Silicon Valley Bank Failure

[Jack Jones]

While the FDIC was stepping in to make all depositors whole at SVB, the Fed was setting up the lifeline for all depository institutions called the Bank Term Funding Program. Pretty cool, they will make term loans to institutions on assets AT PAR. So if a bank holds a bond or MBS portfolio that has been demolished in value due to the increasing rate environment, they can access this liquidity from the Fed. This will give the bank the time to hold their assets until they either recover in value or mature.
https://www.federalreserve.gov/newseven ... 30312a.htm

Where will these funds come from? The Fed will create them obviously. No mention of amount limits, rates or other details.
So are we tightening or loosening? To the point being discussed in one of the other forum threads, maybe both.

This new mechanism is not getting much press but IMO it is really big news, maybe bigger than the FDIC insuring the SVB and Signature Bank.

I agree that both are happening. The average person is experiencing tightening; however, alms will continue to be bestowed to the elite institutions and individuals. The overall effect will be inflationary, it will be under-reported, and it is exactly what the USG wants to happen. The current debt load in unmaintainable unless there is significant inflation.

[Jack Jones]

So... Is it stupid to have money in any bank that isn't one of these?

I opened an account at JP Morgan yesterday!

[vnatale]

So, does this mean that FDIC is now set at infinity? Some clarity needed.

I can't imagine what it was like for hundreds, maybe thousands of entrepreneurs and management who went through maybe the worst 24-48 hours of their careers through no fault of their own. Let's see what this week brings.

Although the libertarian view (depending on your flavor of libertarian) might not be so sympathetic to the depositors. Those entrepreneurs and customers chose to do business with a private bank that chose to mismanage its risk.

Personally I think the government stepping in was the right thing otherwise panic would have spread throughout the system. And because it's obvious no private solution was available i.e. no other bank was willing to come forward and buy SVB. There were probably some discussion that they took the weekend to exhaust before making it a government solution. Remains to be seen what happens next.
Are demolished bond portfolios the new institutional toxic asset?

There is always a cost though, right? What is the cost of the government stepping in here? More inflation, IMO.

No doubt government spending is a cause of some inflation. But all of it? How does one explain the world-wide inflation that is going on? In other words, how much of a cause is government for inflation?

[glennds]

Although the libertarian view (depending on your flavor of libertarian) might not be so sympathetic to the depositors. Those entrepreneurs and customers chose to do business with a private bank that chose to mismanage its risk.

Personally I think the government stepping in was the right thing otherwise panic would have spread throughout the system. And because it's obvious no private solution was available i.e. no other bank was willing to come forward and buy SVB. There were probably some discussion that they took the weekend to exhaust before making it a government solution. Remains to be seen what happens next.
Are demolished bond portfolios the new institutional toxic asset?

There is always a cost though, right? What is the cost of the government stepping in here? More inflation, IMO.

Could be. The FDIC making depositors whole is not inflationary. The lending program could be depending on what banks do with the money. If they just keep it on their balance sheets to cover withdrawals and maintain compliance, then it wouldn't be inflationary. Plus at the end of one year, the loans come due, unless they're re-financed or rolled over.

[Maddy]

The current debt load in unmaintainable unless there is significant inflation.

If the government were at all concerned about its debt load, it wouldn't be cranking the printing presses 24/7 to fund the most frivolous stuff imaginable. There's something else going on here, and it has the feel of a pre-bankruptcy spending spree.

[Tortoise]

Therefore under your proposal [the bank would] only be allowed to loan out the portion of the [deposits] that is CDs?

Correct.

That would certainly be a drastic reduction in how much they'd be able to loan (and a reduction in profits). What do you suggest they do (invest?) with the money that you believe they should not be allowed to loan?

Charge a service fee, as I explained in my previous post. To recap:

• Time deposits (CDs): Bank would make money by lending out the deposits for the duration of the CD
• Demand deposits (checking): Bank would make money by charging a service fee

The reason I call it fraud when a bank lends out demand deposits is because the bank gives the customer the impression (whether explicitly or implicitly) that their demand deposits will be available for immediate withdrawal at any time. But if they lend out the customer's demand deposits, they obviously cannot guarantee such availability for all customers (which becomes painfully obvious during a bank run).

Therefore, lending out a customer's demand deposits knowingly misleads the customer, i.e., it is fraud.

[vnatale]

Therefore under your proposal [the bank would] only be allowed to loan out the portion of the [deposits] that is CDs?

Correct.

That would certainly be a drastic reduction in how much they'd be able to loan (and a reduction in profits). What do you suggest they do (invest?) with the money that you believe they should not be allowed to loan?

