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Banking in uncertain times

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Re: Banking in uncertain times

#221

Post by lordfrito »

spir wrote: post #181
lordfrito wrote: post #75

Earlier quoted context omitted.

> stablecoins are about to become a Very Good Deal for ordinary people > the UX of stablecoins is becoming vastly superior to bank deposits because you'll be immune to bank runs, control your own money, and have instant access to global markets, including for low-risk yield on your stablecoins, such as in treasuries or over-collateralized lending I disagree, but OK > over the weekend, USDC did lose its $1 peg and tra…

For your objection to refute my thesis, you'd need to explain how a world with stablecoins that are immune to bank runs, where those stablecoins are held in next-gen wallets and can be swapped into any asset in the world 24/7 any time you want at the click of a button, is not a superior UX vs. today's bank deposits.

> you'd need to explain how a world with stablecoins that are immune to bank runs...

Wait... I need to explain this? I don't even believe in it.

I'm not really interested in arguing theoretical constructs. You yourself admitted that just last weekend a stablecoin dropped to 88 cents on the dollar (while my bank dollars were still worth one dollar each).

Before I prove anything, why don't you start by proving (heck just demonstrate) a long term stable stablecoin. Just saying it's stable doesn't make it so.

I have dollar deposit protections now. Love or hate the fed, at least you're dealing with a known quantity, and a boatload of laws that are actually (historically demonstrable) enforceable.

There are no regulations or protections in the crypto space, only a bunch of hollow promises.

Until the crypto community can actually demonstrate long term stability (and stable audited reserves) of any so called "stable" coin, I'm not interested in discussing financial theocraticals, let alone moving my dollars out of my FDIC insured bank accounts.

Re: Banking in uncertain times

#222

Post by Acumen321 »

cm_silva wrote: post #215
Acumen321 wrote: post #209

Earlier quoted context omitted.

The loan guy absolutely does need to make sure the bank has the cash to make the loan. You can't loan more money than you have. What happens when B goes to withdraw it from the bank to buy a car or house if it isn't there? If banks can loan more than they have by say borrowing the money at a lower rate than they lend it, that invalidates your basic premise of banks creating money. They wouldn't have created it, they…

Weird, and I thought fractional reserve banking was a thing. https://en.m.wikipedia.org/wiki/Fractional-reserve_banking

It is (was) a thing, the idea works exactly the same way. Person A deposits $100, bank lends $90 to B, $10 goes to reserve (if 10% reserve rate). System thinks there is $190 instead of $100, so money is "created".

As of 2020 in the US the reserve rate is 0%: https://www.federalreserve.gov/monetarypolicy/reservereq.htm

Re: Banking in uncertain times

#223

Post by s1artibartfast »

bombcar wrote: post #202
s1artibartfast wrote: post #191

Earlier quoted context omitted.

>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.

Regulations that required banks (directly or indirectly) to buy government bonds should also require the banks to accept interchange of them when needed. Banks exist at the whim of the gov't, it can require things for stability.

Sure, Governments can do anything they want. They can round people up and put them in gas Chambers. I'm just saying it's a bad idea and don't think the fact that the government can do it has any bearing on if it should do it.

With your proposition, I think it would be a terrible idea and reduce stability. I don't see how letting Banks unload bad assets on each other does anything to help the situation. The Bad Assets just follow the customer wherever they go and some unlucky Bank get stuck with them when the customer converts their cash to something like stocks or buys a cheeseburger.

At best, you have just turned bonds into the same thing as cash, defeating the purpose of bonds to begin with. You buy a bond and are paid interest because you can't use it as cash.

At worst it would be chaos. Everyone buys bonds and holds them when the value is good. When the value is bad, everyone forces each other to take over their bad Investments.

Re: Banking in uncertain times

#225

Post by marcosdumay »

Laremere wrote: post #94
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…

Bank runs killing healthy banks hadn't happened in nearly living memory, but it used to be a thing. Before 1933, if you heard your bank was unhealthy, you'd run to the bank to take out all your money before it vanished. So even a bank with a positive net assets and large liquidity could fail. All it took was a rumor causing a bank run that exceeded the liquidity. This is why the FDIC was formed: to stop rumors causin…

> What failed here is that a group of uninsured depositors did an old fashion bank run.

