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Banking in uncertain times

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Re: Banking in uncertain times

#101

Post by mikeyouse »

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…

The point with bonds is that they'll "recover their losses" if you hold them to maturity.

Think about three time frames:

Year 0: I buy a new-issue $100 bond paying 1.5% interest for $100. I will receive $1.50 every year for 5 years and then get $100 back.

Year 3: Interest rates have increased pretty dramatically, so 2-year bonds are now paying 3% interest. So for someone 'shopping' for a bond that matures in 2 more years, they can buy a new-issue one paying 3% or they could buy my 5-year with 2-years remaining that is only paying 1.5%. Obviously they would buy the new-issue unless I offer a substantial price discount. So if I "mark to market" my bond, I would have to sell it for something like $85 to be equivalent to the new-issue debt. My bond is still paying 1.5% and will still pay $100 when it matures, but it's much less valuable since the interest stream is smaller. I don't sell my bond because I don't want to take the loss.

Year 5: My bond matures and I receive $100 along with the final interest payment.

We're talking about step 2 above -- the losses are only realized if you sell the instrument, so you don't need to "recover" any losses, the underlying debt is still as likely to pay out as they were before, it's just a debt maturity question.

Re: Banking in uncertain times

#102

Post by Kye »

airstrike wrote: post #64
patio11 wrote: post #30

Earlier quoted context omitted.

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 th…

I think it's interesting that their treatment of singular they is more thorough than Merriam-Webster's, manages to address people on the dissenting side with some empathy, and still recognizes that its widespread usage[0] means it would be silly to not include that usage.

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

[0] To the point that even people complaining about it use singular they in their complaints without realizing it.

Re: Banking in uncertain times

#103

Post by airstrike »

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…

Let's simplify and think about it like owning a stock. Maybe you bought it at $100 and it's now worth $80. If you were forced to sell it today, you would have a $20 loss. But you can wait for it to trade up.

Bonds have the added benefit of a guaranteed principal at maturity. So if you buy a bond with $100 face value, it will pay that to you at maturity plus some coupon (say, 4%) between now and then. For the sake of simplicity, let's assume the bond was issued at par (meaning not at a discount or premium), so you paid $100 for that $100 face value

As time goes by and interests rate fluctuate, the price of that bond in the open market will also vary. When interest rates go up, prices go down and yields go up, because investors demand a greater return (higher yield) and since the "4%" is hardcoded into the bond, the only way to give additional yield is by trading your otherwise $100 bond for, say, $98.

Re: Banking in uncertain times

#104

Post by lordnacho »

As a former trading desk guy I struggle to see how the system allows things to be marked-to-cost. Or rather, why is it that we allow a bank to not mark-to-market a security for which there is a liquid market?

Allowing the bank to pretend it has more assets than it actually has seems to be an invitation to hide risk. If they had to MTM their underwater bonds, they would would have been pushed to raise capital earlier, or they would have cut their losses earlier.

It should be straight up "I have these deposit liabilities, I have this book of assets, oops, my assets are down a bit, lets do something about it". Instead of "I'm gonna run the gauntlet and hope the business survives until these bonds come in".

Re: Banking in uncertain times

#105

Post by mikeyouse »

dsr_ wrote: post #42
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…

If you are storing more than $250K (the standard insurance limit), then you need to distribute your deposits. It is as simple as opening accounts in N/250000 banks, although if you are close to an integer or expect the cash to increase substantially, you might want more than that. So for individual people, this affects... maybe 5%. It certainly affects small companies, but those are entities that we, as a society, ex…

It's just not remotely practical to keep dozens of banks accounts with $250k in them for most companies. Many payrolls are larger than that, if you're renting a venue for an event, it'll be larger than that. Obviously well-staffed finance teams could shuffle funds endlessly, but there's just no economic value to creating treasury jobs for the sake of it. We'd be much better off just upping the FDIC limit to something like $5M and mandating better quality assets for the insured portion of bank deposits.

