole banking sector is down. You still think this only affects “badly run banks”? Or maybe monetary policy by this administration has been abysmal, from initially denying there was real inflation, to continuing to sign giant spending bills and refusing to do nearly anything to stop inflation aside from one of the crudest tools and at the same time forcing banks to buy these long term t-bills because 3 years ago it was seen as a safe bet and the least risky move.
This affects all banks, as it changes the financial environment. Well-run banks will manage it well. Badly run banks will close.
The Fed was faced with a choice, fight inflation or not. They choose correctly, and that has ripple effects. That is life. Some banks were prepared and managed their risk well; others did not. And some are probably getting unlucky because SVB really screwed up and now people are keeping their money under the F.D.I.C. insurance level because of their bad management.
(inflation isn't so simple as printing money; it also had to do with companies taking advantage of the cover to raise prices, problems with global logistics delays and higher shipping prices, and a lot more. It is a very complex issue and not so simple.)
The Fed administration? I've never heard it called that. Are you from the USA?
Can you tell me your background in economics? I'd like to understand your expertise and why you think you know better than the brilliant people at the FED who do nothing but think about this and analyze data :). That doesn't mean they are perfect, but they are historically pretty good at their job and constantly improving.
The FDIC killed a bank that was absolutely fine. For the 3rd time in 2 months.
FRB was solvent and had plenty of liquidity if the FDIC didn't force kill it. The FDIC just wanted to flex its muscle because it didn't like the situation — but there was zero reason FRB couldn't have held all its good loans to maturity and been totally fine.
Fuck the FDIC and fuck Jerome Powell for causing all this unnecessary destruction.
> FRB was solvent and had plenty of liquidity if the FDIC didn't force kill it
This is totally incorrect. Face value and market value are a material difference when one faces a liquidity crunch. First Republic was in a slow death spiral for months, and everyone across its capital structure knew it for at least a week.
> there was zero reason FRB couldn't have held all its good loans to maturity and been totally fine
You can’t tell depositors you won’t give them their money for ten years.
I don't understand, the bank is having a massive run on it and collapsing. Thus the FDIC steps in per the norms of the last 50 years and fixes it. The system works like a charm?
How is this bank fine? They have lost confidence and everyone is pulling their money out. They would collapse if not for FDIC insurance and the system stepping in.
They had approximately $200B in (market price, or $220B HTM) assets against approximately $200B in liabilities (including deposits). They weren't especially insolvent, even if depositors kept fleeing.
The FDIC's tolerance for insolvency is "zero," not "pretty close." I'm just saying they were, by all accounts, pretty close. We'll learn more in the coming days.
Insolvent has a precise meaning in accounting. FRB was not insolvent. The book value of their bond and loan portfolio was accounted as held-to-maturity keeping it at cost value and not market value. As long as they could hold to maturity they'd be just fine.
The Fed put in a facility that was supposed to let banks borrow against their securities portfolio at their book value and not at their market value, plus on top of that there's also the discount window facility, which means FRB had plenty of access to capital to handle any withdrawals.
The FDIC is just on a power trip here. They don't _like_ that the market value of those securities is down based on the inverse relationship between yields and price. So they force killed the bank. There was ZERO need to do that, FRB could have just held the loans to maturity, and sure they'd lose some money on the interest they'd have to pay to borrow from the Feb to make up for lost deposits, but in no way were they insolvent and in need of a shut down.
> The FDIC and JPMorgan Chase Bank, National Association, are also entering into a loss-share transaction on single family ... The FDIC estimates that the cost to the Deposit Insurance Fund will be about $13 billion
Not printed. FDIC would levy a special assessment on its member banks, including JPMorgan, if those costs are realised. (Note that up to $40bn of enterprise value [1] was also just destroyed.)
Technically, the Fed has been providing most of the liquidity to the FDIC in the last 2 months. The FDIC isn’t liquid. This most definitely is “printing” money as the Fed generates money in the system when it lends.
If you look at the Fed’s weekly lending (H.4.1), you can see the FDIC has borrowed upwards of 170B in the last 2 months, not including FRC deal. In the FRC deal, FDIC is giving JPM a 50B term loan, which is most likely again borrowed from the Fed.
There’s some speculation why this had to happen, ie the Treasury cannot provide the liquidity due to debt limit, etc…
> the Fed has been providing most of the liquidity to the FDIC in the last 2 months
I’ve seen this claim from AEI folks [1], and while I’m listening, I’m not (yet) buying it. It looks more like the BTFP [2][3]. (EDIT: It’s not the BTFP. Something screwy here, but unclear how much.)
> the FRC deal, FDIC is giving JPM a 50B term loan, which is most likely again borrowed from the Fed
Source? The press release notes a loss-sharing arrangement. No loan. (EDIT: there is a loan.)
