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Banking in uncertain times

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Re: Banking in uncertain times

#191

Post by s1artibartfast »

bombcar wrote: post #142
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 milli…

>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.

Why? HTM bonds are not cash so they are not interchangeable. This is like if you were forced to accept a 10 year IOU in place of cash from your employer.

Re: Banking in uncertain times

#192

Post by whatever1 »

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,…

So in a downturn all of the banks would just seem insolvent.

What is the alternative ? To have the banks trading on a millisecond basis so that the mark to market value of assets is positive ? What about the transaction fees ?

Re: Banking in uncertain times

#193

Post by bjacokes »

s1artibartfast wrote: post #170
kmod wrote: post #165

Earlier quoted context omitted.

Welcome to a non-zero interest rate environment. "$100m equivalent today" is not $100m -- the term to search for is "net present value". These considerations are precisely what marking to market captures

If those assets are in your hold to maturity portfolio, they are still worth $100m. This return is guaranteed unless the Federal Bank defaults on those treasuries.

You're saying that if a bank paid $100m for low-yielding bonds in 2021 which are now worth $80m, those bonds should be valued at $100m on the bank's balance sheet. What if a different bank pays $80m today for the same bonds? Should they be able to show an immediate $20m increase in their book value because those bonds are "worth $100m"?

Re: Banking in uncertain times

#194

Post by Acumen321 »

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…

This is a very popular but false 'take the gist of it as true' misunderstanding.

Yes, banks do "create" money. No, it is not out of thin air. It absolutely does come from deposits.

An example of how banks "create" money, is person A has $100. A deposits it. The bank lends that $100 to B. Now B has $100, but A also still thinks they have $100, even though they just have a number on a piece of paper.

They system goes from acting as if $100 exists, to acting as if $200 exists, but really there is only $100, and an IOU for $100.

That is what bank money "creation" is. It is not from thin air.

People get confused because "money", as in fiat currency, is also a Government IOU. But the above principle is true for gold, bitcoin, or any asset, and they wouldn't get mixed up the same way thinking banks create gold out of thin air.

It is a starkly different thing than how the Government creates money.

Re: Banking in uncertain times

#195

Post by pearjuice »

notahacker wrote: post #166
pearjuice wrote: post #128

Earlier quoted context omitted.

>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…

No, really, this argument is even worse ignorance than the gold standard stuff, because it isn't true even as an oversimplification or historical detail. The difference between Venezuela and any relatively stable country (the US is one of many, some of which have tiny armies and pacifist foreign policies) isn't military spending or reserve currency status, it's that the money in the country with the stable currency i…

>which the borrower and bank has to be repay in future

And when do you expect this debt to be repaid back? If you cycle all the way back, at some point the money is created out of thin air backed by nothing but believe that the US will not default. It's not ignorance but reality that as long as you are the strongest arm in the room nobody is going to challenge you into paying back your debts. Yes, on paper it's all economically sound and "basic accounting" but the reality of the situation is that if America would not be able to defend its position as "stable country", nobody would accept their debt denoted in the currency they create themselves.

Re: Banking in uncertain times

#196

Post by patio11 »

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…

The document I am alluding to is here. It says what it says.

https://dfpi.ca.gov/wp-content/uploads/sites/337/2023/03/DFP...

Re: Banking in uncertain times

#197

Post by pg314 »

s1artibartfast wrote: post #170
kmod wrote: post #165

Earlier quoted context omitted.

Welcome to a non-zero interest rate environment. "$100m equivalent today" is not $100m -- the term to search for is "net present value". These considerations are precisely what marking to market captures

If those assets are in your hold to maturity portfolio, they are still worth $100m. This return is guaranteed unless the Federal Bank defaults on those treasuries.

> If those assets are in your hold to maturity portfolio, they are still worth $100m.

They are still worth $100m at maturity. $100m in ten years is (usually) worth less than $100m now. Do you really want to pretend that a ten year bond you purchased when inflation and the interest rate were near zero, is worth the same when inflation and the interest rate go up to say 10%? What about inflation of 100%? In nominal terms you’ll get back your capital, but in real terms you will get back only one thousandth.

To correctly value them now you need to calculate the NPV.

Re: Banking in uncertain times

#198

Post by daydream »

hn_throwaway_99 wrote: post #125
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.

> 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…

> 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.

This seems like an important point that I haven’t seen mentioned elsewhere. Lots of folks have been like “these people are morons they didn’t hedge their crappy bonds.” Can you write more about this?

Re: Banking in uncertain times

#199

Post by notShabu »

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…

It's the only way to keep society working. Most of the money that exists today (over 90%) is actually bank IOUs kept in their database and is what people see when they log on into their accounts.

Without a fractional reserve system, the liquidity that drives all economic activity grinds to a halt as everyone fights over the few remaining real dollars rather than managing their deployed capital.

Banks basically act to multiply the amount of money in the world today by creating promises about the future that act as a bridge that moves money from the future into the present. That money then flows into restaurants, dog walkers, software engineers, etc... Inflation is kept in check b/c the promises force the money to be paid back to the bank via monthly loan repayments.

Banks that only hold short term reserves or cash equivalents like Brex don't act as this multiplier. Going forward it's likely small banks will move towards this model as only the big banks that are too big to fail (b/c they are necessary as multipliers) can afford to take on the risk of longer term investments or creating loans.

Re: Banking in uncertain times

#200

Post by bubbleRefuge »

Acumen321 wrote: post #194
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…

This is a very popular but false 'take the gist of it as true' misunderstanding. Yes, banks do "create" money. No, it is not out of thin air. It absolutely does come from deposits. An example of how banks "create" money, is person A has $100. A deposits it. The bank lends that $100 to B. Now B has $100, but A also still thinks they have $100, even though they just have a number on a piece of paper. They system goes f…

There is not a dependency on deposits in order create loans. This is false. Banks can make loans to the extend of demand for loans at the banks terms. Deposits have nothing to do with it in terms of funding. The bank must be in compliance with capital requirements and reserve requirement in order to be in the federal reserve system . As Mosler says (founder of MMT) The loan guy does not call the deposit guy at the bank before making a loan.
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