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Banking in uncertain times

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Re: Banking in uncertain times

#301

Post by bubbleRefuge »

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”.

The Fed logically cannot target both monetary aggregates and interest rate levels at the same time. Its impossible by definition. They operate interest rate policy by buying and selling assets (treasuries and Interest on reserve accounts) in order to hit a target. These operations affect monetary aggregates.

Re: Banking in uncertain times

#302

Post by lordfrito »

spir wrote: post #279
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…

Over the weekend, before an FDIC settlement was announced, uninsured SVB deposits were reportedly trading between $0.75 and $0.90 among private sellers. In other words, both USDC and uninsured SVB deposits had the same market response over the weekend. But every USDC holder had unfettered access, whereas only large SVB depositors were able to access the informal market of private sellers. I want you to remember this…

> before an FDIC settlement was announced, uninsured SVB deposits were reportedly trading between $0.75 and $0.90

The key point is that those were uninsured deposits.

Anyone under FDIC protection was fine.

At best a stablecoin is like an uninsured bank deposit, in an unregulated bank. No thanks, I'll stick to FDIC coverage.

Re: Banking in uncertain times

#303

Post by ericpauley »

jnwatson wrote: post #287
forsakenTadpole wrote: post #241

Earlier quoted context omitted.

recently had a call with Fidelity about this. many places including Fidelity will automatically split your cash between many banks on the bank end. for Fidelity the money in my Cash Management account will be split into up to 20 different banks which means that up to $5 million is FDIC insured. https://www.fidelity.com/why-fidelity/safeguarding-your-acco...

It seems like a hack that really should be built into the system. It is insurance only for those in-the-know.

The idea is that if you're keeping 250k+ in cash sitting around you should probably be in-the-know. Deposit sweep accounts are incredibly easy to use, Fidelity lets you open one in ~5 minutes. Further, this isn't just some hack, as distributing funds around many banks makes each individual bank less brittle.

Re: Banking in uncertain times

#304

Post by NovemberWhiskey »

>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 on their long-dated Treasury holdings, but if you hold those bonds to maturity, you're going to get your principal and your interest.

It should be pretty clear those are Not The Same. The clue is in the word "realized", right?

Re: Banking in uncertain times

#305

Post by ericpauley »

skwirl wrote: post #35
pearjuice wrote: post #5

What I still do not understand is why the whole SVB episode isn't a bailout and didn't just introduce much more risk into the system. Yes, the stock went to 0 and investors did not get compensated (if they didn't already cash out when they saw it coming due to inside information) but the gaping hole in the books was filled due to government intervention and explicitly lifting the 250K FDIC limit. Why would any bank l…

>Why would any bank look at SVB and NOT think "oh, time to take more risk for more profit; the government will prop up the FDIC limit if we fail anyway". This makes zero difference to the bank. The bank doesn't get saved by the FDIC limit, as you know. What happens after the bank fails - whether the depositors are made whole or not - is immaterial to the people who owned the bank, who now see their asset (the bank) w…

Levine considered this yesterday as well. If you model bank shares as calls on underlying assets it clearly favors risktaking: https://www.bloomberg.com/opinion/articles/2023-03-14/svb-to...

Re: Banking in uncertain times

#306

Post by ranger207 »

spir wrote: post #47

Stablecoins are conspicuous in their absence in patio11's post. Personally, I believe that patio11's loathing of crypto has made him incurious about its potential. But that's not the point here. The point is that stablecoins are about to become a Very Good Deal for ordinary people: In the near future, stablecoins like USDC will become immune to bank runs because the US Dollar reserves backing them will be held in veh…

Patrick didn't talk about stablecoins, but Matt Levine did in Monday's newsletter[0].

