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Banking in uncertain times

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Re: Banking in uncertain times

#281

Post by spir »

KaiserPro wrote: post #114
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…

> Stablecoins are conspicuous in their absence in patio11's post. Stablecoins are just fractional reserve banking but with a thin veneer of tech, and a massive narrative to differentiate them from standard fiat currency. You're far better off just buying commodities directly, at least where your value is located is much more transparent. Stablecoins are basically "trust me bro its worth this much, and will never drop…

The reason this is not true is because the best stablecoins, like American-run USDC, have excellent transparency and are backed 1:1 in cash and short-duration treasuries, with no fractional reserve system.

https://www.circle.com/en/transparency

Re: Banking in uncertain times

#282

Post by jnwatson »

bostik wrote: post #247
daydream wrote: post #141

Earlier quoted context omitted.

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

From all the information I've gathered, there is an unstated aspect to this. If any number of HTM bonds are sold to cover withdrawals, then all of them must be revalued and losses realised on the whole lot.

What. That’s insane. Essentially, if your deposit modeling is off just a little bit, you’re dead.

Re: Banking in uncertain times

#283

Post by hn_throwaway_99 »

daydream wrote: post #198
hn_throwaway_99 wrote: post #125

Earlier quoted context omitted.

> 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 mor…

Well, "these people are morons they didn’t hedge their crappy bonds" is pretty much correct. Here's a good explainer on the topic: https://corporatefinanceinstitute.com/resources/accounting/h... .

But it's not just that they didn't hedge their interest rate risk, it's also that they assumed that their deposit base would continue to stay the same or grow. The problem is that their highly correlated deposit base of tech startups actually all needed to take their money out at the same time when they couldn't get additional funding.

Thus, it's important to understand that banks themselves make the choice of whether a bond goes into the "held to maturity" or "available for sale" bucket. I'm not a bank compliance officer so I don't know the rules about how much they're allowed to put in each bucket, but one problem was that SVB incorrectly estimated how much liquidity they would need because they didn't plan for the risk of their deposits all needing to be drawn down simultaneously.

Re: Banking in uncertain times

#284

Post by jnwatson »

gumby wrote: post #270

As an account holder I don't even care about the safety of my bank, and never have (I have never kept anything like $250K, much less more, in a current account for more than a day or two either for personal or business accounts). So it makes no difference to me if the bank sector crashes or not. To the degree I care about sectors at all, I'm more likely to be concerned about railroad stocks (would interfere with good…

So you’re making the argument that because you don’t personally care, it doesn’t matter?

Re: Banking in uncertain times

#285

Post by pg314 »

s1artibartfast wrote: post #230
pg314 wrote: post #197

Earlier quoted context omitted.

> 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,…

> In real terms, you will get back exactly a hundred million.

In nominal terms. In real terms you have to adjust for inflation. [1] is a starting point if you want to read more.

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

A dollar now is not the same as a dollar 10 years from now. [2]

[1] https://en.wikipedia.org/wiki/Real_versus_nominal_value_(eco... [2] https://en.wikipedia.org/wiki/Time_preference

Re: Banking in uncertain times

#286

Post by pg314 »

jameshart wrote: post #207
pg314 wrote: post #197

Earlier quoted context omitted.

> 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…

You can’t calculate NPV. You can only estimate it. You can value something at its current market value, if the asset is one that has such a thing. And fair market value will generally correspond to what you would estimate to be net present value, plus whatever risk premiums and holding costs and so on that the market is accounting for.

> You can’t calculate NPV. You can only estimate it.

According to Merrian-Webster [1]:

calculate: 1 b: to reckon by exercise of practical judgment : ESTIMATE

[1] https://www.merriam-webster.com/dictionary/calculate

Re: Banking in uncertain times

#287

Post by jnwatson »

forsakenTadpole wrote: post #241
mikeyouse wrote: post #105

Earlier quoted context omitted.

It's just not remotely practical to keep dozens of banks accounts with $250k in them for most companies. Many payrolls are larger than that, if you're renting a venue for an event, it'll be larger than that. Obviously well-staffed finance teams could shuffle funds endlessly, but there's just no economic value to creating treasury jobs for the sake of it. We'd be much better off just upping the FDIC limit to something…

recently had a call with Fidelity about this. many places including Fidelity will automatically split your cash between many banks on the bank end. for Fidelity the money in my Cash Management account will be split into up to 20 different banks which means that up to $5 million is FDIC insured. https://www.fidelity.com/why-fidelity/safeguarding-your-acco...

It seems like a hack that really should be built into the system.

It is insurance only for those in-the-know.

Re: Banking in uncertain times

#288

Post by jnwatson »

Kye wrote: post #118
ru552 wrote: post #67

Earlier quoted context omitted.

Not even the Big 4 of banks could handle 20% of their deposits leaving in a matter of hours. No bank can survive a run. Now, in the case of the Big 4 being run on, they are too big to fail so the Fed would just extend them unlimited funds (probably).

They would with a 20% reserve requirement. Since that's probably not viable, maybe some changes to the interbank loan system to make emergency loans for this purpose a thing. The FDIC already has wide authority once they're called in, but a system like this could have prevented the need for it. Bigger banks could provide the money to prevent failure of an otherwise solid bank rather than be expected to help clean up…

The FDIC literally just created an emergency loan facility.

I don’t see why a 20% reserve requirement isn’t viable.

Re: Banking in uncertain times

#289

Post by zie »

A4ET8a8uTh0 wrote: post #130
zie wrote: post #106

Earlier quoted context omitted.

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...

I think the Feds are going to keep fighting inflation. Will they rate hike or not I have no idea, but I'd be very surprised if they lowered rates right away.

Unless the economy really goes bonkers stupid and crashes hard, I really don't see them lowering rates anytime this year and maybe not next.

A few banks that were arguably stupid crashing and burning? Well that's part of the expected cost of fighting inflation.

Re: Banking in uncertain times

#290

Post by coryfklein »

Money quote:

> Regulators then heard the numbers, did a bit of modeling in Excel, and then went into wartime execution mode. Regulators have, of course, not declared this war, because it is a war on the public’s perception of reality, and to declare war is to surrender.

SO MUCH of this drama is really a war on perception more than anything else. Banks being "underwater" on 10 year treasuries is only a problem *if everyone thinks its a problem* and if everyone just goes about their daily business ignoring this story, then after 10 years all the bonds mature and nobody is the wiser.

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