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Banking in uncertain times

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Re: Banking in uncertain times

#231

Post by ouid »

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,…

There is a massive conflation of insolvency and illiquidity going on here, because the distinction requires more mathematical finesse than most people have.

A bank is illiquid if its holdings require time to sell at "market price". Selling things like mortgages requires time because the buyer has to perform due diligence. If i have to sell mortgages right now, I'm going to be getting an awful price for them.

OTOH, i can sell treasuries in a fraction of a second at the ask price minus epsilon. It's not a liquidity problem, its an assets < liabilities problem, (as you clearly state, I'm just frustrated by the discussion here).

Re: Banking in uncertain times

#232

Post by meghan_rain »

In defense of bailouts, we need to acknowledge the systemic risks that a failing bank can pose to the broader economy. If we let a major bank collapse without intervention, the consequences could be far-reaching and have negative ripple effects throughout the financial system. By stepping in and providing a bailout, the government helps to maintain confidence and stability, ensuring that the entire system doesn't collapse under the weight of panic and mistrust.

Re: Banking in uncertain times

#233

Post by swores »

misssocrates wrote: post #217
pjc50 wrote: post #50

Earlier quoted context omitted.

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)

The fanfiction is that banks can be trusted. USDC and Tether as of now have a better track record than even some big banks like SVB.

Tether has existed for under a decade, USDC is less than 5 years old, and SVB died after 39 years.

Yes technically "still alive" is better than "just died", but can you really call it a "better track record" when Tether is so opaque that we wouldn't be able to spot if it was about to die until it actually happens? If Tether died tomorrow it would undeniably have a worse track record than SVB, if it dies in a decade then it survived half as long as SVB.

Unless you have some insight into the actual behind the scenes finances of Tether I don't see how you can make that judgement.

And as to this claim from your GP's comment:

> In the near future, stablecoins like USDC will become immune to bank runs because the US Dollar reserves backing them will be held in vehicles that don't loan out the reserves and hold short-duration treasuries directly with the Treasury Department.

Circle (USDC) literally had $3.3B cash deposited at SVB, and presumably more accounts at other banks, so they're exposed directly to potential problems caused by those banks. More importantly they could decide tomorrow, assuming they haven't already, to make the exact same poor choices as any bank could.

There's nothing stopping them moving 95% of their assets tomorrow into 10 year treasury bonds other than that it would be a bad idea, but both they and banks are equally motivated to avoid bad ideas, so it seems to be an unwarranted hope that those in charge of Circle will make better decisions than those in charge of any bank, rather than any specific feature of USDC that makes it impossible for them to make the exact same mistake SVB made?

And that's even before considering that if it had been USDC rather than SVB that made the mistake already, FDIC wouldn't have come running in to fix anything as they try to with failed banks.

Am I missing something about USDC that actually makes it a safer bet, other than apparently having more faith in their management team than in the management teams of various banks?

Re: Banking in uncertain times

#234

Post by notahacker »

pearjuice wrote: post #195
notahacker wrote: post #166

Earlier quoted context omitted.

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 e…

> And when do you expect this debt to be repaid back?

According to the terms of the loan or repo or maturity date of the bond. The money isn't "backed by nothing" it's backed by the productive capacity of an economy, and virtually all of it is created by market demand for credit, not the demand of the US government.

> 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.

It's absolutely ignorance to base your arguments about how a monetary system works on the assumption that the US is the only country in the world with a stable currency and modern central banking. The majority of the developed world is not "the strongest arm in the room" and people happily use those countries' currency and buy up their domestic-currency-denominated sovereign debt without any worries about hyperinflation or their military.

The military is of significance only to the extent that the dollar wouldn't be worth very much if the US was on the verge of being annexed by Mexico, but Venezuela has a military that prevents it from being annexed by Colombia too, and its military spending in excess of its productivity is still a cause of rather than a solution to its problems

Re: Banking in uncertain times

#235

Post by marcosdumay »

Gys wrote: post #13
duxup wrote: post #10

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". Because they don’t want the stock to go to 0? I think most businesses and investors would not want that. We’ve seen bank stocks drop, it is in those banks interest to show they’re not taking chances like SBV.

Then why is (was?) there a limit of 250k anyway?

To guarantee the FDIC itself doesn't fail.

Re: Banking in uncertain times

#236

Post by marcosdumay »

bombcar wrote: post #212
marcosdumay wrote: post #206

Earlier quoted context omitted.

> US Government should have some ability to offer a line of credit against those assets What is the difference between what you are saying and just buying back the bonds before maturity? Anyway, governments do usually have all kinds of lines of credit against bonds. And when there is a difference, it's for the benefit of the government.

It would be some form of emergency credit or something similar to the interbank loans, basically doing what they've had to do with FDIC anyway. Or the bank could have bought TIPS instead, I guess.

> basically doing what they've had to do with FDIC anyway

AFAIK, the thing the FDIC does is confiscate banks. Do they do anything else?

Re: Banking in uncertain times

#237

Post by bubbleRefuge »

Acumen321 wrote: post #218
bubbleRefuge wrote: post #214

Earlier quoted context omitted.

see my other reply on the balance sheet operations above.

There are many problems with your understanding, but the simplest total failure of your model is that if the bank did just get the money from somewhere else to lend, it is not creating it. You are not describing the bank "creating" money, which they actually do as per how I described. You are describing the bank borrowing money.

I disagree . And language can get tricky here. You don't need deposit amounts in order to make loans. There is a bunch of gymnastics under the hood of the transaction I described but none of it requires consumer deposits.

Re: Banking in uncertain times

#238

Post by bubbleRefuge »

__MatrixMan__ wrote: post #229
bubbleRefuge wrote: post #200

Earlier quoted context omitted.

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 co…

Every time a good loan is made. Thats an asset for the bank.

Re: Banking in uncertain times

#239

Post by mikewarot »

prewett wrote: post #220
bjacokes wrote: post #193

Earlier quoted context omitted.

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"?

The problem is that they are worth $100m if held to maturity (you get your $100m back, ergo their value is $100m if held to maturity), but the current price is $80m, because who wants to buy a bond at 0% when you could get around 5% at the next Treasury auction.

Not only that, but the value could drop even more if an inflationary spiral happens... Bank prime loan rates have been higher than 20% in the past, which means a $100m bond 5 years out could go as low as $33m in value... a 67% haircut!

Clearly, US Treasuries carry risk that's not been accounted for.

Re: Banking in uncertain times

#240

Post by bubbleRefuge »

Acumen321 wrote: post #218
bubbleRefuge wrote: post #214

Earlier quoted context omitted.

see my other reply on the balance sheet operations above.

There are many problems with your understanding, but the simplest total failure of your model is that if the bank did just get the money from somewhere else to lend, it is not creating it. You are not describing the bank "creating" money, which they actually do as per how I described. You are describing the bank borrowing money.

Additionally, if you take my example above and change bank B to bank A which is completely feasible in the real world, then it is thin air.
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