Only if you decide to pay 4.5%. Even today we see banks “raise” their rate to 2.X%. That was Scripta’s point, that the rate being offered to customers is entirely discretionary - and yes, a bulk of deposits are pretty sticky, despite the typical behavior of most people here.
You don’t pay market rates, you’re at an even bigger risk of a run when depositors start leaving.
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Only if depositors are aware of and expect a market rate. I suspect there aren’t enough such people to make a difference.
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No time to parse the rest, but from your quoted comment, how low do you predict inflation to go from the current “pressure”?
While correct, I successfully claimed a “loss” on my taxes in … maybe '89 and '90 during the S&L fiasco. Some of my fixed income interest was delayed / destroyed. Although questioned, or “audited” by some people’s definition, my accountant’s explanation was not disputed. Our previous history in Tax Court may have had something to do with that.
I can’t figure out what the heck you’re saying (my fault, not yours), but am going to guess that your answer to @onenote 's question is $5B. Is that right?
hedge fund letter on the banking crisis, very good read on the Fed, FDIC, and economic implications.
Why bank risks exist and also how money market mutual funds are very safe and highly attractive right now, with none of the risks of holding your money in banks.
https://www.bloomberg.com/opinion/articles/2023-03-30/bed-bath-beyond-has-more-stock-to-sell
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A few years ago a bank named TNB USA Inc. — it stands for “The Narrow Bank” — started up with a simple business model. It would take deposits from customers and park 100% of the deposits at the Federal Reserve. The Fed pays interest on bank reserves, so TNB would get interest from the Fed; it would pass some of that interest along to its depositors and keep some to pay its expenses.
This business model had two benefits:
- In 2018, when we first talked about this, banks were paying extremely low rates on deposits (single-digit basis points), while the Fed was paying banks 1.95% interest on their reserves. By cutting out all of the normal expenses of banking (loan officers, capital against loans, etc.), TNB could pass along most of that interest to depositors and offer them a better interest rate than other banks.
- TNB was incredibly safe. It would take no credit risk (all its deposits would be parked at the Fed) and no interest-rate risk (all its liabilities and all its assets would be demand deposits). If there was a run on TNB, it would just take its money out of the Fed and give it to its customers. It could never lose money or cause a crisis. After the 2008 banking crisis, this had an obvious appeal.
To do this business model, TNB needed to open an account with the Fed (so it could park deposits there). And the Fed … said no.
The Fed, it turns out, kind of hated The Narrow Bank. The problem is that TNB would be too safe. In 2019, the Fed proposed a rule to, not quite ban narrow banking, but to discourage it. I summarized the Fed’s concerns at the time, saying that the Fed worried “that narrow banks will take funding away from regular banks, making it harder for those banks to trade stocks and bonds … and maybe even making it harder to make loans,” and “that having too safe a bank would be bad for financial stability: In times of stress, everyone will flee from the regular banks to the super-safe narrow banks, which will have the effect of bringing down the regular banks.”
This seems to be a theme in how the Fed thinks about banks. The Fed likes banks. The Fed is broadly supportive of the idea that banks should get deposits from customers and use those deposits to make loans. This is a very traditional, centuries-old idea. This is just how banking works. But we know that banking is fragile; occasionally — in 2008, in March 2023 — we are reminded of it more forcefully. And so sometimes people come along with ideas — for narrow banking, for stablecoins, for universal Fed accounts, for central bank digital currencies — to make banking safer. “I just want to have a checking account,” they say, “so why should I have to put my money in a bank that will take risks with it by making loans or buying long-term bonds? Why does my checking account have to represent a claim on a complicated system of debt? Why can’t it just be simple electronic dollars? The Fed issues dollars; why can’t my checking account just be that?”
