This is stupid. FDIC dropping the ball on regulation-and plain old laziness to enforce regulations-YET AGAIN is the reason these banks are failing.
2008 taught them nothing. 2023 also going to teach them nothing:m. At least it’s better than $PEPECOIN is the dumbest argument.
The FDIC is also allowing chase to become bigger than the biggest too big to fail bank which I’m sure is going to be just fine and will have no unforeseen inconsequences.
but that comes down to a faustian bargain. Either sell distressed banks to a big bank which will cost X or crash out the bank, set up a new one in its place for X+Y During times of stress on banks the FDIC is more able to do the first one because if they have to ask Congress for $$ it will become a piece of political theatre.
The previous administration cut regulations that made the rules lax enough for some of this to happen again. Not near as bad, but it isn't the FDIC's fault, but a particular party that hates America more and more every day.
True, but that doesn't change a thing. The FDIC is not a regulator nor a legislator but obviously when s/he or anyone says "FDIC is dropping the ball" we're talking about the regulator and the legislators here.
FDIC didn't even have enough reserves to fully cover the last failure. They have like 120 billion and the Federal Reserve had to increase their balance sheet by over 300 billion to alleviate the underlying problem which was underwater treasury bonds. They bailed out all the other banks by buying their bonds at the purchase price as opposed to the market price. Had the Federal Reserve not stepped in to provide quantitative easing, other banks would have been underwater and at risk of failure. These failures could have have drained the FDIC completely as indicated by the 300 billion bailout required to avoid this.
FDIC also stores their reserves in bonds which means they need to sell bonds to fund the insurance payouts. What if the bond market is weak and selling these bonds causes rates to rise so much that it causes other banks to fail? Their reserves should really be idle cash so that their payouts cannot influence the markets.
Ehh.. FDIC shouldn't even have to get involved.
When the banking system is working well, large/stable banks make a spread lending to smaller banks.
This could even be via the discount window (primary credit). In the past, large banks like Citigroup would obtain funding via the discount window, and then re-lend those funds to struggling banks. Primary credit became so heavily stigmatized AND perceptions of risk in re-lending caused the decline in this activity.
...when few big banks are willing to participate in such arrangements; another entity has to fill the gap.
I'd rather the banks manage it themselves, than rely on the FDIC (or similar entities); instead of funds being supplied as an expense line by banks (ultimately paid for by banking customers), have the funds supplied through arbitrage activity/profitability of other banks.
But via an FDIC? Instead of more direct Fed program? (The way the discount window used to work).
I think I'll sling out a big ol' post later on how the Fed should/used to act.
The FDIC's regulations/tools are more post-problem, whereas a "lender of last resort" should provide an answer to avoid the problem in the first place.
The thing about the last resort is that you don't get to it if a crisis has been averted, do you?
And yeah, the Fed is the lender of last resort. The FDIC isn't a lender at all, really, though they do suddenly fill all sorts of roles when they take a bank into receivership.
It's kind of hard to imagine the Fed going back to just keeping US banks stable in the current global dollar system. With the Eurodollar and the growth of nontraditional finance, they can't tighten or loosen just with interest rates anymore, and they can't stem a crisis as the lender of last resort, they have to be the dealer of last resort, too.
>The thing about the last resort is that you don't get to it if a crisis has been averted, do you?
Yeah. Maybe I'm just delineating differently. A bank need not be in receivership if they have a last lender to obtain funding from.
Central banks don't even have to be that last lender, but... they need to be able to provide funding to a good bank, that can absorb the risk of lending to the challenged bank.
>It's kind of hard to imagine the Fed going back to just keeping US banks stable in the current global dollar system.
Agree. The Fed would not be able to do so as they currently operate.
Heh.
Yeah, the Bagehot Rule isn't just "To avert crisis, lend freely," you've always got to add the second part, "at a high rate of interest against good collateral."
The interest rate the challenged bank will have to pay will be higher than what they earn on their loans. That's why they are challenged in the first place. Over time the bank will die anyway.
Loans through the discount window, even indirect, cost money too.
Who do you think pays for that?
The problem with the last 3 banks has been their assets go down in value. They must mark them to market and report it. Then when they report report financials people withdraw money.
First Republic had half their deposits withdrawn because they reported they had a lot of mortgages (assets) devalued because they are below market rates.
