Hacker News Board Hacker News, browsed like a classic message board
Live data from Hacker News

Banking in uncertain times

bitsaboutmoney.com

Post reply on HN
Print view View original

351–360 of 378 posts

Re: Banking in uncertain times

#351

Post by s1artibartfast »

chordalkeyboard wrote: post #349
s1artibartfast wrote: post #345

Earlier quoted context omitted.

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 u…

Im fine with your terminology and reference. The current date (or that of reporting) can be the reference time for a real dollar valuation.

I fully understand how bond market prices are impacted by interest rates. What most people seem ignorant of is the fact that bonds are not simply market trades asset, but are also have a value at maturity. Most people don't seem to know that HTM assets are reported separate from securities available for sale, which ARE tracked at market value.

And then there's the even stupider idea that the value of long-term assets should be listed as the maturation date npv, as if you can just look up future inflation rates for the next 10 to 30 years.

It seems obvious to me that if you never intend to sell a bond, the maturity value is a measure of interest.

Do you have anything else to add to the discussion, or was that your only point?

Re: Banking in uncertain times

#352

Post by HWR_14 »

CraigJPerry wrote: post #249
HWR_14 wrote: post #213

Earlier quoted context omitted.

Interpreting "printing money" to replace the more technical "controlling the size of the monetary base[1]" seems reasonable. How is that incorrect? Unless you're talking about literal printing press operations, "the fed tries to tweak the money supply to control inflation as one of its dual mandates" seems like an absolute correct, if simple, explanation of why we don't have hyperinflation. (I know tone is hard to co…

>> Interpreting "printing money" to replace the more technical "controlling the size of the monetary base[1]" These are different things. Printed money is cash (or currency) and it represents a small amount of the total money in use, just under 3% in the UK. I don't have the figure to hand for the US but it's comparable, less than an order of magnitude difference. Printing money isn't a significant driver of the size…

I am skipping the digression about whether "printing money" should taken literally to mean the actions of the actions of the Mint/Bureau of Engraving as opposed to the controlling the monetary base.

The Fed both controls the rate that commercial banks are charged (via the discount rate, or other rates based on it) to access the discount window and the rules for doing so. Infinite reserves[1] that charge interest when used aren't infinite. They explicitly have to be used to generate more value than the repayment with interest or the banks lose money and go broke.

If I am wrong, please explain how. But I interpreted most of your post a pedantic explanation about how their control of the money supply wasn't direct and instead through controlling other things that then controlled the money supply.

[1] Only, of course, capital requirements limit banks ability to lend.

Re: Banking in uncertain times

#353

Post by HWR_14 »

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…

Capital requirements (which is what Silvergate ran afoul of) have replaced reserve requirements. They function similarly, only instead of the amount of loans being determined by deposits they are determined by shareholder equity.

Re: Banking in uncertain times

#354

Post by kortilla »

czbond wrote: post #74
Pet_Ant wrote: post #45

I mean maybe we should require large companies to split their accounts across several banks, I mean what is the real overhead here?

That really is a CFO's job. To assess risk, and distribute it. Larger amounts in larger banks are swept across multiple branches transparently to reduce the account holders risks for individual branch failures. However, the FDIC limit is REALLY low in today's terms. $250k limit was set in 2010. The money stock has been printed 143% more since 2010. To me that is about $607k in today's dollars.

> 250k limit was set in 2010. The money stock has been printed 143% more since 2010. To me that is about $607k in today's dollars.

That’s not how inflation works.

Re: Banking in uncertain times

#355

Post by gumby »

peripitea wrote: post #340
gumby wrote: post #335

Earlier quoted context omitted.

I replied to jnwatson's comment to explain why I don't think retail banks (from your single-branch local to Wells, Fargo) are that important to the financial system any more.

I am so confused haha. We just saw a large-but-not-that-large bank fail, and got a small glimpse of the chaos it might cause if the government had not stepped in to backstop deposits above and beyond the $250k FDIC limit -- missed payroll, companies going out of business, mass layoffs, etc. And you don't think the entire sector crashing would impact you? I guess I'd ask, do you recognize that's a tiny minority opinio…

> small glimpse of the chaos it might cause if the government had not stepped in to backstop deposits above and beyond the $250k FDIC limit

Yes, that's my point: the government now has a policy of backstopping all deposits, thus the primary function (for almost the entirety of the population) of retail banks is guaranteed to be safe no matter what banklike entity anyone chooses. And because of unbundling, that primary function is essentially the only function of retail banks any more, besides marketing other, unbundled, services.

Thus if all the retail banks went bust tomorrow (except the money center ones, that are subject to much tighter regulation, many of whom have retail arms too) there might be a transient fear just because people don't like change, but actually life would go on essentially unchanged. Retail banking has essentially done a Wile E Coyote of the top of cliff, but hardly anyone is looking down yet.

