Banking in uncertain times • Hacker News Board

Re: Banking in uncertain times

#341

Post by funnymony » Wed, Mar 15, 2023, 9:38 PM UTC

Scoundreller wrote: post #331

alexpotato wrote: post #307

Earlier quoted context omitted.

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 d…

House of cards is bad, but in the mean time consider such hypothetical situations - gov orders you, that you MUST sell a suburban house:

- within next 15 minutes

- within a year

Each time frame will definitely result in different price. All of them will be what market was willing to pay, but prices are somehow still different.

Forced sell does have an impact.

Re: Banking in uncertain times

#342

Post by landemva » Wed, Mar 15, 2023, 9:42 PM UTC

mikewarot wrote: post #239

prewett wrote: post #220

Earlier quoted context omitted.

The problem is that they are worth $100m if held to maturity (you get your $100m back, ergo their value is $100m if held to maturity), but the current price is $80m, because who wants to buy a bond at 0% when you could get around 5% at the next Treasury auction.

Not only that, but the value could drop even more if an inflationary spiral happens... Bank prime loan rates have been higher than 20% in the past, which means a $100m bond 5 years out could go as low as $33m in value... a 67% haircut! Clearly, US Treasuries carry risk that's not been accounted for.

> US Treasuries carry risk that's not been accounted for.

US treasury debt is approximately the safest. The risk was that SVB might need cash before the bonds matured. The regulations encouraged SBV to do this. Now the Fed put is re-imagined, and we shuffle on while mumbling 'nobody could have imagined'.

Re: Banking in uncertain times

#343

Post by landemva » Wed, Mar 15, 2023, 9:45 PM UTC

NovemberWhiskey wrote: post #329

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,…

Isn't the short answer that if you made banks be flat interest rate delta, it would be impossible to make money as a bank - and therefore there would be no banks? If a bank that makes a mortgage loan has to buy an interest rate swap that zeros out the interest rate risk on that loan, then the replicating portfolio is basically ... nothing ... right? Banks have to be long duration risk to be useful.

Banks would charge fees for services.

Re: Banking in uncertain times

#344

Post by landemva » Wed, Mar 15, 2023, 9:50 PM UTC

gumby wrote: post #267

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,…

> 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? Many of their assets aren't really fungible either. Mortgages are the canonical example: yes they can now be turned into MBS, but your local credit union just issues and holds them). The same is true of the co…

> your local credit union just issues and holds them [mortgages]

I was on BoD of a CU. About the only thing we didn't resell were loans which did not conform. The business was to originate, quickly resell, and do some more.

Re: Banking in uncertain times

#345

Post by s1artibartfast » Wed, Mar 15, 2023, 9:54 PM UTC

chordalkeyboard wrote: post #326

s1artibartfast wrote: post #311

Earlier quoted context omitted.

>> $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.' What will the real value of a $1 bond be on your balance sheet the day it matures? exactly $1

> What will the real value of a $1 bond be on your balance sheet the day it matures? exactly $1 The real value in future-date dollars will be $1. In present-day dollars it is likely to be less, the ability to refer to which distinction is the purpose of the formal difference between nominal and real value.

I agree. The difference between the two converges to zero as your your comparison time frames go to zero.

Initial time for real dollar caluculation can be anything. You can ask what your real dollar salary is relative to 1950, or relative to 1951, or yesterday.

You can ask what was the real dollar salary in 1951 relative to 1950, or 2051 compared to 2050.

While I meant to write real dollars, I wish I wrote nominal, based on how much confusion it caused.

I still stand by the idea that it is silly, and not very useful to put a future return on investment on an asset list in to 2023 dollars using a 10 year inflation projection.

Then the reported asset would fluctuate based on your model, and you already know exactly where it will end on the maturation date.

Re: Banking in uncertain times

#346

Post by bubbleRefuge » Wed, Mar 15, 2023, 9:56 PM UTC

notahacker wrote: post #312

bubbleRefuge wrote: post #300

Earlier quoted context omitted.

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.

I never argued there were funding constraints on making loans (there are capital constraints, but they're fuzzier). But the deposit is the bank's liability , not its asset (unlike, say, an organization having the ability to mint coins or cryptotokens for its own use from thin air; much more like Amazon's ability to create as many $10 vouchers as it wants, provided it's got a way of paying its vendors when people try…

Yeah. Sounds good. The bank needs reserves, order federal money, base, or inside money(call it what you want) to meet deposit liabilities when they are called such as when the deposit owner writes a check to another bank or when funds are withdrawn for cash.