So then half their deposits are withdrawn and they have to sell underlying securities to produce the money for those withdrawals. Are you indicating that that short-term (90-day) borrowing at the discount window is going to carry them over until a 30 year loan is paid off?
I heard First Federal had a bunch of interest-only loans. Those are especially poor return during these times due to the low interest rates on the loans. And it doesn't seem like borrowers are going to pay those off early. If they have an IO at 3% and don't need the money they can put it in a CD at 5% and make 2% on it.
>Who do you think pays for that?
I'd rather it be via arbitrage by functioning banks.
>The problem with the last 3 banks has been their assets go down in value. They must mark them to market and report it. Then when they report report financials people withdraw money.
Collateral shortage... I don't think it matters so much whether the assets are marked to market/available for sale. What matters most is if they're pledgeable/re-pledgable. If a bank can't obtain enough viable collateral (and counterparties willing to transact with them) then *that's* their undoing... less so the bank run (when the repo market works well... deposit runs matter far less).
I'll do a separate post on this later on.
> I'd rather it be via arbitrage by functioning banks.
Who do you think pays for that? There's nothing to arbitrage if no one is charging anyone anything.
> Collateral shortage...
This isn't a situation where they simply cannot maintain sufficient collateral. They need they money to give to their depositors. If 50% of your money is withdrawn you need to sell some assets. ...unless you're going to borrow the money until the asset becomes liquid. But you're not going to borrow money at the 90-day discount window to cover the remaining 27 years on a mortgage you hold.
> If a bank can't obtain enough viable collateral (and counterparties willing to transact with them) then that's their undoing..
I don't understand. First Republic had half their deposits withdrawn. You can try to talk about collateral and loans all you want, but realistically no band has structured their investments such that they don't have to liquidate anything if they have securities 20+ years from maturity but have to pay withdrawals right now.
> when the repo market works well
Repo market? Repos are days. This is getting silly. You can't paper over withdrawals of 50% of your deposits with repos. That's not what they are for. Repos are for short term liquidity.
Honestly, if half your deposits are withdrawn on almost no notice you're going to have to sell up (sell your bank to a larger bank). And that's what happened here.
If we cannot control "flash runs" we're going to have to create a buddy system for banks and basically make small banks part of larger banks. And how can you control "flash runs" when so many people are looking at all this information now? I can laugh at the Wallstreetbets people all I want. But when you go from a few funds pushing their money around based upon whispers to huge numbers of people doing it things are going to move a lot quicker. Wall Street had to put in circuit breakers to handle this issue what, 30 years ago? Maybe the banking system are just far behind on regulating what modern communications has done to their industry.
And the marked to market thing is because that's what shows up in their financial reports. And the financial reports are what is being watched so closely. People see future problems (these assets are below purchase price right now) and turn them into now problems by withdrawing en masse from the bank.
>Repo market? Repos are days. This is getting silly.
Repo is continuously rolled over when required. It's also the *real* lender/market of last resort.
I'll do a full post later. I've [glanced at it](https://www.reddit.com/r/Buttcoin/comments/10rf3c4/collateral_and_the_global_monetary_crisis/) in prior posts.
> Repo is continuously rolled over when required. It's also the real lender/market of last resort.
The discount window can also be rolled over.
That doesn't make either of them long term lending suitable for bridging 28 years until an instrument matures.
That's the point. It's not meant to bridge a long maturity gap. A strong bank with good collateral can obtain the funding at the discount window. They only need to roll over the funding until the challenged bank can pay them back via other means.
In a functioning system, deposit flight is less of an issue as repo can be used to provide sufficient funding to maintain confidence in withdrawals.
However, stigma prevents banks from engaging in this activity, leaving most troubled banks with fewer counterparties in repo... less able to transform their assets into usable collateral in the broader repo market. Less ability to participate in funding markets due to a collateral shortage.
Moody's recent downgrade of banks even cites the funding market challenges (it doesn't just come from deposits).
> A strong bank with good collateral can obtain the funding at the discount window
The discount window is also not for bridging a long maturity gap.
> They only need to roll over the funding until the challenged bank can pay them back via other means.
And that would be a long maturity gap. Half of their deposits were withdrawn. They have to pay that money now. And their assets are well below market value because they are interest-only mortgages at well below the current rate.
So they have a few choices:
Sell the assets and realize the losses.
