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The collapse of SVB exposes the largest crack in the economy

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Re: The collapse of SVB exposes the largest crack in the economy

#171

Post by wpietri »

rr808 wrote: post #82
dragontamer wrote: post #74

Earlier quoted context omitted.

No. My money market fund (VMFXX) is composed of Fed Repo notes with 13 _DAYS_ of maturity average ( https://investor.vanguard.com/investment-products/mutual-fun... ) A bank holding customer deposits in lol 30 _Year_ or 10 _YEAR_ treasuries is anything but safe. That's called duration risk, and congrats, they just got burned by duration risk.

Sure, what I meant was Basel rules mark treasuries as level 1 capital. So Basel doesn't have much to do with it, as the OP suggested.

Are you sure? The article says, "short-term Treasury bills get 100-per-cent weightings", implying that longer term ones would get something else.

Re: The collapse of SVB exposes the largest crack in the economy

#172

Post by twic »

inconceivable wrote: post #143
bjornsing wrote: post #126

Earlier quoted context omitted.

I'm not aware of any useful hedge for long term US government bonds. There are inflation protected bonds (TIPS), but they wouldn't have worked as a hedge in this case [1]. 1. https://www.schwab.com/learn/story/treasury-inflation-protec...

there are interest rate swaps (insurance, basically) but i think there may be some kind of regulation against banks engaging in derivatives trading?

The "Volcker Rule" bans banks from trading derivatives for profit, but they are allowed to use them for hedging.

Re: The collapse of SVB exposes the largest crack in the economy

#173

Post by astrange »

orwin wrote: post #159
astrange wrote: post #147

Earlier quoted context omitted.

We have chip-and-nothing, or contactless, which is better than Chip-and-PIN. (Note Apple Pay and similar are basically chip-and-PIN because it's authenticated by the phone passcode.) > And who still uses cheques these days?! US uses them for business-to-customer payments, especially unsolicited ones, because we don't want to give random businesses we don't know our bank account numbers.

You can't get your refund directly on your credit card? It's standard for at least clothes and tools/furniture in my country.

We can, but sometimes you get payments in the mail from businesses you only have an occasional relationship with.

You can pay people instantly by refunding their debit cards - that's how Uber drivers can get paid - but it's not free, which is why most transfers don't go that way.

Re: The collapse of SVB exposes the largest crack in the economy

#174

Post by sashenka »

narrator wrote: post #106
Apocryphon wrote: post #10

So between the tech angle and the housing-related investment vehicles, are we remixing 2000 with 2008 now?

Boom and Bust is a feature, not a bug in western fractional reserve banking. In China, where they have a different system, the central bank would electronically print debt free money and recapitalize the bank and execute any bankers violating lending guidelines or otherwise giving "illegal loans" in order to prevent the moral hazard this would otherwise create. Being a banker and screwing around is an extremely serio…

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Re: The collapse of SVB exposes the largest crack in the economy

#175

Post by delfinom »

rehitman wrote: post #80

Everyone says SVB had bad investment and they deserv it etc. However, I am worried about this being the first of many similar financial instutation failing. After all, bonds are supposed to be safe on paper. Increasintg interest rate fast can break many people who are not able to adjust.

Bonds weren't the problem. The financial strategy employed to use those bonds was the problem.

You can do the same thing to yourself. Take your life savings and emergency fund and put it locked up into 10 year treasuries bought direct from the treasury. Now go have an emergency. Good luck, have fun.

Re: The collapse of SVB exposes the largest crack in the economy

#176

Post by gruez »

Jensson wrote: post #101
PKop wrote: post #19

Earlier quoted context omitted.

