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General Category => General Discussion => Topic started by: kaysixteen on March 13, 2023, 08:37:47 PM

Title: bank failures
Post by: kaysixteen on March 13, 2023, 08:37:47 PM
I confess that I am almost clueless as to the mechanics of why banks collapse, both in general and specifically in the cases of the three that went belly-up in the last week.   And it is certainly the case that there is a nuch of conflicting info being circulated about the reasons for these banks' failures, some of which is clear disinformation being put out by righties.   So could someone(s) in the know elaborate on the specs of these cases?
Title: Re: bank failures
Post by: jimbogumbo on March 14, 2023, 11:07:25 AM
Here is a pretty good explanation for Silicon Valley Bank's issues: https://www.ft.com/content/b556badb-8e98-42fa-b88e-6e7e0ca758b8?segmentId=b385c2ad-87ed-d8ff-aaec-0f8435cd42d9
Title: Re: bank failures
Post by: jimbogumbo on March 14, 2023, 01:18:43 PM
And this in time-line format:https://www.cnn.com/2023/03/14/business/bank-run-explained-svp-dg/index.html
Title: Re: bank failures
Post by: Ruralguy on March 14, 2023, 01:48:02 PM
A financial expert can correct me, but from what I have heard,  it was primarily over-investment in long term bonds (it may have been some other type of security rather than a bond) which have lost value as interest rates have increased.
Title: Re: bank failures
Post by: dismalist on March 14, 2023, 02:06:01 PM
Quote from: Ruralguy on March 14, 2023, 01:48:02 PM
A financial expert can correct me, but from what I have heard,  it was primarily over-investment in long term bonds (it may have been some other type of security rather than a bond) which have lost value as interest rates have increased.

Correct, but it's something the regulators could have easily spotted, and should have. There are different accounting rules for debt to be held to maturity and debt available for sale before maturity. This is regulatory failure. Dodd-Frank has 2300 pages. :-)

See, e.g., https://johnhcochrane.blogspot.com/2023/03/silicon-valley-bank-blinders.html (https://johnhcochrane.blogspot.com/2023/03/silicon-valley-bank-blinders.html)
Title: Re: bank failures
Post by: jimbogumbo on March 14, 2023, 02:23:46 PM
I've been reading that SVB was one of the medium sized banks that got relief from some Dodd-Frank requirements when President Trump signed a 2017 bill (a bill supported by Senate Democrats not named Elizabeth Warren), and at the urging of among others Barney Frank on behalf of Signature Bank (which also went belly up last week?).
Title: Re: bank failures
Post by: dismalist on March 14, 2023, 02:38:41 PM
Quote from: jimbogumbo on March 14, 2023, 02:23:46 PM
I've been reading that SVB was one of the medium sized banks that got relief from some Dodd-Frank requirements when President Trump signed a 2017 bill (a bill supported by Senate Democrats not named Elizabeth Warren), and at the urging of among others Barney Frank on behalf of Signature Bank (which also went belly up last week?).

That was about the size of banks to be scrutinized. Making exceptions to a dumb law is not necessarily smart, nor is not making exceptions. Nevertheless, from CNN:

QuoteThe rollback law did give the Federal Reserve the right to choose to apply the regulations to particular banks with at least $100 billion in assets, and it said that banks that met that $100 billion threshold would still face "periodic" Fed stress tests.

QuoteSVB had $209 billion in assets at the end of last year

QuoteNothing in the law, Kelleher noted, prevented the Fed from telling SVB to come up with a plan to address known problems with its balance sheet, from its high percentage of uninsured depositors to and its customers' concentration in a particular industry and geographic area. "There's this whole panoply of tools and sanctions to back up Federal Reserve supervisors to ensure that a bank doesn't act like this bank did. And yet none of that appears to have happened," Kelleher, who served on Biden's presidential transition team, said Monday.

Asleep at the wheel!
Title: Re: bank failures
Post by: jimbogumbo on March 14, 2023, 03:23:48 PM
Quote from: dismalist on March 14, 2023, 02:38:41 PM

Asleep at the wheel!

Not the first time, nor the last for the Federal Reserve or the SEC for that matter!
Title: Re: bank failures
Post by: dismalist on March 14, 2023, 03:34:21 PM
Quote from: jimbogumbo on March 14, 2023, 03:23:48 PM
Quote from: dismalist on March 14, 2023, 02:38:41 PM

Asleep at the wheel!