Most of the "experts" from Jim Cramer to David Sachs (and let's not forget all the people screaming about how SVB was "bailed out") don't appear to have even understood how banking works in the first place.

Enough of people do understand it (and "look down off the cliff"), of course, which is why I don't expect retail bank stocks to recover, except as I said above, those too-big-to-fail entities which were already fully backstopped by the feds.

Meanwhile I am happy to have my cash in First Republic -- even if they do collapse, which I doubt will happen any time soon, this episode has shown I won't lose access to my funds. I almost never go into the bank of course but if I want to it's nice and close, which is as good a reason to use them as any other.

Re: Banking in uncertain times

#356

Post by chordalkeyboard »

s1artibartfast wrote: post #351
chordalkeyboard wrote: post #349

Earlier quoted context omitted.

> 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 u…

Im fine with your terminology and reference. The current date (or that of reporting) can be the reference time for a real dollar valuation. I fully understand how bond market prices are impacted by interest rates. What most people seem ignorant of is the fact that bonds are not simply market trades asset, but are also have a value at maturity. Most people don't seem to know that HTM assets are reported separate from…

> It seems obvious to me that if you never intend to sell a bond, the maturity value is a measure of interest.

The reason this matters is because in the case of a bank who needs the funds to operate then they very much might need to sell the bonds, or revalue them at NPV because of statutory requirements.

This entire discussion is because the NPV of HTM assets is now relevant.

Re: Banking in uncertain times

#357

Post by OJFord »

echion wrote: post #116
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,…

> why is it that we allow a bank to not mark-to-market a security for which there is a liquid market? Because at maturity, the bank gets back its money. So it is perfectly valid to say "in ten years, this $100m bond is worth $100m...and I intend to hold it for ten years, so it's worth $100m [equivalent] today". The "I intend to hold it" is the relevant part of the valuation, though.

But why is that valid, if it's trading below par?

In the extreme - obviously you can't buy a call option and say 'I intend to hold this until it's $10 in the money, so it's actually worth (time-adjusted) $10'. What's the difference, besides probabilities of outcomes?

Re: Banking in uncertain times

#358

Post by skybrian »

lordnacho wrote: post #320
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…

> 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 This is a _good_ thing. We don't want a house of cards that's so fragile as soon as it looks like it it's going to fall down, we pour glue all over it and prop it up with cardboard. Assets need to…

It seems like there are limits, though. Do you really need to contribute to a flash crash [1], or is some longer time period okay?

Not getting triggered by a flash crash seems more robust, and getting triggered by it more fragile? Some of the time, anyway.

[1] https://en.wikipedia.org/wiki/2010_flash_crash

Re: Banking in uncertain times

#359

Post by fwlr »

photochemsyn wrote: post #135
mooreds wrote: post #25

Read this all the way to the disclaimers at the bottom. It's just a fantastic piece of writing, digging deep into some of the unseen structures that underlie our society. I'm not close enough to the banking system to judge the truth of it, but it was beautiful. PS If you are on email lists, make sure to respond occasionally to the author. It's hard out there and they are shouting into the void. If a piece makes you s…

It seems to avoid discussing a rather basic issue, which is that as Fed interest rates rose, the interest rates on deposits (i.e. individual savings accounts) did not increase at all due to bank executives wanting to harvest more of that pie for themselves. Hence people seem to have an incentive to move money out of banks and into money market accounts that were giving much higher returns on those deposits. The histo…

“ as Fed interest rates rose, the interest rates on deposits (i.e. individual savings accounts) did not increase at all”

Very true

“due to bank executives wanting to harvest more of that pie for themselves.”

Eh, needlessly inflammatory and does not get at the real issue, although it is undoubtedly true that banks profited by not raising deposit interest rates. Banks could not safely raise deposit interest rates because large parts of those deposits were locked into investments in fixed-rate financial instruments.

Re: Banking in uncertain times

#360

Post by jessaustin »

bubbleRefuge wrote: post #203
O__________O wrote: post #100

Earlier quoted context omitted.

Stating obvious, this is only true until debts exceed a leverage US government has to inject currency it magically creates or utilize other financial tools it has available. At the point they are unable to do so, that’s no longer the case, system reaches a critical point for which recovery will take real assets at fair market value on the global market. Ironically, US’s down fall may be its own failure to believe its…

If Banks make bad loans and those loans( or investments) are marked to market bringing the bank out of compliance with Capital requirements, then it gets shutdown.

That's the theory, but does anyone still believe it? In USA now, and for at least the last 15 years, those wealthy enough to hire lobbyists always get bailed out. This week was an opportunity to improve that situation, merely by allowing FDIC to operate in its normal lawful fashion. Small deposits protected entirely, large deposits receive their share of liquidated assets, shareholder equity disappears. Easy and lawful. Saule Omarova, had she been confirmed, would have pushed for this. (If better OCC regulation under her leadership hadn't avoided this situation entirely.) Suddenly it's obvious why she was not confirmed...
Post reply on HN