Banking in uncertain times • Hacker News Board

Re: Banking in uncertain times

#331

Post by Scoundreller » Wed, Mar 15, 2023, 8:54 PM UTC

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…

> At the very least most of the liquidity is gone and spreads get VERY big

Isn’t this just a way of saying “nobody wants to pay what I want to pay me?”. Unless it’s actually worthless, there’s a buyer, you just may not like the price.

The liquidity on my used socks is gone and spreads are very BIG. Why yes, I won’t sell for less than what I paid for them new, but it’s the market that’s failed, not my insane pricing demands.

Re: Banking in uncertain times

#332

Post by Scoundreller » Wed, Mar 15, 2023, 9:05 PM UTC

shawndrost wrote: post #262

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,…

The basic job of a retail bank is to fund long-term loans with short-term deposits. A bank which is doing this optimally is still curiously vulnerable to bank runs. If all short-term deposits decide to redeem at once, that collective decision might render the bank insolvent and incapable of returning deposits at par, because not all long-term loans can be immediately redeemed/sold at par. In the normal course of busi…

> basic job of a retail bank is to fund long-term loans with short-term deposits.

CDs are a thing. Unpopular because their rates sucked but that hasn’t always been the case.

Long-term loans become like short term loans closer to maturity. A mature bank should have a fair amount maturing every year, mortgages 24 or 23 or whatever years ago. Along with some early repayments or reissuances from people moving. Or 4 years ago for a vehicle, etc.

Re: Banking in uncertain times

#333

Post by Scoundreller » Wed, Mar 15, 2023, 9:09 PM UTC

WorkerBee28474 wrote: post #161

SilasX wrote: post #156

Earlier quoted context omitted.

I thought financial companies had regulations against bottlenecks like that? Something like, every employee has to have their access turned off for one uninterrupted week, to ensure they didn't leave something in that depends on them or they're controlling a (fraudulent) process no one else knows about?

Yes, the week (two weeks, IME) is a thing. As are contractor term limits. They reduce key man risk and keep knowledge internal. Still, it's possible to write a script to do something and then just not touch it for years. It keeps chugging away, and the mental model of how it works is lost to time or employee churn, and nothing goes wrong enough that anyone has to dig in and really understand it again.

Also doesn’t help when they never documented a thing and nobody cracked down on that because “it would slow down their unit’s productivity”.

Re: Banking in uncertain times

#334

Post by gumby » Wed, Mar 15, 2023, 9:10 PM UTC

jnwatson wrote: post #284

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?

Good question. My example of a car factory closing is also one where I don't personally care but do care about the jobs loss and (less so but for that matter) the size of its impact on the economy. There are many such.

But banks specifically are no longer that important. The US federal government now backstops all deposits, as they have (for almost a century) underwritten all residential mortgages. I don't think that's a bad thing at all; overwhelmingly most people's interaction with the bank is a current account (checking/savings); and overwhelmingly most peoples' liquidity is less than the FDIC limit, not that that limit may be meaningful any more. The development of the FDIC was a crucial and early product of the New Deal and stabilized the system significantly. Thus, for this crucial function, I couldn't care less if banks themselves succeed or fail. Like food safety, judging the risk profile of a deposit taking institution is beyond the capability of most people to evaluate.

But what about the residual functions of banks? They are mostly unbundled at this point. You don't need to get a credit card from your bank and most people carry such cards that don't come from their bank. In consumer loans (mortgages and small business loans) a local bank arguably knows the local market better than a megabank, and credit unions demonstrate this. But these days banks operate more like mortgage origination companies since the mortgages are bundled into MBSs. That's a function that need not be provided by banks at all! Instead have them be sold by brokerages the way insurance is sold. Safe deposit boxes, to the point they still exist, are outside banks these days. And so on.

Of course there are jobs, but retail banks only employ a couple of million in the US (about 20% of the whole financial sector, which is smaller than manufacturing, constuction, and other fields). An unbundling as I'm talking about would probably not affect employment much.

So yes, I don't care much about the banking sector at all.

Re: Banking in uncertain times

#335

Post by gumby » Wed, Mar 15, 2023, 9:12 PM UTC

peripitea wrote: post #316

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 t…

I replied to jnwatson's comment to explain why I don't think retail banks (from your single-branch local to Wells, Fargo) are that important to the financial system any more.

