Banking in uncertain times • Hacker News Board

Re: Banking in uncertain times

#91

Post by hn_throwaway_99 » Wed, Mar 15, 2023, 2:27 PM UTC

O__________O wrote: post #70

airstrike wrote: post #60

Earlier quoted context omitted.

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 c…

> Am I missing something?

Yes. As bonds get closer to their maturity date, the discount one would have to sell them at to garner a higher prevailing interest rate goes away. That is, the nominal loss "naturally" goes away over time. The article kind of explains this.

Re: Banking in uncertain times

#92

Post by vishnugupta » Wed, Mar 15, 2023, 2:27 PM UTC

bubbleRefuge wrote: post #85

There is allot of financial illiteracy regarding the banking system. For example, heard an NPR reporter this morning talking about a bank not having money to loan because of depositors fleeing. These are vestiges of the Gold standard. There is no loanable funds market. That is, the funding for loans does not come from deposits. It comes from thin air. Banks create loans which then become deposits. So called "Bank Mon…

+1.

To add, the vast amount of money that's circulating is created by banks. As I keep harping, refer to this article by BoE for details.

https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/m...

Re: Banking in uncertain times

#93

Post by 1980phipsi » Wed, Mar 15, 2023, 2:28 PM UTC

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 mechanism is mentioned by another, but the idea is that higher interest rates reduce the present value of future cash flows, resulting in lower asset prices. However, this analysis is holding everything equal, which is not true in real life. For instance, if higher interest rates are due to higher inflation expectations reflecting stronger nominal growth, then some assets might do better in such an environment.

Your second argument is that it would be trivial to stop and reverse inflation if it were true, but even if it were true it would not be so easy. The way we measure inflation is based on the prices paid for goods and services of consumer goods. If the only change from an interest rate hike were on asset prices, then this doesn't directly impact prices of consumer goods.

Re: Banking in uncertain times

#94

Post by Laremere » Wed, Mar 15, 2023, 2:29 PM UTC

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…

Bank runs killing healthy banks hadn't happened in nearly living memory, but it used to be a thing. Before 1933, if you heard your bank was unhealthy, you'd run to the bank to take out all your money before it vanished. So even a bank with a positive net assets and large liquidity could fail. All it took was a rumor causing a bank run that exceeded the liquidity.

This is why the FDIC was formed: to stop rumors causing bank runs. Since the average person knows their deposits are insured, your money isn't going anywhere, so theirs no need to do a bank run.

What failed here is that a group of uninsured depositors did an old fashion bank run. That's why the FDIC announced early that everything was covered: to very clearly telegraph that the bank run was unnecessary, and you shouldn't be doing them.

Re: Banking in uncertain times

#95

Post by dkjaudyeqooe » Wed, Mar 15, 2023, 2:29 PM UTC

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…

It's basically true. A simple example is housing. People will generally borrow as much as they're allowed and spend all of that on the best house they can afford. That tends to raise property prices as the borrowed money chases housing stock. That's been very evident these last years.

The opposite occurs when interest rates go up, people can no longer borrow enough to pay asking prices, demand falls and prices fall to meet demand.

There are obviously other factors involved but the basic relationship holds.

Re: Banking in uncertain times

#96

Post by delfinom » Wed, Mar 15, 2023, 2:29 PM UTC

O__________O wrote: post #70

airstrike wrote: post #60

Earlier quoted context omitted.

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 c…

They are unrealized losses if the assets are sold at market. They are not losses if the assets are held to maturity.

Re: Banking in uncertain times

#97

Post by anononaut » Wed, Mar 15, 2023, 2:29 PM UTC

bubbleRefuge wrote: post #85

There is allot of financial illiteracy regarding the banking system. For example, heard an NPR reporter this morning talking about a bank not having money to loan because of depositors fleeing. These are vestiges of the Gold standard. There is no loanable funds market. That is, the funding for loans does not come from deposits. It comes from thin air. Banks create loans which then become deposits. So called "Bank Mon…

I'll add that approximately 97% of US dollars are created in this way.

https://positivemoney.org/how-money-%20works/how-banks-%20cr...

Re: Banking in uncertain times

#98

Post by zhte415 » Wed, Mar 15, 2023, 2:30 PM UTC

The article does something it shouldn't do: Conflate short term interest rates with holding 10 year treasuries. At least compare like for like. The yield curve has moved up, but not by the 4% in the article, and 'up' compared to.. quantitative easing time.

From https://home.treasury.gov/resource-center/data-chart-center/...

2023-03-14: 10Y: 3.64

2021-03-12: 10Y: 1.64

2019-03-14: 10Y: 2.63

2017-03-14: 10Y: 2.60

2015-03-13: 10Y: 2.13

2013-03-14: 10Y: 2.04

2011-03-14: 10Y: 3.36

2009-03-14: 10Y: 2.89

2007-03-14: 10Y: 4.53

2005-03-14: 10Y: 4.52

2003-03-14: 10Y: 3.72

2001-03-14: 10Y: 4.84

> We went multiple years without a bank failure, of any size, in the United States.

Because short term funding has been next to free.

> The losses banks have taken on their assets are real.

They're not real. That's entirely the point. They're financial assets that are locked in to fixed rate returns. If the assets were real, they'd be variable rate. Like the chicken feed that the author points out is an input to the cost of an egg. The variable chicken feed costs feed into the variable price of an egg.

When chicken feed costs increase but you're stuck selling the eggs at a fixed price, you have a problem. Risk doesn't disappear, at best it gets mitigated or bought for the value it provides. When mortgages have fixed interest rates, the interest rate risk needs to go somewhere.

Re: Banking in uncertain times

#99

Post by kortilla » Wed, Mar 15, 2023, 2:31 PM UTC

O__________O wrote: post #70

airstrike wrote: post #60

Earlier quoted context omitted.

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 c…

They are bonds. Unless they default they will eventually reach maturity and pay out the original gain.

The problem is that might be a 20% gain 10 years from now, so nobody will be willing to buy that bond off of you for the price you paid since they can 40% on new 10 year bonds.

The only time a bond price decline is concerning is if you have to sell it rather than holding to maturity.

Re: Banking in uncertain times

#100

Post by O__________O » Wed, Mar 15, 2023, 2:31 PM UTC

bubbleRefuge wrote: post #85

There is allot of financial illiteracy regarding the banking system. For example, heard an NPR reporter this morning talking about a bank not having money to loan because of depositors fleeing. These are vestiges of the Gold standard. There is no loanable funds market. That is, the funding for loans does not come from deposits. It comes from thin air. Banks create loans which then become deposits. So called "Bank Mon…

Stating obvious, this is only true until debts exceed a leverage US government has to inject currency it magically creates or utilize other financial tools it has available. At the point they are unable to do so, that’s no longer the case, system reaches a critical point for which recovery will take real assets at fair market value on the global market.

Ironically, US’s down fall may be its own failure to believe itself.