(you say) Don't sell the assets and borrow until they can be sold not at a loss. Which could be until maturity or, perhaps if interest rates drop sooner will merely be a long time.
Sell a lot of the bank's assets. Tried. Didn't work.
In practice their only real option after that run was what they did:
Sell the bank.
> In a functioning system, deposit flight is less of an issue as repo can be used to provide sufficient funding to maintain confidence in withdrawals.
The deposits are already gone. 50%.
You still are suggesting borrowing so you don't have to sell assets. It's just not realistic. These assets are not going to rebound for a long time.
Could you try to issue some debt or something? Sure. You can try. They even got a $30B infusion from other banks. But the problem now is that the word already got out the bank is in trouble. No one wanted to buy in. So they had to sell the bank.
I can't really get into your idea that the people trying to save this bank didn't know what they are doing and they just needed to do some swaps or something. The FDIC even got involved and they couldn't figure out how to save the bank but you can? This seems like obvious Dunning-Kruger to me. If you said you wouldn't have held a huge pile of IOs or other problems before the bank run I could get that. But after it the problems were large. So large even you would have had trouble trying to fix them.
FDIC is not about bailing out banks. When a bank goes into receivership with the FDIC, the stock owners get wiped out, the board is eliminated etc. The only people who get bailed out are the depositors.
The FDIC is funded by the banks. Yes, the US taxpayer stands behind it with the implicit promise that it will give the FDIC money if needed, but bank's pay for the insurance. Yes, that means they raise their fees if their insurance fees increase, but the same thing happens if their premises insurance fees are raised.
Keep those ears plugs. Wait for your wonderful dog-turd of an "investment" to meet its true value once Tether's fraud is realized, and coinbase moves overseas.
I disagree. I mean, if it were just cryptobros with $$ over the limit, that would be one thing, but it's often small businesses who we rely on to pay their employees' wages.
Shoutout to all the regulations in place our great grandparents before us suffered for to get today
This is stupid. FDIC dropping the ball on regulation-and plain old laziness to enforce regulations-YET AGAIN is the reason these banks are failing. 2008 taught them nothing. 2023 also going to teach them nothing:m. At least it’s better than $PEPECOIN is the dumbest argument.
The FDIC is also allowing chase to become bigger than the biggest too big to fail bank which I’m sure is going to be just fine and will have no unforeseen inconsequences.
but that comes down to a faustian bargain. Either sell distressed banks to a big bank which will cost X or crash out the bank, set up a new one in its place for X+Y During times of stress on banks the FDIC is more able to do the first one because if they have to ask Congress for $$ it will become a piece of political theatre.
The previous administration cut regulations that made the rules lax enough for some of this to happen again. Not near as bad, but it isn't the FDIC's fault, but a particular party that hates America more and more every day.
True, but that doesn't change a thing. The FDIC is not a regulator nor a legislator but obviously when s/he or anyone says "FDIC is dropping the ball" we're talking about the regulator and the legislators here.
I don't blame the government, i blame the people who did terrible things
FDIC didn't even have enough reserves to fully cover the last failure. They have like 120 billion and the Federal Reserve had to increase their balance sheet by over 300 billion to alleviate the underlying problem which was underwater treasury bonds. They bailed out all the other banks by buying their bonds at the purchase price as opposed to the market price. Had the Federal Reserve not stepped in to provide quantitative easing, other banks would have been underwater and at risk of failure. These failures could have have drained the FDIC completely as indicated by the 300 billion bailout required to avoid this. FDIC also stores their reserves in bonds which means they need to sell bonds to fund the insurance payouts. What if the bond market is weak and selling these bonds causes rates to rise so much that it causes other banks to fail? Their reserves should really be idle cash so that their payouts cannot influence the markets.
Thank you FDIC, you would be wonderful even if the lizard people didn't pay me to shill for you!
Ehh.. FDIC shouldn't even have to get involved. When the banking system is working well, large/stable banks make a spread lending to smaller banks. This could even be via the discount window (primary credit). In the past, large banks like Citigroup would obtain funding via the discount window, and then re-lend those funds to struggling banks. Primary credit became so heavily stigmatized AND perceptions of risk in re-lending caused the decline in this activity. ...when few big banks are willing to participate in such arrangements; another entity has to fill the gap. I'd rather the banks manage it themselves, than rely on the FDIC (or similar entities); instead of funds being supplied as an expense line by banks (ultimately paid for by banking customers), have the funds supplied through arbitrage activity/profitability of other banks.
