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A Bank of One's Own
101–110 of 130 posts
Re: A Bank of One's Own
#102It 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.
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…
> But the gov and Fed did this.
the Feds did what they had to.
The outcome of this fiasco is not a reason to conclude that ZIRP is wrong.
Re: A Bank of One's Own
#103Earlier 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…
> The fed could have done a better job giving long term guidance
the fed can't give long term guidance, because they can't possibly predict shocks that would happen that require them to change the interest rate.
It's like asking mother earth to give a warning before an earthquake.
Re: A Bank of One's Own
#104Earlier quoted context omitted.
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.
This isn't actually true in the modern system; loans are generated by the bank taking a loan from the Federal Reserve at that interest rate, and then applying a markup that covers the cost of KYC, due diligence, customer service, and of course the bank's profit.
If the depositors were willing to accept a lower rate than the federal funds rate, the banks make a bigger profit from the loan interest spread.
Therefore, it is always an incentive for a bank to attract deposits.
Re: A Bank of One's Own
#105Earlier quoted context omitted.
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 forci…
Hmm, you just repeated what I said. Short or Long term is irrelevant here. They didn't make "risky" investments, they parked their money. They didn't do something unconventional. In 2020, it was perceived or assumed that zero interest rates are here to remain a la Japan and Europe. A 10 year outlook made sense at that time.
Of course, hindsight is an completely other thing and everyone has it once the events unfold.
Re: A Bank of One's Own
#106The 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…
> 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 providing a federal guarantee of some deposits is absurd, just take that function away from the private sector.
Could you explain this better? I don't understand
Re: A Bank of One's Own
#107Earlier quoted context omitted.
Well let’s hope not, and let’s hope they arrange an orderly process by 9AM Monday. Friday was not great and appeared to take them by surprise.
Well, not everyone, given that the CEO's been selling shares :)
By them I meant the authorities who intervened midday which is unusual I think?
I do feel the svb ceo/cfo etc should face consequences for their actions, bonuses should be clawed back, but really those are not the important actions here - providing stability to the entire banking system and making sure hundreds of businesses do not close at once because of a bank run are far more important. Otherwise there is significant systemic risk.
Re: A Bank of One's Own
#108Earlier quoted context omitted.
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 forci…
Hmm, you just repeated what I said. Short or Long term is irrelevant here. They didn't make "risky" investments, they parked their money. They didn't do something unconventional. In 2020, it was perceived or assumed that zero interest rates are here to remain a la Japan and Europe. A 10 year outlook made sense at that time. Of course, hindsight is an completely other thing and everyone has it once the events unfold.
I suppose - I just find mentions of things like "liquidity" with no specificity pretty meaningless (plus "FED" for referring to the federal reserve; I truly don't understand why it's capitalized as if it's an acronym or something).
The thing is, they did make risky investments. Going heavy long-term treasuries is risky, because you lose money if you have to sell them early. Banks get some privileges when holding them on balance, but they are still assuming a lot of interest rate risk when they buy them. Shorter term treasuries would definitely have saved them, but also ruined their profit margins (at least in 2020~2022), so it's neither here nor there.
Re: A Bank of One's Own
#109I thought this was a great post. I've commented elsewhere that I'd be pissed at the moral hazard of unsecured depositors getting a federal bailout (though not if the feds just assist in finding a buyer or do as much as possible to ensure depositors can access their funds quickly), but at the same time I'm saddened by so much of the gleeful tribalism I see online (but not too saddened - many of the "dancing on your gr…
The moral hazard of trusting a licensed bank? Do we want depositors to be hesitant to do that? The Fed won’t even allow “narrow banks” (that keep a 100% reserve ratio and cannot fail) because they think it’s crucial for our deposits to be available for loans and bonds.
The problem with narrow banks is that it would expose the fact that the Fed raising interest rates is causing significant instability.
I mean, if banks offer 5% interest and the fed raises interest to 4%, then there is no problem but if the Fed goes to 6%, it becomes a problem because people switch to the narrow bank. In other words, the banks in the real world cannot compete with banks that take government subsidies, so the subsidy must be carefully chosen instead of being raised arbitrarily.
Re: A Bank of One's Own
#110Earlier quoted context omitted.
I agree. It’s not even clear that banks need customer deposits to create credit and loans anyway [1]. Just let them continue with their commercial credit/loan operations, and provide a postal savings system for zero-risk savings for the public. Seems like a much less calamity-prone system. [1]: https://www.youtube.com/watch?v=3N7oD5zrBnc
If basic customers could be served by a federal deposit system and more "unique" customers might look for private options that cater to their needs (basically all of SVB's customers), nothing that played out in SVB's collapse would have changed.
You reckon they would have been holding cash for payroll in SVB if they could have an account directly with the fed instead?