Fundamentally, Tether and banks have the same problem: does everyone believe that that bank still has enough money to pay you your deposits? If not, then bank run. Does everyone believe that Tether has enough money to back each coin with $1? If not, then run on Tether. Banks are regulated, so there's supposed to be a bunch of people keeping track of the bank's reserves to see if they have enough money to back deposits. Tether "solves" the problem by not telling anyone what their reserves are, so nobody can figure out if Tether truly has the money to back each coin at $1 or not.

[0] https://archive.is/l4nLU

Re: Banking in uncertain times

#307

Post by alexpotato »

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 the above coupled with rules of "you need to mark to market" and "if value falls X% you have to sell", lots of selling happens in low liquidity environments and therefore prices fall more, the downward cycle begins

- Post 2008, people realize that "mark to market, always!" maybe isn't the best idea.

- I would imagine, that's why the Govt is saying "Ok, we will pretend that your assets are worth par value". They don't want to trigger the downward spiral.

It's also interesting to note that the Govt made money on many of the assets they bought in 2008 at well below par value. The implication is that those assets were undervalued when they bought them. Again, I would imagine this is a selling point of the idea "the par value is probably not that bad price to pay for these things now".

Re: Banking in uncertain times

#308

Post by halfnormalform »

spir wrote: post #181
lordfrito wrote: post #75

Earlier quoted context omitted.

> stablecoins are about to become a Very Good Deal for ordinary people > the UX of stablecoins is becoming vastly superior to bank deposits because you'll be immune to bank runs, control your own money, and have instant access to global markets, including for low-risk yield on your stablecoins, such as in treasuries or over-collateralized lending I disagree, but OK > over the weekend, USDC did lose its $1 peg and tra…

For your objection to refute my thesis, you'd need to explain how a world with stablecoins that are immune to bank runs, where those stablecoins are held in next-gen wallets and can be swapped into any asset in the world 24/7 any time you want at the click of a button, is not a superior UX vs. today's bank deposits.

In order to refute your thesis, we have to explain why your imaginary situation is not superior to reality? How about it's completely made up?

Re: Banking in uncertain times

#309

Post by jnwatson »

CraigJPerry wrote: post #294
jnwatson wrote: post #280

Earlier quoted context omitted.

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 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 money supply.

Re: Banking in uncertain times

#310

Post by s1artibartfast »

pg314 wrote: post #285
s1artibartfast wrote: post #230

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. $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 nominal terms. In real terms you have to adjust for inflation. [1] is a starting point if you want to read more. > As long as you hold to maturity, the number of dollars does not change. A dollar now is not the same as a dollar 10 years from now. [2] [1] https://en.wikipedia.org/wiki/Real_versus_nominal_value_(eco... [2] https://en.wikipedia.org/wiki/Ti…

I think we are misaligned on the reference time for the real valuation.

If you buy a 10 year bond today, you will get $100m dollars in 2023.

In 2033, that $100m will have a real value of $100m 2033 dollars on your balance sheet.

HTM assets are reported in the nominal purchase price today, which is also the real dollar value if you calculated it on the day of maturity.

I agree that if you estimated the net present value of $100m 2033 dollars, it would be worth less in terms of 2023 dollars.

This brings us back to your earlier question

>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 terms you’ll get back your capital, but in real terms you will get back only one thousandth.

YES! This way the asset sheet is always correct in how much you will get for the asset. If you have a $100 nominal bond it is worth $100 dollars. That is true today, and that will be true on the day of maturity. It will be true every day in between. The dollar value of the asset remains constant at the time of reporting.

Why would you want to report the net present value of that asset at maturation - which sounds like what you are suggesting?

The point of listing your bonds on your balance sheet isn't to estimate profit or returns, it is to list your current asset allocation.

You have a separate line item for revenue coming from those bonds. You have a separate model entirely for calculating ROI and profitability.

If you made a spreadsheet of your current asset allocation today, how would you list money locked in a 10 yr CD. As the dollar amount in the account, the value if you were forced to pull it out and pay a penalty, or some time shifted valuation?

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