The [answer to those questions] is sort of unsatisfying but also very beautiful: Banks are a way to get society to collectively take financial risks that people would not individually take.[[13]]. You want your checking account to be safe, and everyone wants their checking accounts to be safe, but somebody needs to lend people money to start businesses or buy houses, and banks stand between the need for safe checking accounts and the need for risky debt financing and magically transform risk into safety. And they do this through some combination of opacity and mystery and implicit and explicit government backing. It will always be fragile and frustrating, because it is in some deep sense a trick, but it’s a socially valuable trick.
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Here’s their bottom line. Events have proven some of this wrong. The Fed kept on tightening although only a quarter point. Interest rates are coming back up. But the basic points made by the letter are still true IMO.
The market is betting that the sudden lack credit available to business will result in severe economic consequences that will force the Fed to lower rates. Longer term bonds reflect the expected average of shorter term rates. In a single day, the yield on the 6-month Treasury plunged from 5.2% to 4.8%. Even more impressive, the 2-year plunged from 4.6% to 4.0%. The market is saying the Fed is done tightening. Indeed, on March 15, the Fed reported that over the previous week its balance sheet had expanded by $300 billion, erasing half of the Quantitative Tightening that began last April.
These events are setting gold up for another epic run. The banking crises of 2008 and 2020 forced the Fed to hyper-print dollars and sent gold vertical. The market perceived that the recent inflation would prompt the Fed to tighten monetary conditions; gold softened, though not nearly as much as it might have. Now inflation is still running at 6%, yet the Fed has already rolled out extraordinary programs to support bank balance sheets and soon more QE to support the economy. And at some point insurance companies and pension funds will start to fail without rates returning to near zero soon.
From a geopolitical perspective, only U.S. banks are eligible to use the BTFP. Non- U.S. banks active in the eurodollar market who may be in a similar situation as SVB are on their own. Notably, Credit Suisse has been teetering on failure for the past few months, if the market for its credit default swaps are at all accurate. Its shares traded down 29% this morning as the market bets it will not survive, which would all but force the Fed to reopen massive swap lines with the ECB. The U.S. rates market, which last
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Another hedge fund commentary on the banking crisis
Meanwhile the regulators are doing what they always do – creating the next crisis. Markets left alone to clear are the most severe regulators, punishing stupidity and deterring future bad behavior. Markets distorted by the state double down on their worst follies. In this case, the staggering scale of Covid-era stimulus checks flooding the system made it hard for banks to put money to work in a sensible way. Many erred in their capital management, but their goofs would have been survivable without the government’s massive, clumsy programs. Arsonists love innocent fires because it gives them cover to do what they love. Regulators love crises because they can show up and settle old scores. After taking over Signature, they let potential bidders know that they can’t restart their crypto business. After taking over Silicon Valley Bank, they handpicked bidders, shooing away private equity and hand selecting First Citizens (FCNCA) for a bonanza practically can’t lose deal.
Clearly the regulators are not letting the crisis go to waste. They want to be able to pick the winners and losers. This round they added First Citizens to the winners circle along with Bank of America, JP Morgan, Citi, and others whose too big to fail status has flooded them with new deposits.
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Biden to blame Trump for bank failures, nevermind the regulators who saw the SIVB problems and told them over a year ago, and regularly thereafter but stood by and didn’t nothing but remind them until they blew up.
https://www.wsj.com/articles/white-house-calls-for-tougher-midsize-bank-rules-ca33211f
“It would be unfortunate if the response to bad management and delinquent supervision at SVB were additional regulation on all banks that would impose meaningful costs on the U.S. economy going forward,” said Greg Baer, the president and chief executive of the Bank Policy Institute, which represents midsize and large banks. “This has a strong feeling of ready, fire, aim.”
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The chase CEO talks up the economy to try to stanch the outflow of funds from his bank
Dimon, regarded as one of the most powerful investment bankers on Wall Street, wrote in his annual shareholder letter that elevated consumer spending and the massive savings that households accumulated during the lockdown-induced recession are likely to produce a strong economy in the near future, notwithstanding the market volatility of the past year.
