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Banking in uncertain times

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Re: Banking in uncertain times

#311

Post by s1artibartfast »

chordalkeyboard wrote: post #297
s1artibartfast wrote: post #230

Earlier quoted context omitted.

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 the npv at that date will be exactly 100 million. you wrote 'real terms' when you meant 'nominal terms.' > $1 after inflation is still $1. It is just that the value of $1 is now different. That is why we distinguish between 'real value' and 'nominal value.'

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

>That is why we distinguish between 'real value' and 'nominal value.'

What will the real value of a $1 bond be on your balance sheet the day it matures? exactly $1

Re: Banking in uncertain times

#312

Post by notahacker »

bubbleRefuge wrote: post #300
notahacker wrote: post #266

Earlier quoted context omitted.

Yes in normal circumstances they won't need to immediately borrow the full outstanding amount of the loan to convert it to cash, but the fact they can borrow £1m in reserves at that rate to the extent capital weighting rules or withdrawal demands require it is critical to why the £1m credit they add in the borrower's account is treated as money by other banks and their customers. As is the detail that the bank's prof…

If the bank that creates the loan and subsequent deposit is the same bank, then its like creating money out of thin air, as they would be responsible for the reserve requirement imposed on them by that deposit. Reserve requirements can be zero and usually don't have to be met until the next accounting period. So there are not funding constraints on making loans.

I never argued there were funding constraints on making loans (there are capital constraints, but they're fuzzier). But the deposit is the bank's liability, not its asset (unlike, say, an organization having the ability to mint coins or cryptotokens for its own use from thin air; much more like Amazon's ability to create as many $10 vouchers as it wants, provided it's got a way of paying its vendors when people try to spend the vouchers). The only reason anybody else treats the increased number in the customer's bank account as "money" equivalent to cash is that the bank can borrow currency if and when it needs it (and remain solvent because eventually the customer will pay the bank back)

Re: Banking in uncertain times

#313

Post by peripitea »

NovemberWhiskey wrote: post #304

> The U.S. banking system lost $620 billion. Six hundred twenty billion dollars. That is a loss no less real than if money had been loaned out to borrowers who defaulted Uh, no. That's just nonsense. If you lend money to a borrower who defaults, you immediately lose your principal and future interest, subject to whatever recovery rate you achieve. It's an actual, realized loss. Banks have masses of unrealized losses…

The term "real" is overloaded. The author is clearly using a meaning here that is different from the one you are using, but that is intentional. His usage makes sense in the context of that particular segment of his writing. From an equity perspective, those losses are very real whether they are realized or not.

Re: Banking in uncertain times

#314

Post by echion »

kmod wrote: post #165
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.

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

> the term to search for is "net present value"

I understand NPV. I'd edit my post to put "$100m equivalent [NPV] today" to makes it clearer what was meant by "equivalent", but it's too late, and that's precisely what I nodded to with "equivalent" -- no need for jargon to get the sense across.

> These considerations are precisely what marking to market captures.

Of course. And they are -- in theory -- exactly what GP seemed to be asking about. Valuing an instrument at its NPV (NOT MTM) is perfectly reasonable...as a starting point. GP was questioning that. As everyone has pointed out, and anyone who's bootstrapped a yield curve or traded bonds (I have) knows, there are a ton of nuance and caveats to this, but the GP was not dealing with those and they are not relevant to GP's primary point/question.

Re: Banking in uncertain times

#315

Post by s1artibartfast »

morelisp wrote: post #295
s1artibartfast wrote: post #260

Earlier quoted context omitted.

$100m future dollars are still still $100m dollars. It is the value of the dollar that is changing, not the number of them that you hold. The day you are paid, you will still get handed exactly $100m million. Every day between now and then you will still have exactly $100m in bond holdings. How many cheeseburgers you can buy with that number of dollars may change from day to day, but the number of dollars will not.

You don't need to appeal to cheeseburgers to not want to value 100 future dollars at 100 current dollars, if you can buy 100 future dollars for 80 current dollars, which is essentially what happened when rates rose. (Someone else is offering 100 future for 80 current because they have a forecast about cheeseburgers, sure. But you don't have to agree with that forecast to take their deal; the deal looks even better fo…

The whole point of HTM as an asset class is that you dont plan to sell it.

Think of how you would report a non-transferable asset with maturation on your balance sheet?

How would you report savings in a CD with a steep early exit penalty?

Herein lies the difference between a list of assets, and a list of asset liquidation value.

Re: Banking in uncertain times

#316

Post by peripitea »

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…

The bank sector does not crash in a vacuum. If it crashed it would have a massive impact on your life, regardless of how much you hold in your personal account. The last paragraph from this very article gets at that: "Why do I believe (disclosing investment in any banks) is an irrational disclosure, despite general support for this ritual? Because I live in a society, which is sufficient information for you to know that I’m structurally levered long to the stability of the banking system, much like you are."

Re: Banking in uncertain times

#317

Post by echion »

codeflo wrote: post #150
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. It’s really not, at least not mathematically. That intentions play a role is purely an artifact of regulations.

> > relevant

> not mathematically

Agreed. I don't think the GP was asking a mathematical question, so "relevant" meant "to explain why MTM accounting is not the only way".

Re: Banking in uncertain times

#318

Post by peripitea »

floathub wrote: post #55

The claim that, "when interest rates rise, all asset prices must fall" seems, uhm, somewhat off. If this were true, it would be trivial to stop and reverse inflation (i.e. deflate) with any increase in interest rates (?). While it's certainly useful to think about prices as signals that, "embed an interest rate derivative", it seems a stretch to claim every single one of those derivatives is perfectly negatively corr…

Yes, but you don't want to deflate for other (often worse) reasons. So could they raise interest rates to 10% and kill inflation? Easily. The trick is in raising them to the appropriate level to curb inflation without suffocating the economy.

Re: Banking in uncertain times

#319

Post by selimthegrim »

lordfrito wrote: post #221
spir wrote: post #181

Earlier quoted context omitted.

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 ju…

> theocraticals

This is an excellent Freudian slip

Re: Banking in uncertain times

#320

Post by lordnacho »

alexpotato wrote: post #307
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,…

I'm surprised no one has already mentioned this series of events: - Enron used "creative" accounting and mark to something style procedures to create fake valuations - They go out of business. - Regulators say, "Hey! Now you need to mark to market always!" - 2008 happens. Markets for things like CDOs and CDSs dry up almost overnight. At the very least most of the liquidity is gone and spreads get VERY big - B/c of th…

> B/c of the above coupled with rules of "you need to mark to market" and "if value falls X% you have to sell", lots of selling happens in low liquidity environments and therefore prices fall more, the downward cycle begins

This is a _good_ thing. We don't want a house of cards that's so fragile as soon as it looks like it it's going to fall down, we pour glue all over it and prop it up with cardboard.

Assets need to fall in value so that the next guy can have a chance to thrive. Some bank collapsing is an opportunity for some of the younger folks to buy up a piece, or leave with a team and a book of customers.

We should have this happen regularly so that it isn't an earthquake each time.

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