Re: Banking in uncertain times

#347

Post by s1artibartfast » Wed, Mar 15, 2023, 10:09 PM UTC

bjacokes wrote: post #324

prewett wrote: post #220

Earlier quoted context omitted.

The problem is that they are worth $100m if held to maturity (you get your $100m back, ergo their value is $100m if held to maturity), but the current price is $80m, because who wants to buy a bond at 0% when you could get around 5% at the next Treasury auction.

They're worth $80m today, and then maybe $82m next year, $84m the year after, and so on until they're worth $100m at maturity. (Obviously these numbers depend on current and future interest rates, and you'd be earning some interest in the meantime). As I was trying to point out to the parent commenter, conflating "$100m today" with "$100m at maturity" leads to clear contradictions, like saying that a bank could earn…

>As I was trying to point out to the parent commenter, conflating "$100m today" with "$100m at maturity" leads to clear contradictions, like saying that a bank could earn $20m on paper simply by buying bonds trading below par value. Or to put it another way – if bank A holds $100m face value of 10-year bonds yielding 4%, and bank B holds $100m face value of 10-year bonds yielding 2% (but worth, say, $80m at market price), how can you claim that those banks are on equally good footing?

Equal assets should never be thought to mean equal footing. The banks will show the same number for assets locked up for 10 years, but the banks will also show that they have different returns listed on their finalcial statement for the HTM assets, and different revenue from capital!

You cant and shouldnt expect to bank comparison to be easily reduced to a single measure, or for that measure to tell you something that is captured elsewhere.

It is like expecting an athlete's height to tell you something about their speed or strength.

HTM assets tell you the nominal value of assets they are holding to maturity.

It is not intended to show how much they could raise if they had to liquidate it today. It is not intended to show what that yield is for their bonds.

There are separate line items for that.

If you change the valuation of the bonds to market value, then you lose sight of the mature value of those bonds.

Replacing athlete height with athlete BMI tells you something different.

Re: Banking in uncertain times

#348

Post by bubbleRefuge » Wed, Mar 15, 2023, 10:14 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…

reserve requirements are based on deposits/liabilities. Capital requirements are what allows or disallows a bank from making loans.

Re: Banking in uncertain times

#349

Post by chordalkeyboard » Wed, Mar 15, 2023, 10:24 PM UTC

s1artibartfast wrote: post #345

chordalkeyboard wrote: post #326

Earlier quoted context omitted.

> What will the real value of a $1 bond be on your balance sheet the day it matures? exactly $1 The real value in future-date dollars will be $1. In present-day dollars it is likely to be less, the ability to refer to which distinction is the purpose of the formal difference between nominal and real value.

I agree. The difference between the two converges to zero as your your comparison time frames go to zero. Initial time for real dollar caluculation can be anything. You can ask what your real dollar salary is relative to 1950, or relative to 1951, or yesterday. You can ask what was the real dollar salary in 1951 relative to 1950, or 2051 compared to 2050. While I meant to write real dollars, I wish I wrote nominal, b…

> Initial time for real dollar caluculation can be anything. You can ask what your real dollar salary is relative to 1950, or relative to 1951, or yesterday.

Regardless of which day's dollars we use as a baseline for comparison, a bond issued under at a lower interest rate is discounted relative to the same bond issued later at a higher interest rate. Quibbling about how we express this valuation suggests you don't understand this difference, but this difference is important to understanding the current day banking crisis.

> While I meant to write real dollars, I wish I wrote nominal, based on how much confusion it caused.

You still seem unaware that these meanings and words are a very well understood convention that you violated. The only confusion was the confusion you had in the meanings you assigned to the words.

> I still stand by the idea that it is silly, and not very useful to put a future return on investment on an asset list in to 2023 dollars using a 10 year inflation projection.

The main thing is that these valuation rules exist for reasons and while we could debate which rules are good etc., understanding the basics of bond valuation and the common terminology we use to discuss them is a minimum prerequisite and I'm still working on getting you on board with the basic terminology every one else is using.

There isn't much discussion to be had without a common vocabulary.

Re: Banking in uncertain times

#350

Post by bhgtopt » Wed, Mar 15, 2023, 10:35 PM UTC

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,…

Talking about the detail is wasting the effort when the problem is located at higher level, which is, the whole system is built in a socialism territory, started when Gold is by planning (major element of socialism), taken away from banking industry.