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How deep is the rot in America’s banking industry?

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Re: How deep is the rot in America’s banking industry?

#111

Post by opportune »

toomuchtodo wrote: post #4
jgeada wrote: post #2

Bring back Glass Steagall and stop all this madness. Regular banking should be boring, not all that profitable and separated from speculation.

My hot take is that demand deposits should be only invested in (EDIT: short dated, thx codexb) US treasuries (a la Narrow Bank), backed by the Federal Reserve and if a bank (or anyone) wants to lend, they can issue bonds to borrow versus the Rube Goldberg mechanism we currently have of deposits, FDIC, and then the Fed still providing an unlimited guarantee anyway. The bond market already is built to handle this, and…

IMO the Fed should provide publicly available CBDC banking (implemented as a narrow bank with no ROI and no risk, just a balance in a fed table) and make it easy to move that money into treasuries or to integrate with eg visa/banks for payments.

Then commercial banking becomes a competition of who can best manage risk/return on deposits, provide a good UX, integrate with other value add financial services, have the best risk models for lending, etc. I just don’t see a point in a banking system where my deposits are going to be stored in something dead-simple like treasuries with the interest skimmed off, when I could easily do that myself.

The current system where I as a normal (not off-grid or doing some fringe thing like going all cash) consumer have to trust at least one bank with my money, only to get 0% interest in my checking and be exposed to risk, does not seem fair.

Re: How deep is the rot in America’s banking industry?

#112

Post by wootland »

sidewndr46 wrote: post #99
tptacek wrote: post #18

People seem to have a really hard time with the idea that, in the SVB debacle, the system worked effectively and pretty much the way it was planned to. It's not even clear what people are upset about. There's an article on the front page of The Atlantic today about how angry we should be about SVB, and if you read it, it's hard to figure out who those angry people should be. Equity is getting zeroed out. Management w…

> Depositors were made whole almost immediately This is what I'm mad about. FDIC insures to $250k in normal cases. It should not have been used to insure depositors for their full deposit amounts here.

Why does that make you mad? If my money is at risk, I expect to be compensated with an interest rate. If I'm not earning interest, my money should have zero risk. We should remove the FDIC $250k limit and if bank's business models don't work with that, we should nationalize the banks. It's in society's best interest to not have our money wiped out overnight for things beyond our control.

Re: How deep is the rot in America’s banking industry?

#113

Post by jjoonathan »

basseq wrote: post #89
jjoonathan wrote: post #51

Earlier quoted context omitted.

They chose to invest in those 10 year securities, proverbial pennies in front of the steamroller. I'm sure this was framed as a smart move at the time and they gave themselves big bonuses while investors were out to lunch. Ultimate responsibility does lie with investors, but management definitely hustled them and got away with it.

I guess my point is that they still got hit by the steamroller : they lost their jobs and future earnings, they lost any equity (which certainly was part of aforementioned bonus), etc. Earning a nice bonus last year is a reasonable consolation prize, but I'd wager most execs would rather have had a lower bonus and the ability to continue to manage an operational bank through 2023.

No, the investors got hit by the steamroller. Management, who knew exactly what they were doing, did not lose their earnings. Future earnings? Some of these were Lehman execs -- their ability to land a position in SVB is proof that they probably did not sacrifice future earnings.

> Earning a nice bonus last year

Why do you think this was limited to last year? I suspect they made risky moves again and again and again and got paid out again and again and again.

Re: How deep is the rot in America’s banking industry?

#114

Post by HPMOR »

mcherm wrote: post #32
tptacek wrote: post #18

People seem to have a really hard time with the idea that, in the SVB debacle, the system worked effectively and pretty much the way it was planned to. It's not even clear what people are upset about. There's an article on the front page of The Atlantic today about how angry we should be about SVB, and if you read it, it's hard to figure out who those angry people should be. Equity is getting zeroed out. Management w…

I am one of those who has been harmed. I work at a different bank. The rates charged to banks for FDIC insurance have been based on the assumption that the FDIC would cover depositor losses up to the insured limit. By choosing to cover all losses even above the insured limit, we have chosen to put the burden for paying for those losses on all of the other banks (and indirectly on those banks depositors). I suspect th…

As somebody employed by a company which kept all their assets in SVB, I strongly support the FDIC bailout. Even a couple percent haircut would've resulted in many many second order economic implications. I think even for member banks, strong economic activity not realized through a systemic contagion is much better than slightly lower premiums.

Re: How deep is the rot in America’s banking industry?

#115

Post by fumeux_fume »

tptacek wrote: post #18

People seem to have a really hard time with the idea that, in the SVB debacle, the system worked effectively and pretty much the way it was planned to. It's not even clear what people are upset about. There's an article on the front page of The Atlantic today about how angry we should be about SVB, and if you read it, it's hard to figure out who those angry people should be. Equity is getting zeroed out. Management w…

> the system worked effectively and pretty much the way it was planned to

Had a good chuckle at that part in particular. I think it's the plan that a lot of people are having a hard time with.

Re: How deep is the rot in America’s banking industry?

#116

Post by toomuchtodo »

opportune wrote: post #111
toomuchtodo wrote: post #4

Earlier quoted context omitted.