Literally funds the government lol

But why would you need a private corporation to put peoples money in T-Bonds? Why not just make the government do that directly? I don't see how these corporate profits benefited society. They didn't fill some hard to do function, they just risked others money and planned to skim the gains for profit, why should society encourage that? And they didn't even risk the money in growth areas, they just gave it to the gove…

>But why would you need a private corporation to put peoples money in T-Bonds? Why not just make the government do that directly

What you're describing is pretty close to a "narrow bank", minus the "owned by government" part. The Fed doesn't like it for several reasons:

>The Fed raises three main objections. 3 The first is macroeconomic: The Fed worries that narrow banks could mess with the implementation of monetary policy, because if they succeed they will keep a lot of money at the Fed, increasing the size of its balance sheet. 4 They might also make other short-term interest rates (like fed funds) more volatile, because people who would otherwise participate in those markets might park their money at narrow banks instead, making it harder for the Fed to target interest rates. 5

>Second, it worries that narrow banks will take funding away from regular banks, making it harder for those banks to trade stocks and bonds (a business largely funded by repo), and maybe even making it harder to make loans:

>Third, the Fed worries that having too safe a bank would be bad for financial stability: In times of stress, everyone will flee from the regular banks to the super-safe narrow banks, which will have the effect of bringing down the regular banks.

https://www.bloomberg.com/opinion/articles/2019-03-08/the-fe...

Re: The collapse of SVB exposes the largest crack in the economy

#177

Post by gruez »

jfengel wrote: post #113
guhcampos wrote: post #90

This whole discussion around bonds makes me feel like I'm either too stupid or too smart, because it does not make sense to me that SVB would not have any sort of hedging around government bonds? I don't know much about US bonds, but Brazil issues 3 types of bonds: fixed rate, inflation-indexed floating rates and interest-indexed floating rates. It's common sense between investors you need to hold a mix of the 3 to h…

The US does have inflation-indexed bonds, but they're only available in small amounts ($10k/year). They're for consumers, not institutions. You can, however, buy bonds with varying maturity times. That's generally OK, since there's a liquid market in those bonds. They appear to have been caught flat footed by a sudden run.

> The US does have inflation-indexed bonds, but they're only available in small amounts ($10k/year). They're for consumers, not institutions.

You're thinking of I-bonds, but that's not the only inflation indexed bonds out there. There's also TIPS https://treasurydirect.gov/marketable-securities/tips/

Re: The collapse of SVB exposes the largest crack in the economy

#178

Post by JumpCrisscross »

Jensson wrote: post #13
TooSmugToFail wrote: post #2

SVB used an exemption from Basel III, which allowed it to run a riskier business, and eventually led to its implosion. Basel III was introduced to force banks to be more conservative, and thus more safe. Downside: this also means bank is going to be less profitable. European banks were forced to implement Basel III, while the US bankers managed to lobby a loophole for certain types of banks. And sure enough, SVB leve…

> Downside: this also means bank is going to be less profitable. What are the downsides to society if banks are less profitable? They invested in T-Bills, I don't see how that investment served society in any way.

> What are the downsides to society if banks are less profitable?

The minimum viable size of a bank increases. Small, community banks can't implement Basel III. That's why they were exempted. How SVB was in a bucket with the Bank of Jackson Hole, however, is another question.

Re: The collapse of SVB exposes the largest crack in the economy

#179

Post by mullingitover »

> In the 2008 crisis, a major lesson was that you can’t effectively reduce risk by bundling together lots of risky assets into one major asset.

That was the first domino to fall, but that was survivable. The real problem was that the banking system had a suicide pact in the form of credit default swaps on each other that they couldn't cover. The MBS stuff was bad, but that wasn't what caused 2008.

Now I'm just waiting to find out if some other bank is going to need to pay out credit default swaps for SVB in excess of their market cap...

Re: The collapse of SVB exposes the largest crack in the economy

#180

Post by cm2187 »

twelve40 wrote: post #138
TooSmugToFail wrote: post #2

SVB used an exemption from Basel III, which allowed it to run a riskier business, and eventually led to its implosion. Basel III was introduced to force banks to be more conservative, and thus more safe. Downside: this also means bank is going to be less profitable. European banks were forced to implement Basel III, while the US bankers managed to lobby a loophole for certain types of banks. And sure enough, SVB leve…

so it looks like the bank run was not the root cause but a consequence of this mess, and all these people moralizing about not panicking were essentially advising small companies to keep funding wild practices of one adventurous bank CEO out of their pocket - how could it have ended in anything else?

Yes and no. LCR is basically requiring you to keep in cash and liquid assets the equivalent of a 30 day bank run. And it should work. A european bank had very large bank run last year and survived without even breaching its regulatory minimums. But that still leaves the bank in a weak position after the bank run, and you can't predict the exact magnitude of a run.
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