[Bank failure discussion mega-thread]

[technovelist]

Were they not in the business of lending? How did they make money?

They lent money only on assets they held, including gold and silver, and maybe stocks too.
Since those were margin loans, they were callable at any time; if the margin call wasn't met, they would sell the collateral, which was highly liquid so they could get the money immediately.

What bank was this?

Why do you ask?
It was acquired decades ago, so is no longer available for use, if that's what you were thinking.

Doesn't sound like a typical bank. They called those holdings "demand deposits"?

They had two types of deposits, just as virtually all banks had until 30(?) years ago:

1. Demand deposits, i.e., you deposited money with them that you could demand to withdraw on any day. In that case, you had to pay them a fee for holding it for you. I guess if the overnight interest rate was high enough to compensate them for that service, there might not have been a fee, but I don't recall that happening.
2. Term deposits, i.e., you deposited money with them and wanted interest. In that case you had to pick a term for the deposit and couldn't withdraw the money until then. They could then lend it out for the term without having to worry about your demanding it back before then.

Seems pretty simple to me.

[technovelist]

Were they not in the business of lending? How did they make money?

They lent money only on assets they held, including gold and silver, and maybe stocks too.
Since those were margin loans, they were callable at any time; if the margin call wasn't met, they would sell the collateral, which was highly liquid so they could get the money immediately.

What bank was this?

Why do you ask?
It was acquired decades ago, so is no longer available for use, if that's what you were thinking.

I'm thinking it's far from a traditional bank and had a business model that doesn't make sense to me, so I'd like to look into it to better understand what was going on.

I no longer have any records of this, as it was over 30 (40?) years ago, so I'm afraid I can't help you.

[PersonalFinanceJam]

Is SPAXX ok?

SPAXX is one of Fidelity's government money market funds, so my opinion is yes. Some people prefer having a fund which only invests in treasury bills which would be FDLXX. However, unless you want the added benefit of being almost 100% state tax deductible for a treasury only fund, I don't personally see the issue with SPAXX

[UpperNwGuy]

I hold my cash at Schwab in their Value Advantage Money Fund® – Investor Shares (SWVXX) at 4.49%

So would you say it's a good idea to move it to a safer place like Schwab U.S. Treasury Money Fund - Investor Shares at 4.31%

I'm guessing the answer is "yes"?

Edit: Wow,
I skimmed thru the SWVXX holdings and I think I have to change that answer to:
DEFINITELY YES!

I'd still like to hear any views on it tho.

Schwab already saw $8.8B in net outflows from its Value Advantage funds this week. You would be in good company.

What is motivating the exodus of funds from SWVXX? I thought that the SEC regs would keep the problems with Schwab bank from spilling over into Schwab brokerage.

It's a Prime money market fund. Prime money market funds invest in things other than government backed securities such as commercial paper and bank CD's. They are considered a bit more risky than money market funds backed by government securities or just plain old t-bills. Since the financial crisis they can also impose liquidity/redemption gates in times of stress which prevents people from getting their money out exactly when they want to. It really has nothing to do with Schwab Bank, or it should. There is so much hysteria flying out there it's hard to speculate what people may be thinking. The article notes that the prime funds have been seeing outflows but the Schwab government funds have seen net inflows so it seems little more than shifting assets to a less risky money fund..

If that were the explanation, then we should be seeing a similar phenomenon over at Fidelity with FZDXX, their prime money market fund, but as best I can discern, this exodus from SWVXX is not being repeated at prime money market funds at other brokerages.

[exodusNH]

Does this whole fail boil down to chasing yield with duration is bad?

That's part of it, but the whole is more complicated than that. If you want one simplistic sentence, don't have liabilities that are demanding to be paid now when all you have to pay is assets that can not be liquidated to raise enough to pay such liabilities.

Slate has an interesting article: https://slate.com/business/2023/03/sili ... -food.html

Basically, SVB forced clients to move all of their cash to them in exchange for loans / LOCs.

[rockstar]

Now it looks like SVB failure is due to remote work. Better short Zoom.

https://www.axios.com/2023/03/17/svb-em ... nk-failure

[Fpdesignco]

Fears on commercial paper, similar to events seen in 2008. Likely a non issue, however do you want to be the one that finds out, hence perception becomes behavior.

Kind of what has me thinking in recent days banks that are extremely stressed at this point (not closed), what is their hope of recovery? Is there really a thought folks will come back?