Not the first time, nor the last for the Federal Reserve or the SEC for that matter!

Correct. All this regulation, so far, while trying to control risks also incentivizes banks to take more risks! Existing regulation is the product of bankers wanting to make money and bureaucrats wanting to have something to do.

The source of the problem is fractional reserve banking, a problem well understood for maybe two centuries [except in the United States].

Long ago propagated views, such as 100% reserves [from 1935, Irving Fisher & Chicago] or, more recently, limited purpose banking [checking accounts as mutual funds, Laurence Kotlikoff ], are ignored.
Title: Re: bank failures
Post by: Anselm on March 14, 2023, 06:34:12 PM
Now wait...now listen...now listen to me. I beg of you not to do this thing. If Potter gets hold of this Building and Loan, there'll never be another decent house built in this town. He's already got charge of the bank. He's got the bus line. He got the department stores. And now he's after us. Why? Well, it's very simple. Because we're cutting in on his business, that's why. And because he wants to keep you living in his slums and paying the kind of rent he decides. Joe, you had one of those Potter houses, didn't you? Well, have you forgotten? Have you forgotten what he charged you for that broken-down shack? Here, Ed. You know, you remember last year when things weren't going so well, and you couldn't make your payments? You didn't lose your house, did you? Do you think Potter would have let you keep it? Can't you understand what's happening here? Don't you see what's happening? Potter isn't selling. Potter's buying! And why? Because we're panicking and he's not. That's why. He's picking up some bargains. Now, we can get through this thing all right. We've got to stick together, though. We've got to have faith in each other.
Title: Re: bank failures
Post by: Ruralguy on March 14, 2023, 06:49:04 PM
The funnest fact about that movie is that the cops are named Bert and Ernie. Seriously.
Title: Re: bank failures
Post by: dismalist on March 14, 2023, 06:57:15 PM
The saddest thing about that movie is that Karl Marx had already written in the Manifesto that capitalism [the bourgeoisie to him] has saved us from the idiocy of village life.
Title: Re: bank failures
Post by: clean on March 14, 2023, 09:21:09 PM
QuoteThe funnest fact about that movie is that the cops are named Bert and Ernie. Seriously.

I think you will find that Ernie was the taxi driver. 


That aside we are witnissing the twitter version of bank runs. 
Once the run starts, there is little logic and as Jimmy Stewart noted, the money is not in the bank, its in Joe's house and Frank's house (i dont remember the names).  The point is that it would be hard for ANY bank to survive the sort of run that happened last week. 

Hopefully, the belief that no one will (insured or not) will lose any deposits, will keep this contagious fear from spreading to other banks.     

Title: Re: bank failures
Post by: clean on March 14, 2023, 09:34:42 PM
Here is an article I just saw (after my last post)

https://www.msn.com/en-us/money/other/twitter-fueled-bank-run-how-social-media-helped-bring-down-silicon-valley-bank/ar-AA18D92N?ocid=hpmsn&cvid=e30fb80012df4bb4aa793f6c59e9416e&ei=14
Title: Re: bank failures
Post by: kaysixteen on March 14, 2023, 10:00:24 PM
If a run begins on one particular bank. couldn't the govt, instead of chloroforming the whole institution (another quote from George Bailey), merely shut it down temporarily and impose temporary restrictions on the amount of money any given depositor could withdraw, along perhaps with requiring the bank to liquidate some of its assets to bolster its cash on hand?
Title: Re: bank failures
Post by: apl68 on March 15, 2023, 06:35:24 AM
Quote from: clean on March 14, 2023, 09:34:42 PM
Here is an article I just saw (after my last post)

https://www.msn.com/en-us/money/other/twitter-fueled-bank-run-how-social-media-helped-bring-down-silicon-valley-bank/ar-AA18D92N?ocid=hpmsn&cvid=e30fb80012df4bb4aa793f6c59e9416e&ei=14

Somehow it seems appropriate that Silicon Valley Bank was the victim of the first "digital bank run." 
Title: Re: bank failures
Post by: ciao_yall on March 15, 2023, 08:16:48 AM
Quote from: kaysixteen on March 14, 2023, 10:00:24 PM
If a run begins on one particular bank. couldn't the govt, instead of chloroforming the whole institution (another quote from George Bailey), merely shut it down temporarily and impose temporary restrictions on the amount of money any given depositor could withdraw, along perhaps with requiring the bank to liquidate some of its assets to bolster its cash on hand?