Charge a service fee, as I explained in my previous post. To recap:

• Time deposits (CDs): Bank would make money by lending out the deposits for the duration of the CD


• Demand deposits (checking): Bank would make money by charging a service fee

The reason I call it fraud when a bank lends out demand deposits is because the bank gives the customer the impression (whether explicitly or implicitly) that their demand deposits will be available for immediate withdrawal at any time. But if they lend out the customer's demand deposits, they obviously cannot guarantee such availability for all customers (which becomes painfully obvious during a bank run).

Therefore, lending out a customer's demand deposits knowingly misleads the customer, i.e., it is fraud.

All you say seems logical and consistent. But it would certainly be a radical dramatic change in the banking industry if your proposals were adopted.

[Tortoise]

All you say seems logical and consistent. But it would certainly be a radical dramatic change in the banking industry if your proposals were adopted.

Definitely.

But it's a necessary change, IMO. The whole reason why bank runs destroy banks is because of the institutionalized fraud. It makes the banks fundamentally fragile and unstable. If bank loans were legally limited to time deposits (CDs) as they should be, bank runs would not destroy banks.

But the banking industry simply has too much of a vested interest in maintaining its institutionalized fraud, so this change will probably never happen -- unless the entire banking system implodes. Even then, I'm doubtful.

[glennds]

All you say seems logical and consistent. But it would certainly be a radical dramatic change in the banking industry if your proposals were adopted.

Definitely.

But it's a necessary change, IMO. The whole reason why bank runs destroy banks is because of the institutionalized fraud. It makes the banks fundamentally fragile and unstable. If bank loans were legally limited to time deposits (CDs) as they should be, bank runs would not destroy banks.

But the banking industry simply has too much of a vested interest in maintaining its institutionalized fraud, so this change will probably never happen -- unless the entire banking system implodes. Even then, I'm doubtful.

You might have a solution looking for a problem. Or at least a problem big enough for the juice to be worth the squeeze of a radical departure from modern fractional banking.
Bank runs are not that common in the US, especially if you exclude the Great Depression and the 2008 financial crisis. Here is a list: https://en.wikipedia.org/wiki/List_of_bank_runs

This said, social media may be changing the game. Think about it, any fool could put out a tweet or TikTok video saying Wells Fargo has massive problems and your money is not safe there. If the tweet or video goes viral in an hour, next thing you know, there could be a run on that particular bank, for no good reason. That capability simply wasn't there in the past. So even though there isn't a history of bank runs being a frequent issue, there could be new vulnerability. It's kinda like the phenomenon of meme stocks.

[DogBreath]

The whole reason why bank runs destroy banks is because of the institutionalized fraud. It makes the banks fundamentally fragile and unstable. If bank loans were legally limited to time deposits (CDs) as they should be, bank runs would not destroy banks.

Not sure how this would fix anything. AFAIK, all CDs are redeemable on demand with an interest penalty, usually 3 months worth. If you thought the bank that held your CD was going to collapse next week, wouldn't you happily forfeit 3 months of interest to get your principle back immediately? Wouldn't all the other CD holders at that bank think/do likewise?

[Xan]

The whole reason why bank runs destroy banks is because of the institutionalized fraud. It makes the banks fundamentally fragile and unstable. If bank loans were legally limited to time deposits (CDs) as they should be, bank runs would not destroy banks.

Not sure how this would fix anything. AFAIK, all CDs are redeemable on demand with an interest penalty, usually 3 months worth. If you thought the bank that held your CD was going to collapse next week, wouldn't you happily forfeit 3 months of interest to get your principle back immediately? Wouldn't all the other CD holders at that bank think/do likewise?

It's possible that small penalty might very well be enough to prevent a run. At the moment there's zero penalty to trying to get your money out.

Tortoise's plan (since we're just making things up anyway!) might also include CDs that are not redeemable early.

[Tortoise]

You might have a solution looking for a problem. Or at least a problem big enough for the juice to be worth the squeeze of a radical departure from modern fractional banking.
Bank runs are not that common in the US, especially if you exclude the Great Depression and the 2008 financial crisis. Here is a list: https://en.wikipedia.org/wiki/List_of_bank_runs

Are you suggesting that institutionalized fraud in the banking system should be tolerated because bank runs are uncommon?

If so, that's a rather strange argument since civilized societies generally consider fraud to be illegal, unethical, and not to be tolerated.

This said, social media may be changing the game. Think about it, any fool could put out a tweet or TikTok video saying Wells Fargo has massive problems and your money is not safe there. If the tweet or video goes viral in an hour, next thing you know, there could be a run on that particular bank, for no good reason. That capability simply wasn't there in the past. So even though there isn't a history of bank runs being a frequent issue, there could be new vulnerability. It's kinda like the phenomenon of meme stocks.