Re: Banking in uncertain times

#106

Post by zie »

A4ET8a8uTh0 wrote: post #2

"This is a temporary program; banks can only tap this liquidity for about a year. In the ordinary course, bank runs don’t last for a year; they either cause an institution to fail very quickly or peter out. But the other reason this is time-bounded is to defang the moral hazard, on behalf of both banks and their customers. (Moral hazard in insurance is when the existence of insurance makes it incentive-compatible for…

That was the Fed and treasuries way of telling all the owners of banks across the US, take the beating or else.

If the banks listen and take the beating, invest more equity and re-adjust their banking practices to handle interest rate risk, nothing exciting happens.

If the banks don't heed the klaxon call, they will likely get wiped to zero and cease to be owners of banks anymore(because the FDIC will take the bank over and say enough). Depositors/customers of the banks will probably be just fine though. The FDIC will either find a new set of owners or dissolve it and move customers to new banks that did take the beating.

I imagine some idiots will try and call the bluff, get wiped to zero and hopefully learn something in the process, if only to not be a bank owner anymore.

Re: Banking in uncertain times

#107

Post by daydream »

> The losses banks have taken on their assets are real. They already happened. They are survivable if banks remain liquid.

But… they aren’t real yet? They haven’t been realized. If held to maturity they will be paid back in full.

Which I know the author is fully aware of. So I don’t understand this point.

> I would suggest one has at least one backup financial institution. If one hypothetically does not, I would observe that opening bank accounts rounds to free. Thousands of perfectly good financial institutions exist.

Some people have investment accounts with brokerages like Fidelity or Schwab. Many brokerages (including the two mentioned) offer cash management accounts. They offer deposit insurance similar to FDIC and will give you tools similar to checking accounts. Debit cards, checks, bill pay, etc.

They can be excellent backup accounts that don’t add the additional overhead (however small) of yet another company to deal with.

Re: Banking in uncertain times

#108

Post by vishnugupta »

zhte415 wrote: post #98

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 2015-0…

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

This is objectively false, unless by "multiple years" he means 2 years. The data is out in the public[1] so why not do some basic research before putting out claims like that? Basic mistakes like this makes me question rest of the article and the author's grip on the subject.

https://www.fdic.gov/bank/historical/bank/

Re: Banking in uncertain times

#109

Post by pearjuice »

skwirl wrote: post #35
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) w…

Given the bank's yield is some sort of formula with regards to how much and succesful they are in investing/loaning-out the capital of their depositors. Then how is it not a moral hazard, when the bank gets a signal that the FDIC will cover all this capital, regardless what the bank does with it? Even if the bank asset can go to 0, in the end the vehicle used to prop up this asset will come from the depositors. If I (depositor) give you (bank) 100$ and someone else (FDIC) tells you "do whatever you want with that money, if you lose it I'll give it back to the depositor" - you could basically go to the casino and put it all on red. Even if you would also lose your own 100$ in the process (you risked 200$), you would probably take on more risk simply because my capital isn't at risk but the returns will be yours.

Hyperbole yes, but the moral hazard seems to be with the bank (and the investors therein), not the depositors or their actions. Or I misunderstood you.

Re: Banking in uncertain times

#110

Post by KaiserPro »

konne88 wrote: post #82

He seems to say that the fractional reserve system is the only way society can work. But is that actually true? Quite a few banks (e.g. Brex) now allow you to keep your money in a money market fund, which invests in short term US treasuries that are protected by the full faith and credit of the US government. Importantly, in this setup, you own all the assets and the bank just acts as a custodian. And you tend to get…

A traditional bank used to take people's deposits and loan them to other for a fee. the fee would then be returned on aggregate to depositors less the cost of business and profit. this is so called fractional reserve banking.

But that doesn't really provide that much interest to depositors, in this age of loose money supply.

So there are more exotic functions that "investment" banks fiddle with. Ie trading on the stock market (regulated betting) buying companies, and trading on futures and other pure bets.

The problem is that banks are bigger, and have more depositors. So when one pops, other go because they are all doing the same shady shit to make profit.

In the UK there are still a few building societies that offer traditional, boring, consumer banking and mortgages. But they are now large national behemoths.

But to your point, Brex is a payment manager/facilitator. Its not really offering banking, its more a service to manage expenditure. This might seem like pedantry, but its different enough to make the point.

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