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How deep is the rot in America’s banking industry?

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Re: How deep is the rot in America’s banking industry?

#71

Post by tptacek »

jandrese wrote: post #61
tptacek wrote: post #50

Earlier quoted context omitted.

In SVB's case, can't you cover depositors simply by holding their assets to maturity and waiting for them to be repaid? SVB couldn't do that because there was a run that was forcing them to sell early, in unfavorable conditions.

This doesn't make sense though. Sure they would have to take a haircut on those securities thanks to the fed jacking up the interest rate so much, but if you offer the right price they should still sell. Investing involves risk. Sometimes that means losing money, even if you are the bank.

No, they don't, right? They simply hold them to maturity.

The reason a $100 par bond paying 2% sells for (I don't know, say) $87 when interest rates are (I don't know, say) 5% isn't that the original bond is impaired. It's that the same $100 buys you a bond that pays 3% better, so nobody will buy the bond without a discount.

But the bank doesn't normally sell the bond to begin with. That's why people say banks "borrow short and lend long". What the bank is supposed to do is hold the bond until it matures and is paid back in full. The only reason SVB can't do that is that all its depositors simultaneously demanded their money bank, so it couldn't wait the bonds out. But other institutions can do that waiting.

Re: How deep is the rot in America’s banking industry?

#72

Post by el_nahual »

mcherm wrote: post #32
tptacek wrote: post #18

People seem to have a really hard time with the idea that, in the SVB debacle, the system worked effectively and pretty much the way it was planned to. It's not even clear what people are upset about. There's an article on the front page of The Atlantic today about how angry we should be about SVB, and if you read it, it's hard to figure out who those angry people should be. Equity is getting zeroed out. Management w…

I am one of those who has been harmed. I work at a different bank. The rates charged to banks for FDIC insurance have been based on the assumption that the FDIC would cover depositor losses up to the insured limit. By choosing to cover all losses even above the insured limit, we have chosen to put the burden for paying for those losses on all of the other banks (and indirectly on those banks depositors). I suspect th…

Have the FDIC rates actually changed or is this a hypothetical. It's relevant because the FDIC limit has not actually increased--it's still de jure $250K. The fact that the FDIC said they would cover 100% of deposits at SBV could be related to the fact they weren't actually insolvent and could have covered the run if given enough time to liquidate assets.

Re: How deep is the rot in America’s banking industry?

#73

Post by tptacek »

AmVess wrote: post #69
tptacek wrote: post #18

People seem to have a really hard time with the idea that, in the SVB debacle, the system worked effectively and pretty much the way it was planned to. It's not even clear what people are upset about. There's an article on the front page of The Atlantic today about how angry we should be about SVB, and if you read it, it's hard to figure out who those angry people should be. Equity is getting zeroed out. Management w…

Banks failing is how it is planned to work? Zero oversight from agencies charged with keeping their eyes on them is how it is supposed to work?

Yes. That is literally the reason we have the FDIC.

Re: How deep is the rot in America’s banking industry?

#74

Post by tptacek »

lackbeard wrote: post #70
tptacek wrote: post #67

Earlier quoted context omitted.

As I understand it, the ordinary way FDIC resolves a situation like this is that they simply have the failing bank acquired by a peer bank (a bank of generally the same size and structure), which then takes over the depositor obligations. So it's not as if the ordinary course is that uninsured deposits get zeroed out; it's just that the mechanism FDIC is using is novel and abrupt.

I wonder why that didn't happen in this case? Perhaps fear that would just trigger a run on the acquiring bank?

I don't know either. I've been wondering if it's largely because SVB is a weird bank. They were huge --- larger than American Express --- but with an unusually small and extraordinarily correlated based of depositors. I think it's hard to understate just how strange SVB's customer base was; the closest analogy I can come up with is the Last of Us zombies, all perfectly connected with fungus hyphae.

Re: How deep is the rot in America’s banking industry?

#75

Post by rtkwe »

ouid wrote: post #36
tptacek wrote: post #18

People seem to have a really hard time with the idea that, in the SVB debacle, the system worked effectively and pretty much the way it was planned to. It's not even clear what people are upset about. There's an article on the front page of The Atlantic today about how angry we should be about SVB, and if you read it, it's hard to figure out who those angry people should be. Equity is getting zeroed out. Management w…

The problem here is that extremely liquid assets like treasury bonds are not being marked to market resulting in completely invisible insolvency. Banks don't have a right to have you keep your deposits when their assets do not cover those deposits, and, by extension, shouldn't have a right to lie about the market value (aka value) of those assets in order to con you into doing so. Executives were still paying out the…

The weird thing is they were only insolvent under artificial pressure. A lot of banks would have similar trouble there's just not as concentrated of a depositor spread where a scant handful of people can create a run on the bank by themselves.

A distinction between held to maturity assets and market priced assets makes sense though, there should be some consideration in the calculation about term though for sure. The question of that though seems very complex to answer.

Re: How deep is the rot in America’s banking industry?

#76

Post by creato »

stametseater wrote: post #47
geodel wrote: post #42

Earlier quoted context omitted.

Well, people are specially angry about Depositors were made whole almost immediately among other things. And depositors to their dismay are learning they are about as much loved as Wall street bankers, corporate execs and billionaires. More than any particular moral deficiency I think people are finding a general lack of self-awareness common among SV startup founders infuriating.

