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Bank failures come in waves

yarn.pranshum.com

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Re: Bank failures come in waves

#71

Post by 55555 »

dalyons wrote: post #31
bubbleRefuge wrote: post #4

Pretty Simple fix. Have the fed backstop all depositors to infinity. Today there are no limits on the number of 250k FDIC insured deposits. Logically the same thing as insuring a single account to infinity.

I don’t know why you’re being downvoted - it’s the only thing that makes sense. If the fed doesn’t, then we’ll just see a huge boom in middlemen offering accounts that automatically spread across 250k chunks behind the scenes. They already exist as a niche product, but would become mainstream with more failures. Either way the fdic is insuring the same total amount of money, so may as well cut out that inefficiency a…

Or they just close that loophole? Why is that allowed in the first place?

Re: Bank failures come in waves

#72

Post by fuoqi »

neilwilson wrote: post #69
fuoqi wrote: post #53

Earlier quoted context omitted.

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 isolati…

It's entirely 180 degrees backward. Banks operate by discount. You take a thing to the bank, the bank values it and then a financial asset is created which the bank buys by creating an advance of its own liabilities against it. The bank then books the assets (the mortgage) against the advance. The bank's balance sheet is expanded. The individual then 'pays' people with the advance - which does nothing other than chan…

>You don't even need somebody else's money to start a bank. The Bank of England was started by issuing shares to subscribers and booking them on the asset side as nil paid.

We discuss commercial banks. The Bank of England is quite far from your run of the mill commercial bank, to say the least. Try to start a commercial bank without any capital, it will be a fun exercise.

As I've said in the post, there are various make-believe games which can be played with assets. My favorite example is the irredeemable gold certificates owned by the Fed.

Your systematic view is certainly valid, but it does not matter much for day-to-day operations of most banks. They do not care about how the system was kick started. For them reserves at a central bank play role of bag of coins, even though, as you said, there are no real coins, just pairs of assets and liabilities spread out between different balance sheets.

>Much of the problems we have with banking and the view against it is because of the persistence of the Monetarist view

Oh, so the current debacle is mostly fault of monetarists? Got it. And here I thought that the "temporary" make believe games introduced after GFC, lax regulation, irresponsible fiscal and monetary policy had something to do with it... /s

Re: Bank failures come in waves

#73

Post by qqqwerty »

acjohnson55 wrote: post #21
bee_rider wrote: post #19

Earlier quoted context omitted.

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.

This exists, many times over. It's called a cash sweep. See one example here: https://www.wellsfargo.com/investing/cash-sweep/

And just as a warning, it is still not clear how sweep accounts are handled in the case where the primary bank fails. SVB offered sweep accounts. But due to the intervention, the recovery process of those accounts was never tested in a real life scenario. If recovering your sweep accounts takes months, that could be really bad for a business trying to make payroll. And from what I read, there is some "operational risk" as well, i.e. if a bunch of money hits your account the same day a bank fails, that money will be in your primary banks account and if it is over the FDIC limit that amount will be uninsured.

Re: Bank failures come in waves

#74

Post by gnicholas »

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.

You've just coined a new term, "morale hazard". Perhaps this is when there is a moral hazard problem that affects morale?

Re: Bank failures come in waves

#75

Post by strken »

acjohnson55 wrote: post #17
TechBro8615 wrote: post #8

Earlier quoted context omitted.

Maybe we should stop paying taxes since the FED can just print new money when we need it.

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…

I wish MMT adherents would lobby harder to tax capital gains at the same rate as labour.

Re: Bank failures come in waves

#76

Post by Jerry2 »

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…

Yes, that's how it works. There's this amazing animated movie from 2011 that explains how banking works and the history of banks: "The Collapse of The American Dream Explained in Animation" [1] It has almost 10 million views.

[1] https://www.youtube.com/watch?v=mII9NZ8MMVM

Re: Bank failures come in waves

#77

Post by rocqua »

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…

It's not quite right that banks don't loan out their depositors money. They need depositors to be able to make loans. Stashing depositors money at the Fed keeps the bank from making loans.

Stashing money at the Fed is possible by the way, and effectively does destroy the money (or rather, takes it out of the economy). Banks can deposit money at the Fed earning exactly the interest rate that the Fed controls. This effectively takes that money out of the economy. That is generally rather bad, because it stifles growth. But in case of inflation, it can sort of help. That is part of why the Fed interest rate helps regulate inflation.

But generally speaking, you want loans to be made! It helps good and productive ideas get of the ground. It is core to Western economies. Hence the Fed is quite scared of narrow banking. They want to be the 'borrower of last resort'.

Re: Bank failures come in waves

#78

Post by em500 »

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...

Cochrane's speculates a bit about the Fed's motives near the end. He doesn't think they're outright evil, in cahoots with the incumbent commercial banks, etc. He thinks it's a misguided attempt to cross-subsidize the lending activities at the current commercial banks. If the super safe narrow bank draws away a lot of the common depositors, the commercial bank will need to get more other (more expensive) funding sources (bonds and other loans) which can make mortgages, business loans etc more expensive.

edit: It was Scott Sumner, commenting on Cochrane's blog, who speculated that the motive might be cross-subsidizing the normal bank lending activities: https://www.econlib.org/why-does-the-fed-oppose-narrow-banki...

Re: Bank failures come in waves

#79

Post by sonthonax »

dgrin91 wrote: post #50
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…

If I'm a bank why would I want to get X% interest from the Fed when I can instead get X+Y% interest from some other investment option[0]? Yes the risk is higher, but typically only marginally so. Obviously you have big failures like SVB & others, but the reality is that those aren't common. It also lets the bank pass on the increased rates to customers. The current fed interest rate is ~4.5%, but there are banks out…

Banks usually have a regulatory requirement to keep a portion of funds in the Federal Reserve.

Re: Bank failures come in waves

#80

Post by rocqua »

fuoqi wrote: post #68
tasubotadas wrote: post #56

Earlier quoted context omitted.

Crazy. How did the story with narrow bank end?

You can be your own narrow bank by directly investing into short-term bonds or by buying a money market fund.

That has massive fee friction, does not eliminate counter party risk entirely, and earns different (lower?) rates than the Fed offers.
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