Oh, there was so much stuff that happened.

You had a bank where the wide majority of the deposits were uninsured. That's quite a major problem.

But then, it doubles down in that those deposits were largely correlated. They increased all together, and decreased all together.

The bank then made sure to double down on that correlation and favor lending to people whose income were highly correlated with their deposits.

Then, when they got a highly correlated amount of deposits, they decided that the risk of a highly correlated change on their funds was low, and optimized for long-term profits instead of safety. (Why? I still don't fully understand this. I was expecting to see one of those "tails we win, heads you lose" games banks like to play, but from what people say, looks like bare incompetence was a very important factor here.)

Then they use corruption... ops, sorry, lobbying to make sure the government doesn't stop them from betting against their deposits and debit repayment being correlated.

And finally, they got all so surprised by a highly correlation stop on deposits (and probably repayments) when withdraws kept going.

That one bank failure was quite a feat, and it's completely unfair to blame it on a bank run.

Re: Banking in uncertain times

#226

Post by flakeoil »

bjacokes wrote: post #193
s1artibartfast wrote: post #170

Earlier quoted context omitted.

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"?

This thread with NPV is confusing the liquidity issue with the profit of the bond investment. The issue for this bank was not if this was a good or bad investment in the long run (these bonds might very well turn out to be a good investment the day they are paid back on), the issue here is that the bank's customers wanted to withdraw their money and there was not enough liquidity/cash in the bank so they had to sell something and the best/only thing they could sell was the bonds which right now were worth only $80m and the customer wanted their $100m.

Re: Banking in uncertain times

#227

Post by ouid »

If you have over 250k in a bank, you might as well withdraw it and buy treasury bonds yourself. You'll get a better return, and you'll have essentially the same risk profile.

Re: Banking in uncertain times

#228

Post by insonable »

fwlr wrote: post #188
stanleydrew wrote: post #127

Earlier quoted context omitted.

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.

There are smaller tests for liquidity, but the specific major stress test that SVB lobbied themselves out of is the DFAST (the Dodd Frank Act Stress Test) and it does not test liquidity. It takes the scenario of an adverse economic situation and comes up with a bunch of hypothetical numbers you might see for major economic variables - “the unemployment rate will be this, the default rate will be that, etc,” - and the…

Domestic-focused banks with over $250B in assets need to comply with the Basel III inspired (I think?) LCR of enough high-quality liquid assets to cover 30 bad days of withdrawals. What is the requirement for banks under $250B? Another Q would be, did they sell their extension-risk suffering bond portfolio because those bonds didn't qualify as HQLA? I mean they'd seem to me to be liquid and high-quality just as they were, but any sales would harm their balance sheet right?

Re: Banking in uncertain times

#229

Post by __MatrixMan__ »

bubbleRefuge wrote: post #200
Acumen321 wrote: post #194

Earlier quoted context omitted.

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 ba…

I went in search of the capital requirements, just to get a feel for what limits do exist--since they're no longer directly connected to deposits. I found them: https://www.ecfr.gov/current/title-12/chapter-I/part-3/subpa...

But then my eyes glazed over and I remembered that I am not proficient in this language. Presumably the following requirements do place some limits on how much money they can have created?

> A common equity tier 1 capital ratio of 4.5 percent.

> A tier 1 capital ratio of 6 percent.

> A total capital ratio of 8 percent.

> A leverage ratio of 4 percent.

Re: Banking in uncertain times

#230

Post by s1artibartfast »

pg314 wrote: post #197
s1artibartfast wrote: post #170

Earlier quoted context omitted.

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 te…

In real terms, you will get back exactly a hundred million. In the npv at that date will be exactly 100 million.

$1 after inflation is still $1. It is just that the value of $1 is now different.

As long as you hold to maturity, the number of dollars does not change.

If you report your Holdings in terms of dollars, they are always accurate as long as you hold.

If someone tells you they have $100 maturing in 10 years, it is Trivial for you to do the npv calculation yourself with your speculative model of what inflation will look like over the next 10 years.

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