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Banking in uncertain times

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Re: Banking in uncertain times

#121

Post by echion »

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.

> > > > I am very frustrated by political arguments about desert

> > > What does "desert" mean here

> A deserving [...] merit

Thanks. As a native speaker aware of "desert"'s multiple meanings and "just deserts", I think "merit", "deservedness", "appropriateness" would have been much clearer choices here. Perhaps the jarring note alone (of "desert" in this context) should have clued me in that an unusual usage was in play. Thanks again for the clarification.

Re: Banking in uncertain times

#122

Post by HWR_14 »

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,…

As I understand it, banks have some assets that are marked-to-market, and others that are assumed to be held to maturity. Their classification is determined when they are purchased, but there are rules governing the mix.

To some degree this makes sense, because if the maturity timelines and classification are correct the bank is only losing opportunity cost and inflation-adjusted dollars. Not actual dollars.

Meanwhile, if they need money from the fed it is offered against collateral based on mark-to-market value.

Re: Banking in uncertain times

#123

Post by tnel77 »

echion wrote: post #116
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.

Maybe both metrics would be useful. “If we had to sell today, this is our situation. If these bonds are held to maturity, this will be our situation.”

Seems like that would allow an investor to see the state of the bank more clearly.

Re: Banking in uncertain times

#124

Post by UncleMeat »

echion wrote: post #116
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.

But the entire point of computing current assets is to understand the effects of rapid withdrawals from the bank. If you are trying to predict the future value of the bank or how much money they will make then looking at the value at maturity makes sense. But the regulatory system doesn't (or shouldn't) care about that. The regulatory system should be concerned with estimating and mitigating the risk of sudden bank failure.

Re: Banking in uncertain times

#125

Post by hn_throwaway_99 »

echion wrote: post #116
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.

> The "I intend to hold it" is the relevant part of the valuation, though.

Yup, and definitely anticipate there will be major new regulations in this area. A huge part of SVB's book of bonds were categorized as "Hold to Maturity". And, legally, if you mark bonds as HTM, you are not allowed to hedge against their interest rate risk. Basically, the regulations say that if you're hedging against interest rate risk, you don't really intend to hold to maturity, so you need to put them in the "Available for Sale" category.

The fact that SVB had such a huge book of bonds at paltry rates with no/minimal hedging is just awful risk management.

Re: Banking in uncertain times

#126

Post by HWR_14 »

2143 wrote: post #112
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?

In US the fed determines how much money is printed. The EU, UK, Japan, Switzerland, and China have similar central banks. Most countries do, but those are some major players (I left some out). Basically, if you print the right amount of money, it works. So they get smart Econ experts to guess how much money to print. And as long as they get close enough it doesn't cause hyperinflation.

Re: Banking in uncertain times

#127

Post by stanleydrew »

UncleMeat wrote: post #124
echion wrote: post #116

Earlier quoted context omitted.

> 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.

But the entire point of computing current assets is to understand the effects of rapid withdrawals from the bank. If you are trying to predict the future value of the bank or how much money they will make then looking at the value at maturity makes sense. But the regulatory system doesn't (or shouldn't) care about that. The regulatory system should be concerned with estimating and mitigating the risk of sudden bank f…

I believe this is what various "stress tests" are for. If your bank is a certain size you have to basically do scenario planning for situations like ”what if 25% of your deposits leave overnight and you have to sell securities that you didn't plan to sell?” As I understand the situation, SVB was just under the required size to submit to those stress tests.

Re: Banking in uncertain times

#128

Post by pearjuice »

2143 wrote: post #112
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?

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

See https://en.wikipedia.org/wiki/List_of_countries_by_military_...

Not trying to be a low-effort reply but any Economy 101 textbook will theorize that it's impossible. Practically, the world is too dependent on the USD in one way or another. If they try to break loose, they might get confronted with those military expenditures which is a good enough incentive to keep using USD as a global reserve currency.

Re: Banking in uncertain times

#129

Post by nostrebored »

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…

> But… they aren’t real yet?

Barring something extremely abnormal happening, aren't low-yield bonds seeing real losses already due to inflation?

Like it doesn't have to be the spot price we're talking about, aren't many of them toxic already and others expected to track there?

Re: Banking in uncertain times

#130

Post by A4ET8a8uTh0 »

zie wrote: post #106
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 o…

I will admit that I did not think about it in those terms, but that is why I like to come here ; you are exposed to different perspectives.

Do you think this is a way for FED to raise the rates further despite the interest risk you mentioned since failure of SVB put next interest hike into question[1]?

edited for clarity

[1]https://www.marketwatch.com/story/bank-fallout-undermines-fe...

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