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Banking in uncertain times

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Re: Banking in uncertain times

#61

Post by gregw2 »

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…

The moral hazard risk you mention is real. But likewise no bank can rest easy for two reasons: 1) the lending programs setup to backstop banks (not depositors) in the current situation expire in a year. Not all the bank supports can be expected in perpetuity. Regulators buy themselves time to assess true risk of payroll services, Fintech FOB, and the like. 2) Per recent history the first (Bank) victim may get a pass but not the second victim. Bear Stearns was saved, Lehman wasn't. A complacent bank bets that the moral hazard criers won't have the upper hand at the particular+unknown timeframe their bank needs a handout.

Re: Banking in uncertain times

#62

Post by brvsft »

snarf21 wrote: post #57
spir wrote: post #47

Stablecoins are conspicuous in their absence in patio11's post. Personally, I believe that patio11's loathing of crypto has made him incurious about its potential. But that's not the point here. The point is that stablecoins are about to become a Very Good Deal for ordinary people: In the near future, stablecoins like USDC will become immune to bank runs because the US Dollar reserves backing them will be held in veh…

Except that 99.9% of people will buy "stable" coins on Coinbase. Not your keys, not your crypto. If Coinbase gets leveraged or goes the way of SFB, you have literally the same non-immunity as a bank run except you also don't get FDIC backstops.

SFB? You mean SVB? SBF?

Re: Banking in uncertain times

#63

Post by Camus134 »

floathub wrote: post #55

The claim that, "when interest rates rise, all asset prices must fall" seems, uhm, somewhat off. If this were true, it would be trivial to stop and reverse inflation (i.e. deflate) with any increase in interest rates (?). While it's certainly useful to think about prices as signals that, "embed an interest rate derivative", it seems a stretch to claim every single one of those derivatives is perfectly negatively corr…

"If this were true, it would be trivial to stop and reverse inflation (i.e. deflate) with any increase in interest rates"

Well, that is the strategy of the Fed. Raise interest rates when we experience too much inflation.

Re: Banking in uncertain times

#64

Post by airstrike »

patio11 wrote: post #30
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…

Per Merriam-Webster, which for the benefit of international HNers I will mention is a well-known English dictionary: “the quality or fact of meriting reward or punishment”

This seems like a good opportunity to plug the American Heritage Dictionary, which in my experience is at least a couple notches better than Merriam-Webster despite their website being stuck in 1999 (maybe that's a good thing?)

https://ahdictionary.com/word/search.html?q=desert

de·sert (dĭ-zûrt)

n.

1. (often "deserts") Something that is deserved or merited, especially a punishment: They got their just deserts when the scheme was finally uncovered.

2. The state or fact of deserving reward or punishment.

Re: Banking in uncertain times

#65

Post by spir »

snarf21 wrote: post #57
spir wrote: post #47

Stablecoins are conspicuous in their absence in patio11's post. Personally, I believe that patio11's loathing of crypto has made him incurious about its potential. But that's not the point here. The point is that stablecoins are about to become a Very Good Deal for ordinary people: In the near future, stablecoins like USDC will become immune to bank runs because the US Dollar reserves backing them will be held in veh…

Except that 99.9% of people will buy "stable" coins on Coinbase. Not your keys, not your crypto. If Coinbase gets leveraged or goes the way of SFB, you have literally the same non-immunity as a bank run except you also don't get FDIC backstops.

You're right, stablecoins held custodially in an entity could be subject to similar contagion.

Yet, non-custodial holding is becoming much easier and safer.

Crucially, wallets are improving a lot, and a spectrum of custodial options is developing, with rich tradeoffs in eg. safety and self-sovereignty.

For example https://www.coinbase.com/blog/how-smart-cryptography-makes-c...

Re: Banking in uncertain times

#66

Post by [deleted] »

spir wrote: post #58
mtoner23 wrote: post #53

Earlier quoted context omitted.

USDC may have instant 24/7 access to global markets. But why did the price of USDC drop to 90 cents this weekend. It isn't immune bank runs.

You're right, last weekend, USDC dropped to a low of ~$0.88. However note - SVB was closed on a Friday (as is the FDIC's custom). This meant that USDC could not process redemptions over the weekend as banks were closed, and this created fear in the market. - USDC had 8% of their reserves trapped in SVB. The fair market value of USDC would have been $0.92 if all SVB deposits were lost, which was never likely. - crucia…

[deleted]

Re: Banking in uncertain times

#67

Post by ru552 »

brvsft wrote: post #59

> We recently went through that cycle faster than we thought possible with regards to a bank which responsible people considered very safe. According to the official record, one of the institutions went from being financially healthy one day to insolvent the next. I believe that narrative to be face-saving, but it is what The System currently is messaging as the truth, so let’s accept it for now. If this is the truth…

Not even the Big 4 of banks could handle 20% of their deposits leaving in a matter of hours. No bank can survive a run.

Now, in the case of the Big 4 being run on, they are too big to fail so the Fed would just extend them unlimited funds (probably).

Re: Banking in uncertain times

#68

Post by mjdesa »

floathub wrote: post #55

The claim that, "when interest rates rise, all asset prices must fall" seems, uhm, somewhat off. If this were true, it would be trivial to stop and reverse inflation (i.e. deflate) with any increase in interest rates (?). While it's certainly useful to think about prices as signals that, "embed an interest rate derivative", it seems a stretch to claim every single one of those derivatives is perfectly negatively corr…

> The claim that, "when interest rates rise, all asset prices must fall" seems, uhm, somewhat off.

It’s a necessary condition of the discounted cash flow asset pricing model.

https://en.wikipedia.org/wiki/Discounted_cash_flow?wprov=sft...

Re: Banking in uncertain times

#69

Post by airstrike »

ragnot wrote: post #41
alecco wrote: post #31

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…

The answer to the inflation question traditionally has been to short the US dollar via investing in real estate with loans.

it feels a bit too late to do that, though

Re: Banking in uncertain times

#70

Post by O__________O »

airstrike wrote: post #60
O__________O wrote: post #37

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 th…

these are unrealized losses so not necessarily significant if just held to maturity or sold when prices are less punishing they can be an issue if, say, all your depositors decide to make huge withdrawals and the bank's immediate cash needs balloon, or if they have specific payments they need to make in the near term which would force those "available for sale" securities to be actually sold none of this is an inevit…

Possible I am missing something, but your response appears to assume the securities will recover their loses prior to being sold and/or that these unrealized losses do become actual losses, should banks need to sell securities to meet liquidity needs.

Without additional context, seems like wishful thinking to believe such losses will ever be recovered. In fact, while I might be wrong, those unrealized losses assume current market conditions; meaning they do not represent the actual total assets at potentially at risk; might be wrong about this.

Am I missing something?

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