> I think people are finding a general lack of self-awareness common among SV startup founders infuriating. Exactly this. I even read a comment from such a founder saying essentially: "Why are people so angry, don't they know I oppose brogrammer culture?" As if brogrammer culture were the meat of of the reason why people are sick of the hypocrisy of the capital class, or even American startup culture specifically. To…

> If all the depositors were merely semi-wealthy commoners with only $300k in their accounts, they would have only gotten $250k back.

No, they would have gotten $250k + ~90% of the balance. Maybe even 100%. Annoying but I wouldn’t care enough to take to twitter about it.

To explain why: it’s an overall loss of a few percent. The same as the daily fluctuation if I had kept the money in the stock market or whatever.

Re: How deep is the rot in America’s banking industry?

#77

Post by 0xcde4c3db »

tptacek wrote: post #18

People seem to have a really hard time with the idea that, in the SVB debacle, the system worked effectively and pretty much the way it was planned to. It's not even clear what people are upset about. There's an article on the front page of The Atlantic today about how angry we should be about SVB, and if you read it, it's hard to figure out who those angry people should be. Equity is getting zeroed out. Management w…

The main source of upset I've seen (disregarding the silly "woke bank" hot air) is less about banking industry regulations per se and more about viewing government priorities writ large through a blurry sense of class warfare. For example, there's a particular feeling of a double standard between SVB depositors and people with student loan debt. When the government decided to bend the rules for the former, it was done swiftly with a minimum of serious political conflict. When the government decided to bend the rules for the latter, the swift action was to arrange for the program to be challenged at the Supreme Court.

There are all kinds of legal and practical reasons that this isn't really a fair comparison, but again, it's not really about the specific policies, it's about a sense of where the government's priorities are and its flexibility seeming to only bend in one direction.

Re: How deep is the rot in America’s banking industry?

#78

Post by lackbeard »

SkyMarshal wrote: post #40
jjoonathan wrote: post #26

Earlier quoted context omitted.

Yeah, people are flailing. The only party that made out like bandits is the SVB management that piled on the risk in the first place -- but investors are ultimately responsible for letting them do that and investors have been punished.

They didn’t even pile on the risk, at least not in the 2007/2008 sense. They bought long-dated 10yr US Treasuries (or was it MBS’s? I’ve heard both), since that was one of the lowest risk assets they could invest in and still get enough spread vs their deposits to remain a viable business. It’s strange days when that is considered piling on risk. While there wasn’t counterparty risk with those assets, there was durat…

It's well known that long-dated treasuries are highly volatile. I think the lesson we've all learned here is that they didn't have a viable business. It seems like they were offering a product that was not profitable given their competition and reasonable risk management.

Re: How deep is the rot in America’s banking industry?

#79

Post by tptacek »

lackbeard wrote: post #78
SkyMarshal wrote: post #40

Earlier quoted context omitted.

They didn’t even pile on the risk, at least not in the 2007/2008 sense. They bought long-dated 10yr US Treasuries (or was it MBS’s? I’ve heard both), since that was one of the lowest risk assets they could invest in and still get enough spread vs their deposits to remain a viable business. It’s strange days when that is considered piling on risk. While there wasn’t counterparty risk with those assets, there was durat…

It's well known that long-dated treasuries are highly volatile. I think the lesson we've all learned here is that they didn't have a viable business. It seems like they were offering a product that was not profitable given their competition and reasonable risk management.

They're volatile if you trade them, right? But they're not volatile in the sense that there's uncertainty that they'll pay back. Do banks normally actively trade their long-dated bonds?

Re: How deep is the rot in America’s banking industry?

#80

Post by ouid »

tptacek wrote: post #46
ouid wrote: post #36

Earlier quoted context omitted.

The problem here is that extremely liquid assets like treasury bonds are not being marked to market resulting in completely invisible insolvency. Banks don't have a right to have you keep your deposits when their assets do not cover those deposits, and, by extension, shouldn't have a right to lie about the market value (aka value) of those assets in order to con you into doing so. Executives were still paying out the…

The "insolvency" here was detailed in the SEC statements, which is, as I understand it, how the run happened --- there was chatter about it last year. Further: the "market value" thing here is complicated. The reason there is separate available-for-sale and held-to-maturity accounting for bank assets is that, in the ordinary course, the assets are held --- the only reason you sell them is because of extrinsic distres…

I really don't see the market value thing as all that complicated. A banks liabilities are (roughly) instantaneous. They must honor withdrawals when they are requested, so their assets must be measured accordingly. There is no other reasonable definition of instanteous value except for market value. This is an extraordinary advantage of having large markets for things.

Granted, it's sometimes hard to establish market value. In the case of assets with genuinely low liquidity, the market value is somewhere above the bid and probably below the ask. Accounting in this case comes with error bars, but it's not really justifiable to approximate the value of an asset outside of this range.

Here's an example. Suppose a hypothetical bank receives 100 dollars in deposits at an interest rate of effectively 0. They use 85 dollars to buy a bond that matures in 1 year that pays 90 dollars, and keep 10 dollars in cash as reserve requirement. They pay themselves the extra 5 dollars as bonuses. They have met their fractional reserve requirements, and according to your scheme, their holdings should be valued at 100 dollars. Are they solvent?

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