I hold my cash at Schwab in their Value Advantage Money Fund® – Investor Shares (SWVXX) at 4.49%

So would you say it's a good idea to move it to a safer place like Schwab U.S. Treasury Money Fund - Investor Shares at 4.31%

I'm guessing the answer is "yes"?

Edit: Wow,
I skimmed thru the SWVXX holdings and I think I have to change that answer to:
DEFINITELY YES!

I'd still like to hear any views on it tho.

Schwab already saw $8.8B in net outflows from its Value Advantage funds this week. You would be in good company.

What is motivating the exodus of funds from SWVXX? I thought that the SEC regs would keep the problems with Schwab bank from spilling over into Schwab brokerage.

[PersonalFinanceJam]

I hold my cash at Schwab in their Value Advantage Money Fund® – Investor Shares (SWVXX) at 4.49%

So would you say it's a good idea to move it to a safer place like Schwab U.S. Treasury Money Fund - Investor Shares at 4.31%

I'm guessing the answer is "yes"?

Edit: Wow,
I skimmed thru the SWVXX holdings and I think I have to change that answer to:
DEFINITELY YES!

I'd still like to hear any views on it tho.

Schwab already saw $8.8B in net outflows from its Value Advantage funds this week. You would be in good company.

What is motivating the exodus of funds from SWVXX? I thought that the SEC regs would keep the problems with Schwab bank from spilling over into Schwab brokerage.

It's a Prime money market fund. Prime money market funds invest in things other than government backed securities such as commercial paper and bank CD's. They are considered a bit more risky than money market funds backed by government securities or just plain old t-bills. Since the financial crisis they can also impose liquidity/redemption gates in times of stress which prevents people from getting their money out exactly when they want to. It really has nothing to do with Schwab Bank, or it should. There is so much hysteria flying out there it's hard to speculate what people may be thinking. The article notes that the prime funds have been seeing outflows but the Schwab government funds have seen net inflows so it seems little more than shifting assets to a less risky money fund..

If that were the explanation, then we should be seeing a similar phenomenon over at Fidelity with FZDXX, their prime money market fund, but as best I can discern, this exodus from SWVXX is not being repeated at prime money market funds at other brokerages.

Fidelity saw a day of net outflows in its retail prime money fund similar to Schwab as seen here however then it resumed net inflows although not to the degree it had. Like I said, it's hard to judge investor psychology but Fidelity hasn't been in the news as much either. I'm sticking to my answer that SWVXX has nothing to do with Schwab bank but is more risky than a government money fund.

[theac]

I hold my cash at Schwab in their Value Advantage Money Fund® – Investor Shares (SWVXX) at 4.49%

So would you say it's a good idea to move it to a safer place like Schwab U.S. Treasury Money Fund - Investor Shares at 4.31%

I'm guessing the answer is "yes"?

Edit: Wow,
I skimmed thru the SWVXX holdings and I think I have to change that answer to:
DEFINITELY YES!

I'd still like to hear any views on it tho.

Schwab already saw $8.8B in net outflows from its Value Advantage funds this week. You would be in good company.

What is motivating the exodus of funds from SWVXX? I thought that the SEC regs would keep the problems with Schwab bank from spilling over into Schwab brokerage.

It's a Prime money market fund. Prime money market funds invest in things other than government backed securities such as commercial paper and bank CD's. They are considered a bit more risky than money market funds backed by government securities or just plain old t-bills. Since the financial crisis they can also impose liquidity/redemption gates in times of stress which prevents people from getting their money out exactly when they want to. It really has nothing to do with Schwab Bank, or it should. There is so much hysteria flying out there it's hard to speculate what people may be thinking. The article notes that the prime funds have been seeing outflows but the Schwab government funds have seen net inflows so it seems little more than shifting assets to a less risky money fund..

If that were the explanation, then we should be seeing a similar phenomenon over at Fidelity with FZDXX, their prime money market fund, but as best I can discern, this exodus from SWVXX is not being repeated at prime money market funds at other brokerages.

I switched from Schwab's Prime MMkt to their Treasury MMkt as a precaution.

Maybe nothing will happen, but at least it's one less worry if it does, and it definitely won't be advertised in advance. It will just happen, then everybody will start scrambling after the fact.

As soon as I looked at the list of holdings for Schwab's Prime MMkt, and all I saw was bank after bank listed, I just feel better with the switch. May avoid some future headache, or maybe not. But for losing just a few basis points, (to me) worth the precaution.

[rockstar]

Schwab already saw $8.8B in net outflows from its Value Advantage funds this week. You would be in good company.

