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Banking in uncertain times

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Re: Banking in uncertain times

#321

Post by echion »

tnel77 wrote: post #123
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.

Maybe both metrics would be useful. “If we had to sell today, this is our situation. If these bonds are held to maturity, this will be our situation.” Seems like that would allow an investor to see the state of the bank more clearly.

Definitely. And SVB's financial reporting / balance sheet showed this problem beforehand, AIUI.

Re: Banking in uncertain times

#322

Post by [deleted] »

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,…

[deleted]

Re: Banking in uncertain times

#323

Post by marcosdumay »

bombcar wrote: post #298
marcosdumay wrote: post #236

Earlier quoted context omitted.

> 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?

FDIC uses funds from the member banks and backstopped by the government to make depositors whole. In this case, all depositors with no limit.

The interaction between the FDIC and a problematic bank is simply that the FDIC confiscates it. AFAIK, that's the only one they are allowed to have.

They don't lend money, don't put money in it, don't do anything else. They take the bank for themselves, and then proceed to pay the depositors.

Re: Banking in uncertain times

#324

Post by bjacokes »

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.

They're worth $80m today, and then maybe $82m next year, $84m the year after, and so on until they're worth $100m at maturity. (Obviously these numbers depend on current and future interest rates, and you'd be earning some interest in the meantime).

As I was trying to point out to the parent commenter, conflating "$100m today" with "$100m at maturity" leads to clear contradictions, like saying that a bank could earn $20m on paper simply by buying bonds trading below par value. Or to put it another way – if bank A holds $100m face value of 10-year bonds yielding 4%, and bank B holds $100m face value of 10-year bonds yielding 2% (but worth, say, $80m at market price), how can you claim that those banks are on equally good footing?

Valuing liquid bonds at par value is pretty clearly a hack to reduce volatility and increase confidence in banks' balance sheets, even if some people in the comments seem to view it as a more logical way of accounting. (Although to be clear, I don't mind companies doing their own fuzzy math as long as they give investors enough information to do proper due diligence. It's similar to the non-GAAP earnings that a lot of tech companies report.)

Re: Banking in uncertain times

#325

Post by lordfrito »

selimthegrim wrote: post #319
lordfrito wrote: post #221

Earlier quoted context omitted.

> 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

Whoopsie! Good catch.

Re: Banking in uncertain times

#326

Post by chordalkeyboard »

s1artibartfast wrote: post #311
chordalkeyboard wrote: post #297

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. 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

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

The real value in future-date dollars will be $1. In present-day dollars it is likely to be less, the ability to refer to which distinction is the purpose of the formal difference between nominal and real value.

Re: Banking in uncertain times

#327

Post by s1artibartfast »

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"?

Yes and yes, if they are allocated for HTM.

If you put cash in a a CD with a 1 year lock in, do you list it at current value or subtract a withdraw penalty.

Do you subtract early withdrawal penalties when calculating the balance in your 401k?

At the end of the day, a list of your asset values is not the same as how much you could liquidate those assets for today.

That would be a list of liquidatable assets.

HTM assets are called out separately on the balance sheet specifically to highlight that they cannot be easily liquidated.

Re: Banking in uncertain times

#328

Post by chordalkeyboard »

peripitea wrote: post #313
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.

As Schumpeter predicted, the complexity of our economy is has outstripped our language and consequently our ability to understand it.

Re: Banking in uncertain times

#329

Post by NovemberWhiskey »

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,…

Isn't the short answer that if you made banks be flat interest rate delta, it would be impossible to make money as a bank - and therefore there would be no banks?

If a bank that makes a mortgage loan has to buy an interest rate swap that zeros out the interest rate risk on that loan, then the replicating portfolio is basically ... nothing ... right?

Banks have to be long duration risk to be useful.

Re: Banking in uncertain times

#330

Post by jgilias »

vishnugupta wrote: post #83
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…

> it would be trivial to stop and reverse inflation (i.e. deflate) with any increase in interest rates (?). As trivial as it sounds it is exactly the premise with which fed operates. Their mandate is price stability (~2% inflation) with low unemployment rate. And interest rate is a key lever they have. So yes they are going to keep rising rates until they see inflation come down to around 2%. They harp on this at eve…

That was on February 1st though. They also have a mandate to keep the financial system stable.
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