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Banking in uncertain times

bitsaboutmoney.com

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Re: Banking in uncertain times

#31

Post by alecco »

Just use a MM account at a bank/institution using Federal Reserve deposits. It sucks to concentrate on the large big institutions but it's the only safe move right now.

Note, the Federal reserve has now insane liabilities. But they can print money so they will never default. If your payroll and expenses are in USD nominal you are covered.

If you go, aha! but how do you safely protect your funds from inflation and Fed's money printer? Good luck with that. The system is rigged. "It's a big club and you ain't in it".

Re: Banking in uncertain times

#32

Post by ajross »

pearjuice wrote: post #5

What I still do not understand is why the whole SVB episode isn't a bailout and didn't just introduce much more risk into the system. Yes, the stock went to 0 and investors did not get compensated (if they didn't already cash out when they saw it coming due to inside information) but the gaping hole in the books was filled due to government intervention and explicitly lifting the 250K FDIC limit. Why would any bank l…

> but the gaping hole in the books was filled due to government intervention and explicitly lifting the 250K FDIC limit.

That's not the correct analysis. It was a liquidity crunch, not a "hole" in the sense of a debt. In some sense the bank always had the assets, just not in a form they could pay out as a withdrawal. So when everyone wanted out at once they ran out of cash and got seized by the FDIC.

That's not to say there won't be any losses at all. There likely will as the successor bank liquifies holdings and makes whole the folks who want out. And yes: those losses are (as reported currently) not going to be borne by depositors at all. Currently the idea is that they'll be rolled into fees on other banks, which is part of the FDIC insurance regime. So we all collectively pay for it, just not via taxes per se.

Re: Banking in uncertain times

#33

Post by lifty »

I have been seeing conflicting opinions from people in the financial know-how. On one hand, patio11 says that you can ignore this and that the banking system is very resilient. On the other hand, him and others mentions that you need to use 3rd party providers in order to distribute your deposits in order to have full insurance coverage. Is there any way for a non sophisticated person to avoid these headaches? Otherwise why is this so different than the knowledge required to self custody crypto-assets?

Re: Banking in uncertain times

#34

Post by kasey_junk »

I like this and it rings true for the most part to my experience.

But I find 2 parts of it troubling. First ‘patio11 seems to have bought into the goalpost movement around depositor obligations in the banking regime. It maybe that as a society we don’t want any depositors, no matter how big, to have no concern about counterparty risk (or maybe move the bar higher) but that’s not the assumption built into the system now and it’s not obvious on its face or in the essay that it should change.

Second, the appeal to FBO operators falls flat. Large custodial firms have existed for decades and being able to provide a beneficiary list on the weekend is something they build and staffed for. That it is difficult for other technology firms to do so says more about the choices those firms are making than an intrinsic problem with the existing system.

Re: Banking in uncertain times

#35

Post by skwirl »

pearjuice wrote: post #5

What I still do not understand is why the whole SVB episode isn't a bailout and didn't just introduce much more risk into the system. Yes, the stock went to 0 and investors did not get compensated (if they didn't already cash out when they saw it coming due to inside information) but the gaping hole in the books was filled due to government intervention and explicitly lifting the 250K FDIC limit. Why would any bank l…

>Why would any bank look at SVB and NOT think "oh, time to take more risk for more profit; the government will prop up the FDIC limit if we fail anyway".

This makes zero difference to the bank. The bank doesn't get saved by the FDIC limit, as you know. What happens after the bank fails - whether the depositors are made whole or not - is immaterial to the people who owned the bank, who now see their asset (the bank) worth $0.

If you want to make a moral hazard argument with respect to the FDIC, you'd have to make it with respect to the actions of depositors.

Also, WRT the $250k limit, that's the minimum they will guarantee. They have always tried, and in recent decades always succeeded, in making depositors whole one way or another, usually without spending much (if anything) from their insurance fund. The $250k is the worst case scenario.