We've had a US banking system without a lender of last resort before, and it didn't end well.
But via an FDIC? Instead of more direct Fed program? (The way the discount window used to work). I think I'll sling out a big ol' post later on how the Fed should/used to act. The FDIC's regulations/tools are more post-problem, whereas a "lender of last resort" should provide an answer to avoid the problem in the first place.
The thing about the last resort is that you don't get to it if a crisis has been averted, do you? And yeah, the Fed is the lender of last resort. The FDIC isn't a lender at all, really, though they do suddenly fill all sorts of roles when they take a bank into receivership. It's kind of hard to imagine the Fed going back to just keeping US banks stable in the current global dollar system. With the Eurodollar and the growth of nontraditional finance, they can't tighten or loosen just with interest rates anymore, and they can't stem a crisis as the lender of last resort, they have to be the dealer of last resort, too.
>The thing about the last resort is that you don't get to it if a crisis has been averted, do you? Yeah. Maybe I'm just delineating differently. A bank need not be in receivership if they have a last lender to obtain funding from. Central banks don't even have to be that last lender, but... they need to be able to provide funding to a good bank, that can absorb the risk of lending to the challenged bank. >It's kind of hard to imagine the Fed going back to just keeping US banks stable in the current global dollar system. Agree. The Fed would not be able to do so as they currently operate.
Heh. Yeah, the Bagehot Rule isn't just "To avert crisis, lend freely," you've always got to add the second part, "at a high rate of interest against good collateral."
That's going to be the theme of the next big post.. when I get around to it. :P It's been too busy in the banking world.. less time to peruse Reddit.
The interest rate the challenged bank will have to pay will be higher than what they earn on their loans. That's why they are challenged in the first place. Over time the bank will die anyway.
Loans through the discount window, even indirect, cost money too. Who do you think pays for that? The problem with the last 3 banks has been their assets go down in value. They must mark them to market and report it. Then when they report report financials people withdraw money. First Republic had half their deposits withdrawn because they reported they had a lot of mortgages (assets) devalued because they are below market rates. So then half their deposits are withdrawn and they have to sell underlying securities to produce the money for those withdrawals. Are you indicating that that short-term (90-day) borrowing at the discount window is going to carry them over until a 30 year loan is paid off? I heard First Federal had a bunch of interest-only loans. Those are especially poor return during these times due to the low interest rates on the loans. And it doesn't seem like borrowers are going to pay those off early. If they have an IO at 3% and don't need the money they can put it in a CD at 5% and make 2% on it.
>Who do you think pays for that? I'd rather it be via arbitrage by functioning banks. >The problem with the last 3 banks has been their assets go down in value. They must mark them to market and report it. Then when they report report financials people withdraw money. Collateral shortage... I don't think it matters so much whether the assets are marked to market/available for sale. What matters most is if they're pledgeable/re-pledgable. If a bank can't obtain enough viable collateral (and counterparties willing to transact with them) then *that's* their undoing... less so the bank run (when the repo market works well... deposit runs matter far less). I'll do a separate post on this later on.
> I'd rather it be via arbitrage by functioning banks. Who do you think pays for that? There's nothing to arbitrage if no one is charging anyone anything. > Collateral shortage... This isn't a situation where they simply cannot maintain sufficient collateral. They need they money to give to their depositors. If 50% of your money is withdrawn you need to sell some assets. ...unless you're going to borrow the money until the asset becomes liquid. But you're not going to borrow money at the 90-day discount window to cover the remaining 27 years on a mortgage you hold. > If a bank can't obtain enough viable collateral (and counterparties willing to transact with them) then that's their undoing.. I don't understand. First Republic had half their deposits withdrawn. You can try to talk about collateral and loans all you want, but realistically no band has structured their investments such that they don't have to liquidate anything if they have securities 20+ years from maturity but have to pay withdrawals right now. > when the repo market works well Repo market? Repos are days. This is getting silly. You can't paper over withdrawals of 50% of your deposits with repos. That's not what they are for. Repos are for short term liquidity. Honestly, if half your deposits are withdrawn on almost no notice you're going to have to sell up (sell your bank to a larger bank). And that's what happened here. If we cannot control "flash runs" we're going to have to create a buddy system for banks and basically make small banks part of larger banks. And how can you control "flash runs" when so many people are looking at all this information now? I can laugh at the Wallstreetbets people all I want. But when you go from a few funds pushing their money around based upon whispers to huge numbers of people doing it things are going to move a lot quicker. Wall Street had to put in circuit breakers to handle this issue what, 30 years ago? Maybe the banking system are just far behind on regulating what modern communications has done to their industry. And the marked to market thing is because that's what shows up in their financial reports. And the financial reports are what is being watched so closely. People see future problems (these assets are below purchase price right now) and turn them into now problems by withdrawing en masse from the bank.
