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Banking in uncertain times

bitsaboutmoney.com

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Re: Banking in uncertain times

#111

Post by echion »

daydream wrote: post #107

> 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 obse…

> > 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? [...] So I don’t understand this point.

If people withdraw their deposits, the bank will have to deliver the money somehow...by selling the assets that have lost money. So the point is that although, if nobody withdraws, the losses are survivable, if enough people withdraw, the losses are not survivable. As soon as depositors realise this situation, they will withdraw their money. So that's the problem.

Re: Banking in uncertain times

#112

Post by 2143 »

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 just don't get this about the system in the US.

If you keep creating money out of thin air — which as per my admittedly naive understanding is equivalent to just printing money without giving back anything in return — wouldn't it ultimately lead to a collapse or a hyper inflation? Like it did in Venezuela a few years ago (???).

Why is the US seemingly immune to this kind of thing?

Re: Banking in uncertain times

#113

Post by zhte415 »

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…

> There is allot of financial illiteracy regarding the banking system.

And nor does the balance sheet become inexplicably unbalanced. It issues bills, a liability, which will cancel out as an asset unless it sells them, or takes a value from it's balance sheet capital, or gets interbank funding (which still balances, because that's another bank's asset).

You're not wrong a bank can fund it's lending, indeed there's that often cited BoE paper all about it, but that funding doesn't come from thin air.

Re: Banking in uncertain times

#114

Post by KaiserPro »

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…

> Stablecoins are conspicuous in their absence in patio11's post.

Stablecoins are just fractional reserve banking but with a thin veneer of tech, and a massive narrative to differentiate them from standard fiat currency.

You're far better off just buying commodities directly, at least where your value is located is much more transparent.

Stablecoins are basically "trust me bro its worth this much, and will never drop, just don't trade too much and make me defend the peg."

Re: Banking in uncertain times

#115

Post by ajb »

On the recommendation of maintaining accounts with multiple banks, readers at least in the UK should be aware that for the purpose of compensation, the important part is not the brand name, but whether the banks are part of the same group. This isn't so obvious so you need to check the FCSS website if they do.

Re: Banking in uncertain times

#116

Post by echion »

lordnacho wrote: post #104

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,…

> why is it that we allow a bank to not mark-to-market a security for which there is a liquid market?

Because at maturity, the bank gets back its money. So it is perfectly valid to say "in ten years, this $100m bond is worth $100m...and I intend to hold it for ten years, so it's worth $100m [equivalent] today". The "I intend to hold it" is the relevant part of the valuation, though.

Re: Banking in uncertain times

#117

Post by zhte415 »

vishnugupta wrote: post #108
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/

Indeed.

Re: Banking in uncertain times

#118

Post by Kye »

ru552 wrote: post #67
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).

They would with a 20% reserve requirement. Since that's probably not viable, maybe some changes to the interbank loan system to make emergency loans for this purpose a thing. The FDIC already has wide authority once they're called in, but a system like this could have prevented the need for it. Bigger banks could provide the money to prevent failure of an otherwise solid bank rather than be expected to help clean up the mess later.

Re: Banking in uncertain times

#119

Post by bjacokes »

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…

In 2008 the Fed was decreasing interest rates, which helped support asset prices. Banks held a lot of bad loans which were worth much less than their balance sheets showed. Both of these factors could have caused the unrealized losses in 2008 to look somewhat small, but the high leverage at banks caused forced asset sales, and the uncertainty around credit losses led to asset prices tanking.

In 2023 the situation isn't necessarily worse, but it is certainly different. Asset prices seem relatively well-understood, in that their declines are a straightforward function of interest rates as opposed to an uncertain function of credit losses. Bank leverage is less than in 2008 as a result of regulation.

If the situation in 2008 was "some banks are _super_ insolvent, and it's hard to tell which ones", in 2023 it seems to be "some banks are mildly insolvent, and it's fairly clear which ones". A mildly insolvent bank can probably stay afloat as long as it continues to have access to capital, which the Fed is giving them. But if people start withdrawing their deposits from one of the mildly insolvent banks, it will become increasingly difficult for that bank to dig out of even a small solvency hole, so there's still some uncertainty as to whether the Fed lifeline is enough to save them.

Re: Banking in uncertain times

#120

Post by em500 »

phphphphp wrote: post #43
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…

Pretty much nobody has enough cash held in a bank account for this to be a concern. People were worried about SVB because it was so overrepresented with accounts of more than the insured limit because it was used by cash-rich technology companies. A normal person, even if they’re rich, probably has most of their net worth in assets (real estate, investments) and is not holding cash. Just don’t exceed the insured amou…

Banks are slow moving institutions. I think most have not yet come to grips with the idea of a bunch of 20-somethings getting handed millions of $ for a nice plan but with $0 revenue. OTOH, SVB was supposed to be specialized in such cases.
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