What is motivating the exodus of funds from SWVXX? I thought that the SEC regs would keep the problems with Schwab bank from spilling over into Schwab brokerage.

It's a Prime money market fund. Prime money market funds invest in things other than government backed securities such as commercial paper and bank CD's. They are considered a bit more risky than money market funds backed by government securities or just plain old t-bills. Since the financial crisis they can also impose liquidity/redemption gates in times of stress which prevents people from getting their money out exactly when they want to. It really has nothing to do with Schwab Bank, or it should. There is so much hysteria flying out there it's hard to speculate what people may be thinking. The article notes that the prime funds have been seeing outflows but the Schwab government funds have seen net inflows so it seems little more than shifting assets to a less risky money fund..

If that were the explanation, then we should be seeing a similar phenomenon over at Fidelity with FZDXX, their prime money market fund, but as best I can discern, this exodus from SWVXX is not being repeated at prime money market funds at other brokerages.

I switched from Schwab's Prime MMkt to their Treasury MMkt as a precaution.

Maybe nothing will happen, but at least it's one less worry if it does, and it definitely won't be advertised in advance. It will just happen, then everybody will start scrambling after the fact.

As soon as I looked at the list of holdings for Schwab's Prime MMkt, and all I saw was bank after bank listed, I just feel better with the switch. May avoid some future headache, or maybe not. But for losing just a few basis points, (to me) worth the precaution.

I'm sticking to buying individual t bills and TIPS. I'll get some paper I Bonds with my tax return. It's one less layer to worry about.

[theac]

What is motivating the exodus of funds from SWVXX? I thought that the SEC regs would keep the problems with Schwab bank from spilling over into Schwab brokerage.

It's a Prime money market fund. Prime money market funds invest in things other than government backed securities such as commercial paper and bank CD's. They are considered a bit more risky than money market funds backed by government securities or just plain old t-bills. Since the financial crisis they can also impose liquidity/redemption gates in times of stress which prevents people from getting their money out exactly when they want to. It really has nothing to do with Schwab Bank, or it should. There is so much hysteria flying out there it's hard to speculate what people may be thinking. The article notes that the prime funds have been seeing outflows but the Schwab government funds have seen net inflows so it seems little more than shifting assets to a less risky money fund..

If that were the explanation, then we should be seeing a similar phenomenon over at Fidelity with FZDXX, their prime money market fund, but as best I can discern, this exodus from SWVXX is not being repeated at prime money market funds at other brokerages.

I switched from Schwab's Prime MMkt to their Treasury MMkt as a precaution.

Maybe nothing will happen, but at least it's one less worry if it does, and it definitely won't be advertised in advance. It will just happen, then everybody will start scrambling after the fact.

As soon as I looked at the list of holdings for Schwab's Prime MMkt, and all I saw was bank after bank listed, I just feel better with the switch. May avoid some future headache, or maybe not. But for losing just a few basis points, (to me) worth the precaution.

I'm sticking to buying individual t bills and TIPS. I'll get some paper I Bonds with my tax return. It's one less layer to worry about.

Yes last year I bought several 3 and 6 month T-Bills for the first time and was surprised how easy it was. Was very happy with them. But toward the end of the year the rates didn't seem all that far off from Schwab MMkt so this year haven't bought any so far.

Now that the rates have dropped, I wish I had gotten some 1 year T-Bills.
Oh well, maybe things will turn around again.

I do still buy my annual I-Bonds.

[watchnerd]

Dr. Doom weighs in on the banking crisis:

https://youtu.be/Mz-384YntTc?t=84

[jarjarM]

Dr. Doom weighs in on the banking crisis:

https://youtu.be/Mz-384YntTc?t=84

I guess I'm NOT surprise with his view.

[moneyflowin]

The 250k cap is useless. You need to either have banking regulations that prevent all banks (not just the biggest banks) from going under. Or you need all banks to pay into insurance that will cover their depositors in a credit event including deposits over 250k. The banking industry must have confidence for depositors or it ceases to function. We have a combination of the above right now. Regulations enacted in 2009 prevent excessive risk taking by banks but are less strict on smaller banks.

In the 90 years of the FDIC, there has never been a period where all deposits were insured. So why now would the banking system cease to function if we continue to insure only mom and pop depositors?