Risk probability is a consideration, sure, but so is risk magnitude. For example, "black swan" events typically have very low probability but very large magnitude. I'd say a bank run is a good example of a black swan event.

In any case, whether bank runs remain uncommon or become more common due to social media is really not the point. Institutionalized fraud should be opposed for legal and moral reasons alone, even aside from any considerations regarding the likelihood that the fraud will ultimately lead to a bank run.

[Tortoise]

The whole reason why bank runs destroy banks is because of the institutionalized fraud. It makes the banks fundamentally fragile and unstable. If bank loans were legally limited to time deposits (CDs) as they should be, bank runs would not destroy banks.

Not sure how this would fix anything. AFAIK, all CDs are redeemable on demand with an interest penalty, usually 3 months worth. If you thought the bank that held your CD was going to collapse next week, wouldn't you happily forfeit 3 months of interest to get your principle back immediately? Wouldn't all the other CD holders at that bank think/do likewise?

It's possible that small penalty might very well be enough to prevent a run. At the moment there's zero penalty to trying to get your money out.

Tortoise's plan (since we're just making things up anyway!) might also include CDs that are not redeemable early.

Yes. I'm definitely not an expert on this stuff, but the bank should probably match CD types with corresponding loan types. So if a given CD is callable, it should be matched with a callable loan. And if a given CD is non-callable, it should be matched with a non-callable loan.

Private insurance companies could also play a role, I'm sure. (I think Mark mentioned that earlier in the thread.)

[vnatale]

The whole reason why bank runs destroy banks is because of the institutionalized fraud. It makes the banks fundamentally fragile and unstable. If bank loans were legally limited to time deposits (CDs) as they should be, bank runs would not destroy banks.

Not sure how this would fix anything. AFAIK, all CDs are redeemable on demand with an interest penalty, usually 3 months worth. If you thought the bank that held your CD was going to collapse next week, wouldn't you happily forfeit 3 months of interest to get your principle back immediately? Wouldn't all the other CD holders at that bank think/do likewise?

It's possible that small penalty might very well be enough to prevent a run. At the moment there's zero penalty to trying to get your money out.

Tortoise's plan (since we're just making things up anyway!) might also include CDs that are not redeemable early.

Yes. I'm definitely not an expert on this stuff, but the bank should probably match CD types with corresponding loan types. So if a given CD is callable, it should be matched with a callable loan. And if a given CD is non-callable, it should be matched with a non-callable loan.

Private insurance companies could also play a role, I'm sure. (I think Mark mentioned that earlier in the thread.)

What is usual longest term CD? Five years? Under your scenario how would banks finance house mortgages?

[glennds]

Are you suggesting that institutionalized fraud in the banking system should be tolerated because bank runs are uncommon?

If so, that's a rather strange argument since civilized societies generally consider fraud to be illegal, unethical, and not to be tolerated.

How is it fraud?
Did a bank ever tell you that they had enough cash on hand to satisfy every single depositor withdrawing all funds at one time?
I have never heard of a bank making such a representation.
The banking system is heavily regulated, and the way it works is not concealed from its depositors. So I can understand criticism of it, but I'm not seeing the fraud part.

[Tortoise]

What is usual longest term CD? Five years? Under your scenario how would banks finance house mortgages?

In finance, I think this problem is called cashflow matching.

Basically, one way to do it would be to take a pool of 5-year CDs with staggered maturities and match it with a pool of 30-year mortgages, such that the total CD cash flow matches the total mortgage cash flow.

[Tortoise]

Are you suggesting that institutionalized fraud in the banking system should be tolerated because bank runs are uncommon?

If so, that's a rather strange argument since civilized societies generally consider fraud to be illegal, unethical, and not to be tolerated.

How is it fraud?
Did a bank ever tell you that they had enough cash on hand to satisfy every single depositor withdrawing all funds at one time?
To your knowledge, has any American bank ever made that representation?
The banking system is heavily regulated, and the way it works is not concealed from its depositors. Help me understand the fraud part.

It's fraud because what the bank says to a given demand depositor is effectively, "We will hold your demand deposits for safe keeping, and we promise to make them available to you for withdrawal immediately at any time." They don't mention the potential actions of "every single depositor", because the promise they are making to me is regarding my funds only.