That makes a lot of sense. Maybe a little too much? Theoretically, the fact that the wheels have already fallen off means that it might be too late for that bank.

Banking laws are designed to keep banks from getting to that point in the first place. They don't like it because it costs them profit - they have to keep reserves at a certain level so they can't invest in more profitable, riskier investments. So they kvetch about "strangling regulations" until they want the government to bail them out.

The 2009 financial crisis and bailouts were handled, IMO, very poorly by the government, and the banks ended up laughing all the way to.. the bank? So I think they are more cautious this time about who needs to be protected.

That said, no bank could survive all its depositors suddenly demanding their cash back.
Title: Re: bank failures
Post by: Ruralguy on March 15, 2023, 08:20:49 AM
Oh, sorry, yes, one of them was the taxi driver. But there is the scene in which, I think its Bailey, calls out "Bert! Ernie!" and I laughed at that the first time I heard it. 
Title: Re: bank failures
Post by: Anselm on March 15, 2023, 10:01:44 AM
K16, I believe part of the idea behind the FDIC was to assure the public that their money is safe and they can still withdraw funds even from a distressed bank.  I believe that normally people can get their money within one business day of a bank failure.   With SVB it does look like they came up with a system to keep it running.  What I want to know is if this option is already written in their rules or if they are making things up on the fly.  In past years did owners of large deposits lose most of their money when their bank failed?  One old schoolmate of mine was president of a a bank that failed during the GFC of 2007.  Eight million dollars of his personal net worth evaporated.  I want to know if there are new rules in place for all banks or is SVB being treated with special kid gloves.
Title: Re: bank failures
Post by: ciao_yall on March 15, 2023, 10:23:18 AM
Quote from: Anselm on March 15, 2023, 10:01:44 AM
K16, I believe part of the idea behind the FDIC was to assure the public that their money is safe and they can still withdraw funds even from a distressed bank.  I believe that normally people can get their money within one business day of a bank failure.   With SVB it does look like they came up with a system to keep it running.  What I want to know is if this option is already written in their rules or if they are making things up on the fly.  In past years did owners of large deposits lose most of their money when their bank failed?  One old schoolmate of mine was president of a a bank that failed during the GFC of 2007.  Eight million dollars of his personal net worth evaporated.  I want to know if there are new rules in place for all banks or is SVB being treated with special kid gloves.

That was always a risk for large depositors. During 2008-9 there were people who risked losing their escrow accounts, for example, because they were over the limit during the period that the bank was siezed. Not sure how those situations finally worked out.

Title: Re: bank failures
Post by: dismalist on March 15, 2023, 10:49:07 AM
QuoteI want to know if there are new rules in place for all banks or is SVB being treated with special kid gloves.


"The Treasury Department designated both SVB and Signature as systemic risks, giving it authority to unwind both institutions in a way that it said "fully protects all depositors." The FDIC's deposit insurance fund will be used to cover depositors, many of whom were uninsured due to the $250,000 cap on guaranteed deposits." From NBC.

SVB owners are losing all. SVB depositors lose nothing. The reason is fear, panic really, of contagion.

The cash is coming form the FDIC, which is financed by banks. This reduces banks' profits indirectly, and reduces their owners' tax payments, so the bailout is financed by taxes! Just doesn't look that way. :-)

The difficulty with such bailouts is that it encourages banks to take greater risks. I win, I win big. I lose, I lose a little and you lose a lot.

There are better ways of handling the risks to the monetary system posed by fractional reserve banking, but not today.
Title: Re: bank failures
Post by: ciao_yall on March 15, 2023, 11:25:55 AM
Quote from: dismalist on March 15, 2023, 10:49:07 AM
QuoteI want to know if there are new rules in place for all banks or is SVB being treated with special kid gloves.


"The Treasury Department designated both SVB and Signature as systemic risks, giving it authority to unwind both institutions in a way that it said "fully protects all depositors." The FDIC's deposit insurance fund will be used to cover depositors, many of whom were uninsured due to the $250,000 cap on guaranteed deposits." From NBC.

SVB owners are losing all. SVB depositors lose nothing. The reason is fear, panic really, of contagion.

