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Bank failures come in waves

yarn.pranshum.com

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Re: Bank failures come in waves

#51

Post by the_optimist »

fuoqi wrote: post #49
zizee wrote: post #41

From what I understand, when someone takes out a loan, a bank doesn't lend out depositors' money. Instead money is "created" by the bank (on behalf of the fed), and the bank needs to pay the fed interest. The bank also needs to pay the loan back by an agreed uppn time (which destroys the money). Why can we not have a similar system for deposits? A bank takes a deposit, the fed "destroys" the money, but pays interest…

>when someone takes out a loan, a bank doesn't lend out depositors' money. Instead money is "created" by the bank (on behalf of the fed), and the bank needs to pay the fed interest. Commercial banks can not create loans out of thin air during normal operation. They either have to use depositors' money or share holders' capital. In other words, bank's liabilities (e.g. user deposits) should not exceed its assets (loan…

This is outright incorrect. https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/m...

Re: Bank failures come in waves

#52

Post by laserbeam »

That's it?

Alright. What do you mean by a wave? How did any of the 3 previous bank failures collapse "in waves"? Based on your graphic why did the S&L failure have more financial institutions fail towards the end of thr wave, but the 2008 crysis had more fail at the start?

The graph is beautiful but really, none of the analysis done even discusses waves, or how a bank failure can progress.

Finally, you make a point towards the end that SVB made a mistake and we don't know how widespread it is... Can we look at the pretty graph to other scenarios when a bank made a mistake and was isolated?

I somehow felt cheated at the end of the article, as if I expected some analysis but only found surface level news. This feels like a piece that should have been 2-3x long, and could have explored how each of the previous failures evolved over time.

Re: Bank failures come in waves

#53

Post by fuoqi »

the_optimist wrote: post #51
fuoqi wrote: post #49

Earlier quoted context omitted.

>when someone takes out a loan, a bank doesn't lend out depositors' money. Instead money is "created" by the bank (on behalf of the fed), and the bank needs to pay the fed interest. Commercial banks can not create loans out of thin air during normal operation. They either have to use depositors' money or share holders' capital. In other words, bank's liabilities (e.g. user deposits) should not exceed its assets (loan…

This is outright incorrect. https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/m...

What exactly is incorrect in my explanation? Are you saying that bank's liabilities can exceed its assets for a prolonged time? Or that reserves at a central bank do not pay interest? The second order effects (such as loan at one banks creates deposit at another, meaning M2 gets essentially "printed"), which are important for monetary policy and regulation, are not relevant when we view operation of a bank in isolation.

Re: Bank failures come in waves

#55

Post by acjohnson55 »

brightball wrote: post #38
acjohnson55 wrote: post #17

Earlier quoted context omitted.

Your comment seems pretty unserious, but modern monetary theory ( https://en.wikipedia.org/wiki/Modern_Monetary_Theory ) adherents assert that the point of taxes is not to "fund" anything, but to engineer incentives, redistribute wealth, and remove excess money. And that, yes, we should simply print money, to the extent that we need to, subject to the constraint that excess money causes inflation in specific circumst…

In all circumstances. It’s a nonsense theory that is entirely based on the idea that everybody in the world will accept the value of our currency is maintained while no other country on earth gets this benefit. The sarcasm was warranted.

I'm not an expert on MMT, but I've never heard anyone say that. MMTers say that a government cannot be forced to default on debts denominated in its own currency, but that doesn't mean it can control exchange rates if it chooses to prints money to pay them. MMT encourages a broader range of thinking about what's possible, but those possibilities aren't free of consequences.

Re: Bank failures come in waves

#56

Post by tasubotadas »

xyzzyz wrote: post #44
zizee wrote: post #41

From what I understand, when someone takes out a loan, a bank doesn't lend out depositors' money. Instead money is "created" by the bank (on behalf of the fed), and the bank needs to pay the fed interest. The bank also needs to pay the loan back by an agreed uppn time (which destroys the money). Why can we not have a similar system for deposits? A bank takes a deposit, the fed "destroys" the money, but pays interest…

Fed hates that and fights this tooth and nail. See, for example: https://johnhcochrane.blogspot.com/2018/09/fed-nixes-narrow-... https://johnhcochrane.blogspot.com/2019/03/fed-vs-narrow-ban...

Crazy. How did the story with narrow bank end?

Re: Bank failures come in waves

#58

Post by dehrmann »

bee_rider wrote: post #19
insaneirish wrote: post #7

Earlier quoted context omitted.

> Pretty Simple fix. Backstops have a cost, and infinite backstop subsidizes risk taking activity of deposit taking institutions. I'm not even saying that what was done in the wake of SVB and Signature was wrong, per se, but making it formal policy that all deposits in a bank are insured is a fundamental change to the foundation of banking in the US. It may be "right" or it may be "wrong", but the one thing it is not…

Hmm. Would it be easy nowadays to just have a software service that split up an account into n accounts of less than $250k, and then presented a single interface to all of them? I guess individual purchases over $250k would be a problem, but I guess a short-term gather operation could be ok, as long as you aren’t too worried about a bank run while that transaction was occurring.

Seems silly to make people jump through these hoops when all the want is a safe, low-yield investment.

Re: Bank failures come in waves

#59

Post by acjohnson55 »

bubbleRefuge wrote: post #24
acjohnson55 wrote: post #13

Earlier quoted context omitted.

I think that's not necessarily true. They can do what was done for SVB and backstop deposits, but take over the bank if the insurance kicks in, firing the managers and wiping out many of the investors. That's probably enough to prevent moral hazard. The bigger issue is the concentration of deposits and potential suppression of investment.

agree with all except your last sentence . whats the issue ?

Concentration of deposits leads to less competition in the banking sector and more concentrated risk in global systemically important banks, i.e. the ones that are too big to fail. But maybe that's no the end of the world, and maybe the deposit limit isn't the best way to create competition.

And if banks aren't allowed to make risky investments with deposits (good policy, IMO), then I believe we want people and businesses using banks for their most liquid needs, but otherwise, putting their money to work through investment.

Re: Bank failures come in waves

#60

Post by acjohnson55 »

maxilevi wrote: post #36
acjohnson55 wrote: post #13

Earlier quoted context omitted.

I think that's not necessarily true. They can do what was done for SVB and backstop deposits, but take over the bank if the insurance kicks in, firing the managers and wiping out many of the investors. That's probably enough to prevent moral hazard. The bigger issue is the concentration of deposits and potential suppression of investment.

Managers might have been fired and equity wiped out but they still have all the rent and bonuses that were extracted during the high risk high reward activities. That’s why it’s a morale hazard and the fed taking over it doesn’t solve it.

I don't see how letting the depositors get hosed while the bank gets taken over is any better than bailing out the depositors. Either way, the rents have been extracted. Why does the $250k limit make a difference to bank management behavior?
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