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A Bank of One's Own

nayafia.substack.com

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Re: A Bank of One's Own

#91

Post by seo-speedwagon »

digitaltrees wrote: post #85
polygamous_bat wrote: post #53

Earlier quoted context omitted.

> Like I don’t want to defend the execs too much as they are the responsible people. But the gov and Fed did this. Erratic economic policy did this. It’s sad so many people think it’s a greedy bank. Being named Silicon Valley Bank doesn’t help. Classic libertarian chant assigning the success to the private individual and blame to the government. Everyone is dealing with the same macroeconomic environment. SVB execs d…

SVB got unlucky due to some unique structural problems (massive inflow of cash resulting in high proportion of portfolio with low rate assets backing the deposits and a client base that was shifting to withdrawals all at the same time due to difficulty raising capital). The fed could have done a better job giving long term guidance and honestly should set up a facility to exchange debt when the interest rate risk cou…

Making sure you don’t fail catastrophically if you get unlucky is the entire purpose of risk management, which SVB failed to do.

Re: A Bank of One's Own

#92

Post by DoreenMichele »

This was a good read. I learned something.

But I can't help but think that part of the problem is the American lifestyle that does a poor job of allowing people to live both well and frugally while fully participating in life.

We have a gun to our head to own a car, to have a large home, etc. There's a cost to that, both individually and societally.

Re: A Bank of One's Own

#93

Post by NortySpock »

Shout out to all the credit unions out there!

* Owned by those who bank there

* Non-profit organization -- "Excess" profit is typically returned to members as a dividend

* Savings from your accounts are used to invest in mortgages and bonds and securities in your community

* Deposits up to $250k are insured by the National Credit Union Share Insurance Fund (is all of this sounding familiar?)

signed, a happy credit union member

Re: A Bank of One's Own

#94

Post by alxmng »

digitaltrees wrote: post #83
alxmng wrote: post #74

Earlier quoted context omitted.

The way any other creditor issues loans? Investors put money together, loan it out at interest to make a profit and cover losses.

That would be a fraction of the size of depositor back lending which would significantly reduce capital available for all kinds of uses. The current system is better specifically because it supplies guard rails that incentivize private investors and all savers to lend their money.

The venture capital and stock market are not capitalized with bank deposits, and that comprises the bulk of commercial startup capitalization and investment. What percentage of startup capitalization and investment comes from deposit-backed bank loans? I'd guess not much. None of the tech startups impacted by SVB's insolvency were capitalized by loans from checking deposits. Their deposit accounts were lent out to mostly non-business securities (mortgages and government bonds). Fractional reserve banking always will and always does result in bank runs.

The idea of separating deposit and investment banking goes back to the 1930s. It's known as "The Chicago Plan" (full reserve deposit banking). The IMF published a study that estimates no negative impact on economic growth.

https://en.wikipedia.org/wiki/Chicago_plan

https://www.imf.org/en/Publications/WP/Issues/2016/12/31/The...

https://qr.ae/pGQXNx

Re: A Bank of One's Own

#95

Post by neilwilson »

88913527 wrote: post #68
dools wrote: post #27

The obvious fact is that we don’t need private banks to run our payment system or provide deposit accounts. It can be done perfectly well by allowing individuals to have accounts at the central bank through a postal savings system. There is probably some value in having banks to do loan underwriting and allowing private credit creation but this whole thing if allowing private banks to run everything and then providin…

Banks depend on depositor's money to generate loans. How would loans be generated, then, if consumers kept their money with the central bank? Issuing debt is a key engine for economic growth. This would incur an extremely contractionary effect.

Loans create deposits. Always have always will.

Deposits don’t move banks. What happens is the ownership tag changes.

So when you “move” your money to an account at the central bank, the central bank necessarily takes over your old deposit in the bank you’re moving from. That becomes an asset of the central bank and they create a new deposit for you against that.

That’s how all bank transfers work at root.

Re: A Bank of One's Own

#96

Post by neilwilson »

fludlight wrote: post #56
dools wrote: post #27

The obvious fact is that we don’t need private banks to run our payment system or provide deposit accounts. It can be done perfectly well by allowing individuals to have accounts at the central bank through a postal savings system. There is probably some value in having banks to do loan underwriting and allowing private credit creation but this whole thing if allowing private banks to run everything and then providin…

Banks use some of those deposits to make loans to private parties. This is, on the whole, beneficial to society so we want it to continue. You do not want the government, which is supervised by politicians, picking who gets loans.