My hot take is that demand deposits should be only invested in (EDIT: short dated, thx codexb) US treasuries (a la Narrow Bank), backed by the Federal Reserve and if a bank (or anyone) wants to lend, they can issue bonds to borrow versus the Rube Goldberg mechanism we currently have of deposits, FDIC, and then the Fed still providing an unlimited guarantee anyway. The bond market already is built to handle this, and…

IMO the Fed should provide publicly available CBDC banking (implemented as a narrow bank with no ROI and no risk, just a balance in a fed table) and make it easy to move that money into treasuries or to integrate with eg visa/banks for payments. Then commercial banking becomes a competition of who can best manage risk/return on deposits, provide a good UX, integrate with other value add financial services, have the b…

I think there is some nuance around CBDC vs simple "accounts" but I agree with your thesis, as do others, on issuing deposit accounts directly from the Fed.

https://rooseveltinstitute.org/wp-content/uploads/2021/08/GD... (Central Banking for All: A Public Option for Bank Accounts By Morgan Ricks, John Crawford, and Lev Menand* | June 2018)

Re: How deep is the rot in America’s banking industry?

#117

Post by TuringNYC »

Ilverin wrote: post #105
tptacek wrote: post #18

People seem to have a really hard time with the idea that, in the SVB debacle, the system worked effectively and pretty much the way it was planned to. It's not even clear what people are upset about. There's an article on the front page of The Atlantic today about how angry we should be about SVB, and if you read it, it's hard to figure out who those angry people should be. Equity is getting zeroed out. Management w…

Stylized example of how the game works: Bet on every number but 0 on a roulette wheel Not 0: you and your investors make 3 billion this year 0: you and your investors lose your 20 billion you have invested, and the government bails out your depositors who kept 200 billion with you This stylized bet is a good deal for the investors and management and bad for the government. Sometimes investors lose everything but it's…

>> They could have been less reckless by covering their interest rate exposure, but the fed has an equity to deposits ratio requirement, and getting any equity to invest requires a return.

Great point. To rephrase a bit, they lost money...and then kept doubling down by not cutting their losses (?hoping things would turn?) They finally tried to do something about it, but it was too late to matter.

Re: How deep is the rot in America’s banking industry?

#118

Post by tripletao »

tptacek wrote: post #87
jandrese wrote: post #82

Earlier quoted context omitted.

But it's not like there is no market for bonds. You can calculate what they will be worth at maturity and sell them to people looking for shorter term bonds. Yes they're getting a bad deal thanks to the Fed, but that's life. It will be a loss for the bank, but that seems better than total collapse. Banks are ultimately companies that take calculated risk to make money, if you can't afford to take an occasional loss t…

Right: SVB was incompetent. Their stock got zeroed out. Meanwhile, institutions that have adequate cushion can step in and hold SVBs assets to maturity. The thread here asks: "who's paying to cover SVB's uninsured depositors?". Isn't that the answer?

The SVB was mark-to-market insolvent, not just undercapitalized. There's no indication that those marks were unrealistic; the market was orderly, and they were consistent with a naive NPV calculation, with a loss due to the increase in that discount rate. So it wasn't obvious that sufficient money to repay the depositors would exist even after zeroing the shareholders and creditors; if it were, then the SVB would probably have found a buyer.

Maybe enough depositors will leave money in the SVB at below-market interest rates that it will earn its way out of the hole. The FDIC has given depositors a special incentive to, since by guaranteeing all funds they've made the SVB the safest bank in the USA. If the depositors don't, then the FDIC will take the loss, and socialize it over all participating banks.

Per my other comment, the HTM accounting is a distraction. That accounting was compliant, but accounting doesn't define reality. The holders of long-term bonds take a real economic loss when interest rates increase, regardless of whether they sell. This may seem unintuitive since the cash flows don't change, but it couldn't be otherwise--if the bond is worth par, then why aren't any buyers willing to pay that?

Re: How deep is the rot in America’s banking industry?

#119

Post by ouid »

tptacek wrote: post #83
ouid wrote: post #80

Earlier quoted context omitted.

I really don't see the market value thing as all that complicated. A banks liabilities are (roughly) instantaneous. They must honor withdrawals when they are requested, so their assets must be measured accordingly. There is no other reasonable definition of instanteous value except for market value. This is an extraordinary advantage of having large markets for things. Granted, it's sometimes hard to establish market…

I guess the core of my argument is that SVB's viability and the damage caused by their implosion are separable concerns, and FDIC has rather neatly separated them. Nobody has to take a bath on SVB's bond portfolio; deposits are guaranteed, so they can just be held to maturity; there's no pressure to sell. Meanwhile: SVB's equity is zeroed out, so they've paid the ultimate price for their incompetence.

Paying out from the FDIC insurance fund is inflationary, at the very least, which means everyone takes a bath.

Re: How deep is the rot in America’s banking industry?

#120

Post by whatshisface »

HPMOR wrote: post #114
mcherm wrote: post #32

Earlier quoted context omitted.

I am one of those who has been harmed. I work at a different bank. The rates charged to banks for FDIC insurance have been based on the assumption that the FDIC would cover depositor losses up to the insured limit. By choosing to cover all losses even above the insured limit, we have chosen to put the burden for paying for those losses on all of the other banks (and indirectly on those banks depositors). I suspect th…

As somebody employed by a company which kept all their assets in SVB, I strongly support the FDIC bailout. Even a couple percent haircut would've resulted in many many second order economic implications. I think even for member banks, strong economic activity not realized through a systemic contagion is much better than slightly lower premiums.

If we're not going to let economic signals tell companies to check who they're banking with before putting all their assets in one place, how can that happen? Regulations saying every small business needs to have a risk officer, and more regulations specifying how that officer has to make decisions?
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