bank failures

[kaysixteen]

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?

[jimbogumbo]

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

[jimbogumbo]

And this in time-line format:https://www.cnn.com/2023/03/14/business/bank-run-explained-svp-dg/index.html

[Ruralguy]

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.

[dismalist]

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

[jimbogumbo]

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?).

[dismalist]

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:

The 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.

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

Nothing 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!

[jimbogumbo]

Asleep at the wheel!

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

[dismalist]

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.

[Anselm]

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.

[Ruralguy]

The funnest fact about that movie is that the cops are named Bert and Ernie. Seriously.

[dismalist]

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.

[clean]

The 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.     

[clean]

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

[kaysixteen]

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?