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Banking in uncertain times

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Re: Banking in uncertain times

#291

Post by jameshart »

pg314 wrote: post #286
jameshart wrote: post #207

Earlier quoted context omitted.

You can’t calculate NPV. You can only estimate it. You can value something at its current market value, if the asset is one that has such a thing. And fair market value will generally correspond to what you would estimate to be net present value, plus whatever risk premiums and holding costs and so on that the market is accounting for.

> You can’t calculate NPV. You can only estimate it. According to Merrian-Webster [1]: calculate: 1 b: to reckon by exercise of practical judgment : ESTIMATE [1] https://www.merriam-webster.com/dictionary/calculate

Okay, weird bit of pedantry - pretty sure that if a math test asks you to ‘calculate the product of 127 and 954’ you wouldn’t get many marks for answering ‘about 100,000’, but feel free to staple a copy of the dictionary definition to your exam paper and see if that works for you.

But sure, let me clarify it to: you can’t calculate a precise NPV.

You can only estimate one.

Which, when we are trying to do things like ‘calculate the total assets a bank has’, makes the net present value of their assets a not very reliable number to use.

Re: Banking in uncertain times

#292

Post by bostik »

insonable wrote: post #204
stanleydrew wrote: post #127

Earlier quoted context omitted.

I believe this is what various "stress tests" are for. If your bank is a certain size you have to basically do scenario planning for situations like ”what if 25% of your deposits leave overnight and you have to sell securities that you didn't plan to sell?” As I understand the situation, SVB was just under the required size to submit to those stress tests.

The original asset threshold over which banks were subject to "enhanced prudential standards" in the 2010 Dodd-Frank bill was $50B. In 2018 the requirement was amended to >$250B in assets, or at the discretion of the Fed for banks over $100B. SVB was reportedly at $210B in assets.

And SVB were one of the banks lobbying for that amendment. At the time they were falling close to the $50B limit themselves.

So they certainly would have known at the time that being subject to the stricter regulations would have hurt their profitability.

Re: Banking in uncertain times

#293

Post by andrekandre »

insonable wrote: post #204
stanleydrew wrote: post #127

Earlier quoted context omitted.

I believe this is what various "stress tests" are for. If your bank is a certain size you have to basically do scenario planning for situations like ”what if 25% of your deposits leave overnight and you have to sell securities that you didn't plan to sell?” As I understand the situation, SVB was just under the required size to submit to those stress tests.

The original asset threshold over which banks were subject to "enhanced prudential standards" in the 2010 Dodd-Frank bill was $50B. In 2018 the requirement was amended to >$250B in assets, or at the discretion of the Fed for banks over $100B. SVB was reportedly at $210B in assets.

this one?

https://www.cnbc.com/2018/05/24/trump-signs-bank-bill-rollin...

Re: Banking in uncertain times

#294

Post by CraigJPerry »

jnwatson wrote: post #280
bubbleRefuge wrote: post #257

Earlier quoted context omitted.

100% + I'd expand by saying the Fed uses its operations to control the price of money, which is interest rates, not the supply of money. The supply of money has many factors such as how many loans are created, etc. Taxes paid. etc beyond the Feds operational control.

That’s a rather pedantic interpretation. Yes the Fed doesn’t run the printing press, and it doesn’t set M1, but it controls the levers. That’s like saying to the police officer: “I didn’t speed, I merely pressed on this pedal that’s connected to a rod that opened a valve providing more fuel to the engine that’s connected to the wheels”.

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 account, perhaps another dept managing funding sources etc. but the loan making function doesn’t consult them before creating new money to make the loan

Re: Banking in uncertain times

#295

Post by morelisp »

s1artibartfast wrote: post #260
kmod wrote: post #190

Earlier quoted context omitted.

$100m future dollars , which are less valuable than present dollars.

$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 for you if you don't agree.)

Re: Banking in uncertain times

#297

Post by chordalkeyboard »

s1artibartfast wrote: post #230
pg314 wrote: post #197

Earlier quoted context omitted.

> If those assets are in your hold to maturity portfolio, they are still worth $100m. They are still worth $100m at maturity . $100m in ten years is (usually) worth less than $100m now. Do you really want to pretend that a ten year bond you purchased when inflation and the interest rate were near zero, is worth the same when inflation and the interest rate go up to say 10%? What about inflation of 100%? In nominal te…

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.'

Re: Banking in uncertain times

#298

Post by bombcar »

marcosdumay wrote: post #236
bombcar wrote: post #212

Earlier quoted context omitted.

It would be some form of emergency credit or something similar to the interbank loans, basically doing what they've had to do with FDIC anyway. Or the bank could have bought TIPS instead, I guess.

> 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.

Re: Banking in uncertain times

#299

Post by pg314 »

jameshart wrote: post #291
pg314 wrote: post #286

Earlier quoted context omitted.

> You can’t calculate NPV. You can only estimate it. According to Merrian-Webster [1]: calculate: 1 b: to reckon by exercise of practical judgment : ESTIMATE [1] https://www.merriam-webster.com/dictionary/calculate

Okay, weird bit of pedantry - pretty sure that if a math test asks you to ‘calculate the product of 127 and 954’ you wouldn’t get many marks for answering ‘about 100,000’, but feel free to staple a copy of the dictionary definition to your exam paper and see if that works for you. But sure, let me clarify it to: you can’t calculate a precise NPV. You can only estimate one. Which, when we are trying to do things like…

> Okay, weird bit of pedantry - pretty sure that if a math test asks you to ‘calculate the product of 127 and 954’ you wouldn’t get many marks for answering ‘about 100,000’, but feel free to staple a copy of the dictionary definition to your exam paper and see if that works for you.

I wasn't taking a math test. I was saying something about NPV using a common meaning of an English word. You chose to ascribe a different meaning to that word, and pedantically - and incorrectly - tried to correct me.

Re: Banking in uncertain times

#300

Post by bubbleRefuge »

notahacker wrote: post #266
bubbleRefuge wrote: post #253

Earlier quoted context omitted.

Banks in compliance can create loans on demand. They don't need to borrow the funds.

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.
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