“Unemployment is extremely low, and wages are going up, particularly at the low end,” the executive wrote. “Even if we go into a recession, consumers would enter it in far better shape than during the great financial crisis. Finally, supply chains are recovering, businesses are pretty healthy and credit losses are extremely low.”
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Chase / JPM are big winners in this banking crisis. All the money moves out of small / regional accounts that are worried about being uninsured if they’re not as important as SIVB and its VC patrons, and goes to Chase, BofA, etc.
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I have read mixed stories on that. Some are as you say but other articles say that even the big ones are seeing outflows. I do not think it is good for Chase if a large number of small banks fail.
Dimon is also sending mixed messages
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The FDIC is dumping all those treasuries and mortgages the failed banks held.
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I wonder how these compare to the daily trading volume in the securities?
The FDIC said the face values of the two portfolios are approximately $27 billion for Signature Bank’s holdings and $87 billion for SVB’s holdings The securities consist primarily of agency mortgage-backed securities (MBS), collateralized mortgage obligations (CMO), and commercial mortgage-backed securities (CMB).
The sales “will be gradual and orderly,” the FDIC said, “and will aim to minimize the potential for any adverse impact on market functioning by taking into account daily liquidity and trading conditions.”
Opinion piece - Regulations, loosened or not, were not the cause of these failures.
In neither case would the Dodd-Frank regulations have prevented the bank from failing. US Treasury bonds are commonly viewed as the safest asset that one can buy, meaning that SVB’s portfolio would have likely passed any “stress tests” that regulators would have thrown at it. Signature closed its doors as a result of a good old-fashioned bank run, which Dodd-Frank—nor any other regulation—could ever truly prevent. This fact was attested to by Barney Frank himself, who was on the board of directors at Signature! As convenient an explanation as it might be, the exemption of these banks from Dodd-Frank had nothing to do with their ignominious collapse.
The full implications of the Fed’s malicious monetary policy are yet to fully manifested, but one point is already clear. If we are to prevent these or other crises in the future, the problem must be pulled out by its roots: the cheap-money policies of the Fed must be ended once and for all.
While centralized control over interest rates and the money supply persists, we can expect continued recessions and crises into the future. Dodd-Frank—or any similar legislation, for that matter—misunderstands the problem entirely. The solution to financial distress is not in regulating markets but in removing interference in them. No regulation, large or small, can save us from the consequences of bad monetary policy and economic illiteracy.
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This opinion writer fails to mention why others think that SVB would have failed a Dodd-Frank stress test – poor asset liability management. They had too much assets allocated to long-term Treasury bonds. I don’t recall the exact numbers I read and can’t find the source, but it was something like twice more than other banks (like 60% vs 30% of all assets). We all knew a year ago that the Fed would be raising rates, so the bank should have known that the value of their portfolio would go down. With better asset allocation they might have survived a bank run, but more likely there wouldn’t even be a bank run.
Isnt that the exact argument the quote dismisses with
Sure, different asset allocation could’ve allowed them to absorb more of a run before failing, but that’s unrelated to regulation prior to that bank run occuring. Only at the point of mass withdrawals did they begin to fail any actual or hypothetical test. A better asset allocation would’ve only affected the calculation used to determined if they were insolvant, and delayed that drop-dead point to some extent.
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And I believe that the “SVB’s portfolio would have likely passed any “stress tests” that regulators would have thrown at it” is wrong. If you read the linked document, you’ll see that the stress tests include many variables, including the short and long-term treasury rates using quarterly rates starting in 2000. Some of those tests would have resulted in the current scenario of a deep cut in asset values. I don’t see the meaning of passing or failing, but I suspect it would have at least raised some flags. The author himself states “would have likely passed”, meaning that he is not entirely certain of his own claims.
I’d also argue that the run on the bank only occurred because enough people realized that the bank was going under, because their assets were losing value at an incredible pace. If the bank had fewer such assets, the run might not have occurred.