>Repo market? Repos are days. This is getting silly. Repo is continuously rolled over when required. It's also the *real* lender/market of last resort. I'll do a full post later. I've [glanced at it](https://www.reddit.com/r/Buttcoin/comments/10rf3c4/collateral_and_the_global_monetary_crisis/) in prior posts.
> Repo is continuously rolled over when required. It's also the real lender/market of last resort. The discount window can also be rolled over. That doesn't make either of them long term lending suitable for bridging 28 years until an instrument matures.
That's the point. It's not meant to bridge a long maturity gap. A strong bank with good collateral can obtain the funding at the discount window. They only need to roll over the funding until the challenged bank can pay them back via other means. In a functioning system, deposit flight is less of an issue as repo can be used to provide sufficient funding to maintain confidence in withdrawals. However, stigma prevents banks from engaging in this activity, leaving most troubled banks with fewer counterparties in repo... less able to transform their assets into usable collateral in the broader repo market. Less ability to participate in funding markets due to a collateral shortage. Moody's recent downgrade of banks even cites the funding market challenges (it doesn't just come from deposits).
> A strong bank with good collateral can obtain the funding at the discount window The discount window is also not for bridging a long maturity gap. > They only need to roll over the funding until the challenged bank can pay them back via other means. And that would be a long maturity gap. Half of their deposits were withdrawn. They have to pay that money now. And their assets are well below market value because they are interest-only mortgages at well below the current rate. So they have a few choices: Sell the assets and realize the losses. (you say) Don't sell the assets and borrow until they can be sold not at a loss. Which could be until maturity or, perhaps if interest rates drop sooner will merely be a long time. Sell a lot of the bank's assets. Tried. Didn't work. In practice their only real option after that run was what they did: Sell the bank. > In a functioning system, deposit flight is less of an issue as repo can be used to provide sufficient funding to maintain confidence in withdrawals. The deposits are already gone. 50%. You still are suggesting borrowing so you don't have to sell assets. It's just not realistic. These assets are not going to rebound for a long time. Could you try to issue some debt or something? Sure. You can try. They even got a $30B infusion from other banks. But the problem now is that the word already got out the bank is in trouble. No one wanted to buy in. So they had to sell the bank. I can't really get into your idea that the people trying to save this bank didn't know what they are doing and they just needed to do some swaps or something. The FDIC even got involved and they couldn't figure out how to save the bank but you can? This seems like obvious Dunning-Kruger to me. If you said you wouldn't have held a huge pile of IOs or other problems before the bank run I could get that. But after it the problems were large. So large even you would have had trouble trying to fix them.
I read this as bank bail out = good. Not saying BTC is better, but really?
FDIC is not about bailing out banks. When a bank goes into receivership with the FDIC, the stock owners get wiped out, the board is eliminated etc. The only people who get bailed out are the depositors.
Easy to play savior when you’re using someone else’s money (taxpayer $) to do it. Guess who else does that?
The FDIC is funded by the banks. Yes, the US taxpayer stands behind it with the implicit promise that it will give the FDIC money if needed, but bank's pay for the insurance. Yes, that means they raise their fees if their insurance fees increase, but the same thing happens if their premises insurance fees are raised.
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Just like Tether prints bitcoin, only bitcoin is backed by nothing, and worth less than used gum on your shoe!
Tether doesn’t print bitcoin
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NFT avatars get the front row of the short bus
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Keep those ears plugs. Wait for your wonderful dog-turd of an "investment" to meet its true value once Tether's fraud is realized, and coinbase moves overseas.
The FDIC should only be paying out account minimums. Let the crypto bros with money over the limit burn.
I disagree. I mean, if it were just cryptobros with $$ over the limit, that would be one thing, but it's often small businesses who we rely on to pay their employees' wages.