The cash is coming form the FDIC, which is financed by banks. This reduces banks' profits indirectly, and reduces their owners' tax payments, so the bailout is financed by taxes! Just doesn't look that way. :-)

The difficulty with such bailouts is that it encourages banks to take greater risks. I win, I win big. I lose, I lose a little and you lose a lot.

There are better ways of handling the risks to the monetary system posed by fractional reserve banking, but not today.

Actually the investors and owners lose big, because the value of their investments is reduced or wiped out.

Depositors should be protected because it isn't their fault the banks mismanaged themselves. Should they have been monitoring the bank? Maybe. But that's also the expectation that we pay fees for banks to manage themselves, and taxes for regulatory oversight.

For example... Charles Schwab... (https://www.businessinsider.com/svb-banking-crisis-billionaire-charles-schwab-losses-brokerage-shares-plunge-2023-3)
Title: Re: bank failures
Post by: dismalist on March 15, 2023, 11:45:10 AM
Quote from: ciao_yall on March 15, 2023, 11:25:55 AM
Quote from: dismalist on March 15, 2023, 10:49:07 AM
QuoteI want to know if there are new rules in place for all banks or is SVB being treated with special kid gloves.


"The Treasury Department designated both SVB and Signature as systemic risks, giving it authority to unwind both institutions in a way that it said "fully protects all depositors." The FDIC's deposit insurance fund will be used to cover depositors, many of whom were uninsured due to the $250,000 cap on guaranteed deposits." From NBC.

SVB owners are losing all. SVB depositors lose nothing. The reason is fear, panic really, of contagion.

The cash is coming form the FDIC, which is financed by banks. This reduces banks' profits indirectly, and reduces their owners' tax payments, so the bailout is financed by taxes! Just doesn't look that way. :-)

The difficulty with such bailouts is that it encourages banks to take greater risks. I win, I win big. I lose, I lose a little and you lose a lot.

There are better ways of handling the risks to the monetary system posed by fractional reserve banking, but not today.

Actually the investors and owners lose big, because the value of their investments is reduced or wiped out.

Depositors should be protected because it isn't their fault the banks mismanaged themselves. Should they have been monitoring the bank? Maybe. But that's also the expectation that we pay fees for banks to manage themselves, and taxes for regulatory oversight.

For example... Charles Schwab... (https://www.businessinsider.com/svb-banking-crisis-billionaire-charles-schwab-losses-brokerage-shares-plunge-2023-3)

And both failed miserably. Incentives.

Narrow banking is a better way: https://www.forbes.com/2009/04/22/loan-mortgage-mutual-fund-wall-street-opinions-contributors-bank.html?sh=52f1305853d0 (https://www.forbes.com/2009/04/22/loan-mortgage-mutual-fund-wall-street-opinions-contributors-bank.html?sh=52f1305853d0)
Title: Re: bank failures
Post by: Hegemony on March 15, 2023, 12:02:06 PM
Quote from: Ruralguy on March 14, 2023, 06:49:04 PM
The funnest fact about that movie is that the cops are named Bert and Ernie. Seriously.

Perhaps you already know this, but the Sesame Street Bert and Ernie were specifically named after the It's A Wonderful Life characters. So it's not a coincidence.
Title: Re: bank failures
Post by: Ruralguy on March 15, 2023, 12:14:59 PM
I didn't know it, but I suspected so, which is why I thought it was funny.
Title: Re: bank failures
Post by: dismalist on March 15, 2023, 02:52:47 PM
Quote from: kaysixteen on March 14, 2023, 10:00:24 PM
If a run begins on one particular bank. couldn't the govt, instead of chloroforming the whole institution (another quote from George Bailey), merely shut it down temporarily and impose temporary restrictions on the amount of money any given depositor could withdraw, along perhaps with requiring the bank to liquidate some of its assets to bolster its cash on hand?

'Ya know, it was once that way, before the founding of the Federal Reserve in 1913. Banks in trouble would just suspend converting money in checking accounts to cash. You could still write checks on your account, and the check would trade at a discount, the size of which depended upon in how much trouble people thought were in. But you checking account didn't go to zero! Anyway, after some while things would get back to normal for the depositors, not necessarily for the owners.
Title: Re: bank failures
Post by: pgher on March 15, 2023, 06:42:46 PM
Quote from: Hegemony on March 15, 2023, 12:02:06 PM
Quote from: Ruralguy on March 14, 2023, 06:49:04 PM
The funnest fact about that movie is that the cops are named Bert and Ernie. Seriously.

