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.
Moral Hazard?
Bank failures come in waves
91–100 of 259 posts
Re: Bank failures come in waves
#92Interestingly enough, the graph of bank failures looks like the ones Mandelbrot shows in his works about transmission errors if I recall correctly (can't check right now). My conjecture is that markets encode information rather than other things like value etc. Failures are just transmission errors.
Re: Bank failures come in waves
#93Earlier quoted context omitted.
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 sourc…
Am I reading this right? They expected this mechanism to be too efficient for regular, already established banks to compete? So a safer, more efficient mechanism for banking is declined in order to keep the established banks competitive? Isn't that sort of outrageous?
You're in good company if you find that outrageous. But the (speculative) reasoning is not so much to keep them competitive, but to keep borrowing cheap. In the real world, lots of people want to borrow money for 3, 5 or 10 years for their business or 10, 20, 30 years for their mortgage (and preferably at fixed rates), while very few people want to lend out money for such long terms at fixed rates. So the way banks handle this is pool together lots of small short terms loans like deposits and count on the observed regularity that they usually don't withdraw their money simultaneously (SVB notwithstanding). If the relatively stable and cheap small deposits are all going to narrow banks, how are the lending banks going to fund the longer term loans?
Re: Bank failures come in waves
#94Earlier quoted context omitted.
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 sourc…
The narrow bank restricts the Fed's ability to hawkishly raise the interest rate. It won't be able to get away with gross market Vs policy mismatches anymore. I mean think about it, the Fed makes an unintended policy error and raises the interest rate far above what banks can pay, everyone goes to the narrow banks. If the interest rate is too low nobody goes to the narrow bank. So the Fed essentially would have to pe…
Which is ok, because that's just the market punishing the Fed for poor decisions.
Re: Bank failures come in waves
#95Continuing the theme of the article the current banking crisis has exposed two conflicting functions of money i.e., store of value and a vehicle of investment both of which are facilitated by banks.
Keeping money safe, whether physically or digitally, comes at a cost. Banks absorb this cost because they make money through credit creation, maturity transformation, and interchange fees. They even pass on some of that profit to depositors. However, each of these banking activities create risk, which is passed onto the deposit holders and is offset, to an extent, by deposit insurance. In low to zero-interest-rate scenarios, banks act as pure custodians as their revenues decline, which is why we saw EU banks charging negative interest rates, i.e., a fee, to maintain customer deposits.
There's a delicate balance and an inherent conflict between keeping money safe and earning yields, the two functions performed by a commercial bank. Customers don't perceive this conflict unless a bank breaks down as SVB did.
I think this crisis is the strongest yet reason to push for CBDCs as only a central bank can fully guarantee a deposit. In terms of systems design, this is a clear delineation of responsibilities.
CBDC: If you want safe custody of your money.
Bank: If you want to lend your money in return for a yield. And as with any lending, you take the risk of a borrower defaulting.
Re: Bank failures come in waves
#96From 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…
Creating money out of nothing is a mechanism to get large projects off the ground. Without it, it would be difficult to fun infrastructure, R&D, etc. like most mechanisms, it can be used in good and bad ways.
Re: Bank failures come in waves
#97Pretty 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.
This is a monumentally bad idea.
If there is infinity backstop, I will simply create a bank and lend millions to my friends and promptly go bust. They get paid out by the government and I walk away. They do the same for me. We laugh at the poor taxpayer who foots the bill.
Re: Bank failures come in waves
#98Earlier quoted context omitted.
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 m…
"Try to start a commercial bank without any capital, it will be a fun exercise."
It's precisely the same. You issue shares to subscribers and mark them as nil paid.
That is capital - because you have a call on their resources - much as the names of Lloyds of London capitalise the insurance market.
Reserves are irrelevant to banking. Here in the UK we didn't even have reserves until 2005 yet we'd been operating a central banking system for 300 years at that point.
This obsession with central bank reserves is a peculiarly American concept.
Loans create deposits, and the central bank simply accommodates the simulation of money moving around the payment system.
There is no control function from central bank reserves. It's a complete myth. If the central bank tries, monetarist style, then the payment system breaks, fires break out and they have to back off. Hence the Bank Term Funding Program.
There comes a point when the belief in bags of coins and fixed amounts of money has to die.
Re: Bank failures come in waves
#99Earlier 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.
Seems silly to make people jump through these hoops when all the want is a safe, low-yield investment.
There is no safe investment of any kind. Even bonds or cash have risks.
This stuff is immensely complicated once you peer behind the curtains.
Re: Bank failures come in waves
#100Earlier quoted context omitted.
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?
Then they would immediately start a run toward Treasuries.