They don’t.

Loans create deposits.

Deposits in a bank never go anywhere. All that happens as you “move” money around is the ownership tag changes. And that tends to change the price the bank has to pay on those deposits.

Re: A Bank of One's Own

#97

Post by Panzer04 »

csomar wrote: post #89
erik_seaberg wrote: post #10

It worries me that people assume SVB must have taken crazy risks on startups or crypto, when the actual mistakes were locking up so much money in long-term mortgage and Treasury bonds, and having clients who talk to each other.

Most people here are parrots. The FED raising the rate is the FED removing the liquidity from the market. Liquidity being removed from the market means no more credit, and possibly some people/funds losing money from their bank accounts. Actually, that's a certainty. It seems that the institution that is most susceptible to this will be an institution in a field where most people are parrots and fast parrots too. SVB…

This isn't really an explanation of why they failed, just applying a macro explanation to a micro phenomenon.

The bank bought long-dated treasuries for the 2% yield (as opposed to short-term treasuries yielding next to nothing). The moment rates went up they were going to start losing a lot of money mark-to-market. This could be tolerated, except they also had an undiversified deposit base withdrawing money and forcing them to take the losses, and so they blew up.

Re: A Bank of One's Own

#98

Post by polygamous_bat »

digitaltrees wrote: post #85
polygamous_bat wrote: post #53

Earlier quoted context omitted.

> Like I don’t want to defend the execs too much as they are the responsible people. But the gov and Fed did this. Erratic economic policy did this. It’s sad so many people think it’s a greedy bank. Being named Silicon Valley Bank doesn’t help. Classic libertarian chant assigning the success to the private individual and blame to the government. Everyone is dealing with the same macroeconomic environment. SVB execs d…

SVB got unlucky due to some unique structural problems (massive inflow of cash resulting in high proportion of portfolio with low rate assets backing the deposits and a client base that was shifting to withdrawals all at the same time due to difficulty raising capital). The fed could have done a better job giving long term guidance and honestly should set up a facility to exchange debt when the interest rate risk cou…

> SVB got unlucky due to some unique structural problems

"Getting unlucky" in banking is making a few risky loans, getting defaulted on, and coming below projected growth for the quarter. The bank's revenue gets a hit, the shareholders takes a haircut, all part of the playbook, happens every now and then. What "getting unlucky" is not is not understanding interest rate risk so much that you blow your entire bank up. It's like calling someone who drove drunk and killed 16 pedestrian "little unlucky while turning a corner", absolutely not in the same ballpark.

Re: A Bank of One's Own

#99

Post by roenxi »

polygamous_bat wrote: post #53
nemo44x wrote: post #50

Earlier quoted context omitted.

It’s such a strange thing. Gov stims everything and the fed drops rates to nothing and it works. Cash flows are coming in. But there’s just so much cash and not enough borrowers so they buy one of the safest assets. The very same entities that created all the cash and low interest rates start rapidly changing the interest rates and then this happens. Like I don’t want to defend the execs too much as they are the resp…

> Like I don’t want to defend the execs too much as they are the responsible people. But the gov and Fed did this. Erratic economic policy did this. It’s sad so many people think it’s a greedy bank. Being named Silicon Valley Bank doesn’t help. Classic libertarian chant assigning the success to the private individual and blame to the government. Everyone is dealing with the same macroeconomic environment. SVB execs d…

40% of the spending in the US economy is directly from government, substantially more is directed based on regulations by the US government and the leadership in that government is generally recognised as poor.

The odds of any given crisis being caused by government are good enough to justify it being the base-case assumption before any real evidence comes to light. Although in this case, the long stretch of time at near 0% interest rates and a culture of bailouts encouraging reckless financial decisions are probably going to turn out to be major factors.

Re: A Bank of One's Own

#100

Post by pixelesque »

erik_seaberg wrote: post #10

It worries me that people assume SVB must have taken crazy risks on startups or crypto, when the actual mistakes were locking up so much money in long-term mortgage and Treasury bonds, and having clients who talk to each other.

https://nongaap.substack.com/p/sivb-held-to-mortem-governanc...

claims they didn't have a Chief Risk Officer for most of 2022 however, so if true, might that have contributed to not seeing the approaching difficulty as mortgages became stressed?

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