Perhaps you already know this, but the Sesame Street Bert and Ernie were specifically named after the It's A Wonderful Life characters. So it's not a coincidence.

I always thought so, but apparently it's an urban legend:
https://www.sfgate.com/entertainment/carroll/article/A-Few-Tiny-Errors-Part-I-3326829.php (https://www.sfgate.com/entertainment/carroll/article/A-Few-Tiny-Errors-Part-I-3326829.php)
Title: Re: bank failures
Post by: nebo113 on March 16, 2023, 05:44:19 AM
What happened to risk taking capitalism?  Now they expect government bailouts.
Title: Re: bank failures
Post by: dismalist on March 16, 2023, 10:29:24 AM
Quote from: nebo113 on March 16, 2023, 05:44:19 AM
What happened to risk taking capitalism?  Now they expect government bailouts.

Risk taking capitalism works when he who chooses the risk level gains when it works and loses when it fails. Fractional reserve banking [not all your cash is not in the bank's cellar, its been lent out] means if the bank takes risks and wins, it keeps the gains, but if it loses, the whole banking system can go down the tubes. That's why there has to be regulation of risk. Bailouts are necessary to save the system, not the owners of the failing bank.

There are better ways.
Title: Re: bank failures
Post by: kaysixteen on March 16, 2023, 11:20:30 AM
Those better ways should probably not be capitalizing all the profits whilst socializing the risks.   What do you suggest?  As an aside here, the govt had better figure out a way to take back those hideous bonuses SVB paid its execs last week.
Title: Re: bank failures
Post by: dismalist on March 16, 2023, 11:57:15 AM
Narrow banking is a better way: https://www.forbes.com/2009/04/22/loan-mortgage-mutual-fund-wall-street-opinions-contributors-bank.html?sh=52f1305853d0 (https://www.forbes.com/2009/04/22/loan-mortgage-mutual-fund-wall-street-opinions-contributors-bank.html?sh=52f1305853d0)

The idea is that your checking account money goes into a mutual fund of your choice, including one that keeps your dollar bills in the cellar. Your checking account can become worth more or less, but hardly worthless. You can still write checks. You bear the risk. If that's too high for you, put your money into the fund that just puts your dollars into the cellar. 

Banks would no longer be able to make money from demand deposits, just from raising capital  or borrowing in the form of bonds and lending that out. Such a bank could still fail, like any other company, but it would leave the depositors, and hence the financial system, intact. No more bank runs. And bureaucrats would have less to do. Therefore, will never come to pass. :-)
Title: Re: bank failures
Post by: Stockmann on March 17, 2023, 08:10:26 AM
Quote from: kaysixteen on March 14, 2023, 10:00:24 PM
If a run begins on one particular bank. couldn't the govt, instead of chloroforming the whole institution (another quote from George Bailey), merely shut it down temporarily and impose temporary restrictions on the amount of money any given depositor could withdraw, along perhaps with requiring the bank to liquidate some of its assets to bolster its cash on hand?

That sounds far more likely to cause widespread panic than making depositors whole the next day or so. It seems to me that depositors made whole would mostly deposit the money in some other bank, as a message is sent that depositors are safe, whereas if access to your money is restricted, that means that depositors WILL be affected (limited access to their own money) which creates an incentive to keep money as cash under the mattress, crypto, etc. These are not just theoretical considerations - Argentina once went down the restricted access route (granted, this being Argentina it applied to all banks, not just some) and it was catastrophic, not least because it restricted people's ability to spend. But if applied to just one or a few banks, I don't see how it would save them - depositors would surely withdraw, spend or transfer every penny they could, as fast as they could, out of the restricted accounts, have any income deposited into another bank, etc.
Title: Re: bank failures
Post by: kaysixteen on March 17, 2023, 08:15:50 AM
This is not necessarily wrong, but it may keep the bank alive, whereas what is done, as in the case of SVB, kills it completely.  I am not sure that a bank's total demise is a good thing.
Title: Re: bank failures
Post by: dismalist on March 18, 2023, 10:43:48 AM
Contagion is a real worry:

--First Republic Bank  is going down the tubes even though a group of banks deposited $30 billion with First Republic.

--Credit Suisse will borrow up to $54 billion form the Swiss Central Bank.

This ain't over yet.