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Banking in uncertain times

bitsaboutmoney.com

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Re: Banking in uncertain times

#141

Post by daydream »

echion wrote: post #111
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 w…

Yes, if the bonds must be sold to cover withdrawals then the losses become realized (real) at that point. But not before.

Re: Banking in uncertain times

#142

Post by bombcar »

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,…

It seems to me (being uneducated in the matter) that if a bank is holding US government debt (treasuries) as "hold to maturity" that the US Government should have some ability to offer a line of credit against those assets for cases like this one was.

Or that the bank should be able to say "depositor X transferred $100 million to Chase, so we sent Chase a wire for $10 million and treasuries marked HTM worth $90 million" or something.

Re: Banking in uncertain times

#143

Post by alxmng »

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?

Because:

1) taxation destroys money.

2) new money can be absorbed by economic growth. Imagine you have $100 in an economy and 100 apples. $100 is added, so there’s $200/100 apples. Inflation might occur. But if you make 100 more apples, so there’s $200/200 apples, the ratio of money to goods didn’t change, and you wouldn’t get inflation. That’s an extremely contrived example, but it gets the point across.

Considering both of those factors, I hope it’s understandable that printing money doesn’t necessarily cause inflation.

Re: Banking in uncertain times

#144

Post by rabf »

pjc50 wrote: post #50
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…

This is essentially fanfiction, as stablecoins so far have been very opaque about what they do with their reserves. Especially Tether. (largely because the mechanics of holding $60bn in treasuries would attract some questions about KYC which stablecoins are unable to answer)

Circle and Tether can freeze their stablecoins for AML/KYC and to stop criminal exploits on chain, and have done this many times in the past. Also to change to regular fiat you will be doing that via a regulated entity which will have done the appropriate AML/KYC checks on you.

Re: Banking in uncertain times

#145

Post by shapefrog »

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.

Except the treasury desk is paying 5% to the person who gave you the $100m to buy the bond that is paying you and interest rate of 1%.

Re: Banking in uncertain times

#146

Post by bombcar »

nostrebored wrote: post #129
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?

This is true, but there can be a lot of slight of hand when talking about dollars and future dollars.

Banks run on nominal dollars, and SVB would have remained capitalized if withdrawals hadn't overwhelmed their ability to get ready cash, which caused them to sell at a loss, which spooked everyone, causing a run.

Re: Banking in uncertain times

#147

Post by bombcar »

Kye wrote: post #88
antibasilisk wrote: post #51

Earlier quoted context omitted.

I (native) also did not realize this.

Native English speaker here too. TWL (Today We Learned) I always assumed it was one one of those odd manglings that gained traction, like irregardless.

Apparently it's spelled "deserts" and pronounced "desserts"

https://www.merriam-webster.com/words-at-play/just-deserts-o...

Re: Banking in uncertain times

#148

Post by skwirl »

pearjuice wrote: post #109
skwirl wrote: post #35

Earlier quoted context omitted.

>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…

I think there's a real misunderstanding here with the distinction between banks, depositors, and what protections apply to each. The scenario (betting on red) is illegal, but assuming it was not, it doesn't matter to the bank whether or not its depositors have their deposits protected.

I can kind of assume what your misunderstanding is, but it's not completely clear. I think you are assuming that if the deposits are protected, the bank gets to keep the deposits and continue running. This isn't how it works, though. As soon as the bank becomes insolvent (loses its bet on red), the bank is shut down and its shareholders are wiped out. The FDIC sets up a new, government run bank to hold and guarantee the deposits, and then tries to find another bank to sell the failed bank's deposits and loans. Right now there is no Silicon Valley Bank. If you had deposits there, they are now held by Silicon Valley Bridge Bank, N.A, which is a new bank operated by the FDIC.

Re: Banking in uncertain times

#149

Post by shapefrog »

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,…

You just know that all the losing trades went from the hold-to-sell-for-a-profit book to the hold-to-maturity book.

In the olde days that was the bottom drawer where you would stuff the losing tickets at the end of the day and hope that they were in the money tomorrow.

Re: Banking in uncertain times

#150

Post by codeflo »

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.

It’s really not, at least not mathematically. That intentions play a role is purely an artifact of regulations.

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