Re: Banking in uncertain times

#36

Post by Semaphor »

tetrep wrote: post #6
echion wrote: post #3

First, the article is a great explanation of what's going on. "Maturity Transformation" explains the cause. "Trying to forestall a banking crisis" is a great discussion of the important next stage of the non-headline-grabbing solution. Just wondering about this "desert" word, in context: > I am very frustrated by political arguments about desert, which start with an enemies list and celebrate when the enemies suffer…

A deserving; that which makes one deserving of reward or punishment; merit or demerit; good conferred, or evil inflicted, which merits an equivalent return: as, to reward or punish men according to their deserts. "Just deserts" is a common phrase that uses it in the same way.

Oh wow. I (non-native) never realized it only had one s, I always assumed it was "just desserts", as in, you are getting the dessert you deserve, after the food (the evil you did) :D

Re: Banking in uncertain times

#37

Post by O__________O »

Mentioned in the article, Chart 7 from an FDIC report [1] is concerning, specifically that currently there are “unrealized losses on available–for–sale and held–to–maturity securities totaled $620 billion” — which appears to be not only a recent trend, but roughly 10x more than any point in recent history, including during 2008.

Is anyone able to provide more context and clarify how significant these losses are to the US banking system beyond what’s covered in the article?

[1] https://www.fdic.gov/news/speeches/2023/spfeb2823.html?ref=b...

_________________

EDIT: For the unfamiliar, OP article’s author is a notable user on HN:

https://news.ycombinator.com/user?id=patio11

Re: Banking in uncertain times

#38

Post by skwirl »

Gys wrote: post #13
duxup wrote: post #10

Earlier quoted context omitted.

> Why would any bank look at SVB and NOT think "oh, time to take more risk for more profit; the government will prop up the FDIC limit if we fail anyway". Because they don’t want the stock to go to 0? I think most businesses and investors would not want that. We’ve seen bank stocks drop, it is in those banks interest to show they’re not taking chances like SBV.

Then why is (was?) there a limit of 250k anyway?

To prevent bank runs.

Re: Banking in uncertain times

#39

Post by patio11 »

Gys wrote: post #13
duxup wrote: post #10

Earlier quoted context omitted.

> Why would any bank look at SVB and NOT think "oh, time to take more risk for more profit; the government will prop up the FDIC limit if we fail anyway". Because they don’t want the stock to go to 0? I think most businesses and investors would not want that. We’ve seen bank stocks drop, it is in those banks interest to show they’re not taking chances like SBV.

Then why is (was?) there a limit of 250k anyway?

There has been, over the nearly century we’ve had the institution, many many waves of feelings regarding it. That said, three prominent ones: the amount one needs to reserve, and therefore the rates one needs to charge banks to build the reserve, are sensitive to what portion of the sector is actually insured. There exists a sense that rich, sophisticated people and entities can arrange for their own risk management at their own expense rather than a society-wide program with implicit government backstopping. Finally, there is frequently strong disinterest in either the reality or the appearance of public funds being used to backstop the banking industry.

And so that is the reason for the limit. It gets bumped up every few years, partially due to inflation and partially due to the increasing wealth of the upper middle class and retirees, who the insurance fund is primarily aimed at motivating. It would not be effective in its aims if “local elites” at the typical community bank felt like they still shouldered run risk, and local elites in 2023 are substantially wealthier than they were in 1945.

Re: Banking in uncertain times

#40

Post by nervousvarun »

lifty wrote: post #33

I have been seeing conflicting opinions from people in the financial know-how. On one hand, patio11 says that you can ignore this and that the banking system is very resilient. On the other hand, him and others mentions that you need to use 3rd party providers in order to distribute your deposits in order to have full insurance coverage. Is there any way for a non sophisticated person to avoid these headaches? Otherw…

Apologies in advance if I'm missing some context here but from my understanding it's pretty straight-forward: in the U.S. an individual is insured by the FDIC up to $250K. So anything you have over that in the one account is "susceptible" to bank failure losses (and even then it's not guaranteed that you'd lose your $...just possible).

So if you have $1M parked in one account then you're at risk. $250K parked in 4 accounts caries zero risk.

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