Look, most of us here are financial geeks. But the average person is decidedly not a financial geek. When Joe Six-Pack deposits money into a checking account, he generally doesn't research the nature of the fractional-reserve banking system and pore over financial statements and regulatory reports. Maybe he should, but let's be realistic; he doesn't. He hands over his money with the implicit or explicit (I'm not fully sure which) understanding that the bank will hold it safely for him and give it back to him if and when he demands it.

My claim is that when a bank lends out demand deposits, it is violating that implicit or explicit understanding. When the bank promises Joe Six-Pack that he can withdraw his deposits at any time, Joe reasonably assumes his deposits are kept in a type of allocated or unallocated storage. But in fact they are not. Most of the time, most of the customers' demand deposits are being loaned out by the bank. It's deceptive, and to me that means it's fraud.

But I guess you're free to use a different definition of fraud if it makes more sense to you.

[Maddy]

It's fraud because what the bank says to a given demand depositor is effectively, "We will hold your demand deposits for safe keeping, and we promise to make them available to you for withdrawal immediately at any time." They don't mention the potential actions of "every single depositor", because the promise they are making to me is regarding my funds only.

Look, most of us here are financial geeks. But the average person is decidedly not a financial geek. When Joe Six-Pack deposits money into a checking account, he generally doesn't research the nature of the fractional-reserve banking system and pore over financial statements and regulatory reports. Maybe he should, but let's be realistic; he doesn't. He hands over his money with the implicit or explicit (I'm not fully sure which) understanding that the bank will hold it safely for him and give it back to him if and when he demands it.

My claim is that when a bank lends out demand deposits, it is violating that implicit or explicit understanding. When the bank promises Joe Six-Pack that he can withdraw his deposits at any time, Joe reasonably assumes his deposits are kept in a type of allocated or unallocated storage. But in fact they are not. Most of the time, most of the customers' demand deposits are being loaned out by the bank. It's deceptive, and to me that means it's fraud.

I agree that it's deceptive--and not only toward the unsophisticated. The reality of what a bank offers a depositor is so ridiculously one-sided that if people really understood what was going on, they'd never put their money there.

Remember the recording that surfaced a few weeks back? A member of the banking establishment made a remark to the effect that "We can't let the public know what the situation really is or else there will be a run on the banks." That statement pretty much says it all. It betrays (1) a recognition that ordinary people don't know, and (2) that the banking industry is actively engaged in a course of conduct calculated to insure that they don't find out.

[Xan]

Is there any particular reason to have a lot of cash sitting in a bank? I keep enough to pay the monthly bills, but the rest of my "cash" is in a T-bill fund at a brokerage. Anybody here use a bank to just hold significant money?

[vnatale]

Is there any particular reason to have a lot of cash sitting in a bank? I keep enough to pay the monthly bills, but the rest of my "cash" is in a T-bill fund at a brokerage. Anybody here use a bank to just hold significant money?

I had been for many, many, many years strictly through inertia. It did not help that Money Market funds were paying next to nothing. I was finally motivated to get it out of the bank sometime next year when it really became worth it to get it into the Vanguard Treasuries money market fund.

[glennds]

I agree that it's deceptive--and not only toward the unsophisticated. The reality of what a bank offers a depositor is so ridiculously one-sided that if people really understood what was going on, they'd never put their money there.

Where do you keep your money?
Do you have a way of paying your bills outside the banking system?

[Maddy]

Where do you keep your money?
Do you have a way of paying your bills outside the banking system?

I don't have a lot of money, so that solves a multitude of problems!

[glennds]

Where do you keep your money?
Do you have a way of paying your bills outside the banking system?

I don't have a lot of money, so that solves a multitude of problems!

Well that's an elegant solution!

But the bigger question is how does one go about living a normal life without the banking system? I'm concluding it's nearly impossible. Even life without a credit or debit card is not particularly easy.
I guess the crypto fans fantasize about a future without banking where transactions occur peer to peer. Not sure how realistic that vision is.

[Maddy]

The only thing I can think of to do is to split your money between multiple banks and credit unions. Because credit unions are insured by an entirely different entity with different rules, and because credit unions are typically exposed to a somewhat different set of risks, that kind of diversification is likely to give you an edge in case of a systemic "event." Another thought is to pay bills ahead.

[vnatale]

This was an excellent segment regarding this topic and banks, in general.

He is not shy in giving his opinions regarding how things should have been and should be done.



https://www.c-span.org/video/?526807-6/ ... k-deposits

MARCH 27, 2023 | PART OF WASHINGTON JOURNAL 03/27/2023
Washington Journal
William Isaac on FDIC and Government's Role to Protect Bank Deposits
Former FDIC Chair William Isaac talked about the federal government’s role in the SVB and Signature Bank crisis and the level of responsibility government has in protecting bank deposits.