Re: Banking in uncertain times

#336

Post by colinsane » Wed, Mar 15, 2023, 9:27 PM UTC

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…

now we’re getting into weird philosophical questions: if every bank had sold these treasuries (realizing the loss) and used the proceeds to buy similar treasuries, their portfolio would be basically the same: same present value (obviously), and same to within a few percent future cashflows. at any layer above the balance sheet, these two worlds are difficult to distinguish. so what makes one “real” and the other not?

Re: Banking in uncertain times

#337

Post by CraigJPerry » Wed, Mar 15, 2023, 9:30 PM UTC

jnwatson wrote: post #309

CraigJPerry wrote: post #294

Earlier quoted context omitted.

How does the fed control the levers? Customer approaches commercial bank for a loan, bank assesses credit worthiness[1] and choses to make the loan. New money was “printed” into the economy. What levers did the fed pull? Also what function does the fed have in the tax part the GP mentioned? [1] the bank has other depts looking at capitalisation constraints, another dept managing day to day operations of the reserve a…

The most obvious, direct lever is they set the reserve requirement ratio. The bank isn't going to make the loan if they don't have the reserve. The next mechanism is setting the Fed funds rate and discount rate. That will very directly incentivize the bank to loan more or less money. The third is the ability to buy whatever asset it deems necessary to support the economy. Quantitative easing almost directly impacts m…

>> they set the reserve requirement ratio

No that doesn't exist anymore: https://www.federalreserve.gov/monetarypolicy/reservereq.htm

>> The bank isn't going to make the loan if they don't have the reserve

The bank has unlimited reserves since the central bank will issue reserves via the discount window in unlimited quantities.

Loan making is capital constrained, not reserve (or deposit!) constrained.

>> That will very directly incentivize the bank to loan more or less money

No. This is ignoring what's happened over the past 14 years.

>> Quantitative easing almost directly impacts money supply

Again - this is a statement that isn't supported by what we've seen happen since the GFC.

Re: Banking in uncertain times

#338

Post by lliamander » Wed, Mar 15, 2023, 9:33 PM UTC

So, I'm a layman here, but I feel like he makes narrow banking (i.e. full-reserve or maturity-matched banking) sound more dangerous than it probably is, for instance:

> Take an exploding mortgage, the only way to finance homes in a dystopian alternate universe. It’s like the mortgages you are familiar with, except it is callable on demand by the bank. If you get the call and can’t repay the mortgage by the close of the day, you lose your house. What did you do wrong to make the mortgage explode? Literally nothing; exploding mortgages just explode sometimes. Keeps you on your toes.

It sounds to me like this could simply be solved with mortgage insurance. Granted, that insurance might be more expensive than it is now, but when a mortgage explodes you end up owning your house outright. Seems like not a bad deal. To reduce their risk (and consequently the cost of the insurance) the insurer would probably take on responsibility for finding alternate lending in the case of the loan being called, and the home owner would never hear about it until after the new lending was secured.

I'm sure there would be other problems, but it is not at all clear to me that those problems are worse than the ones we have now.

Re: Banking in uncertain times

#339

Post by landemva » Wed, Mar 15, 2023, 9:33 PM UTC

hn_throwaway_99 wrote: post #283

daydream wrote: post #198

Earlier quoted context omitted.

> 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 tec…

They went overweight in long duration bonds to get a little more yield. Terrible timing when interest rates were at 1000-year lows, but it kept the bonuses flowing and the stock compensation in the green.

Re: Banking in uncertain times

#340

Post by peripitea » Wed, Mar 15, 2023, 9:36 PM UTC

gumby wrote: post #335

peripitea wrote: post #316

Earlier quoted context omitted.

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 t…

I replied to jnwatson's comment to explain why I don't think retail banks (from your single-branch local to Wells, Fargo) are that important to the financial system any more.

I am so confused haha. We just saw a large-but-not-that-large bank fail, and got a small glimpse of the chaos it might cause if the government had not stepped in to backstop deposits above and beyond the $250k FDIC limit -- missed payroll, companies going out of business, mass layoffs, etc. And you don't think the entire sector crashing would impact you? I guess I'd ask, do you recognize that's a tiny minority opinion, and if so what insight do you think you have that everyone else (including experts who are well aware of all the facts about how the industry has evolved that you laid out in your other comment) is missing?