Sounds like a knee-jerk reaction to the failure of a couple of unique banks

[coachd50]

The issue is whether SVB is insolvent (more liabilities than assets) or merely illiquid (enough assets, but not liquid enough to meet current expenses.) All banks work by borrowing short and lending long. They have enough to cover withdrawals eventually, but take a calculated risk that they won't need all of it right now.

SVB needed to pay out now, but the bonds were going to pay later. They couldn't afford to wait. They couldn't meet their obligations now by liquidating their bonds now--selling them on the market--because the value of those bonds is depressed because of the rise in interest rates.

The "magic" is the difference in time frame between SVB and the FDIC. The FDIC can afford to just wait for the bonds to mature. When they do, they will pay out their full face value--not their currently depressed market value--and the FDIC will be fully repaid.

I gather that nobody is quite sure what the bottom line is, but SVB was roughly solvent and had roughly enough assets to meet obligations. That's why SVB and some people feel so aggrieved about the situation, because in their hearts they feel that SVB was sound and failed due to bad luck and scare talk on Twitter. The argument, as always, is whether they took too much risk, or whether they took a reasonable amount of risk and were done in by abnormal events that nobody could have possibly foreseen, that they shouldn't be punished for.

[quoted color modified by admin LadyGeek]

I agree. This thread has grown quite long, mostly discussing a very basic reality of our banking system that most seem to either not realize or just ignore: EVERY bank would be perceived illiquid if a sufficient run its deposits would occur. EVERY bank.

I think part of what is new is the ease in which panic can spread due to social media, combined with the ease at which withdrawals can be made due to mobile technology.

I don't think I agree with many (here and elsewhere) crying for heads on pikes because a bank used deposits to purchase 10 year Treasuries because shorter terms were yielding under 1%. With the 20/20 hindsight of knowing a run on deposits would occur, sure it seems like a bad decision. 20/20 hindsight always seems pretty good though.

[rkhusky]

Yes last year I bought several 3 and 6 month T-Bills for the first time and was surprised how easy it was. Was very happy with them. But toward the end of the year the rates didn't seem all that far off from Schwab MMkt so this year haven't bought any so far.

Now that the rates have dropped, I wish I had gotten some 1 year T-Bills.
Oh well, maybe things will turn around again.

I do still buy my annual I-Bonds.

Trying to time the bond market is just as hard as timing the stock market. Best to just have a plan and stay the course.

[exodusing]

UBS in Talks to Take Over Credit Suisse
Discussions are part of an urgent effort by Swiss and global authorities to restore trust in the banking system
Credit Suisse took a more-than-$50 billion Swiss National Bank liquidity lifeline this week after concerns deepened about its prospects. The action didn’t do enough to stop the slide in Credit Suisse’s shares or stem the loss of bank deposits, compelling the central bank and Switzerland’s top financial regulator to orchestrate talks with Credit Suisse’s larger rival, UBS.

First Republic Stock Plunges After Bank Rescue Plan, Dividend Suspension
A $30 billion deposit influx from biggest U.S. banks fails to calm jittery investors

Plus numerous threads here focused on the safety of various investments and institutions.

One month ago, 30-Day Fed Funds futures pricing data predicted an 82% chance the Fed would raise 25bps and 18% it would raise 50. Now we're at 38% chance of 0 and 62% 25.

[nisiprius]

...I think part of what is new is the ease in which panic can spread due to social media, combined with the ease at which withdrawals can be made due to mobile technology...

And that's a problem doesn't seem to be receiving much attention, and it could be addressed.

The stock market has circuit breakers. Bond funds and money market funds have liquidity fees and redemption gates. Mutual funds have the right to delay large redemptions that could "disrupt" the operation of the fund.

I'm slightly puzzled as to whether or not the language is still there--it used to be printed right in the bankbooks--but everything except checking accounts and the lowest tier savings accounts used to have fine print giving the bank the right to delay withdrawals for, maybe seven days. I don't know if that language is gone, or whether banks have never implemented a way to invoke it with online banking.

[seajay]

I agree. This thread has grown quite long, mostly discussing a very basic reality of our banking system that most seem to either not realize or just ignore: EVERY bank would be perceived illiquid if a sufficient run its deposits would occur. EVERY bank.

Except for custodial banks, the former banking where you deposited your money/assets into the banks safe for safekeeping, but paid a fee for the banks services/insurance.

[alex_686]

...I think part of what is new is the ease in which panic can spread due to social media, combined with the ease at which withdrawals can be made due to mobile technology...

And that's a problem doesn't seem to be receiving much attention, and it could be addressed.

The stock market has circuit breakers. Bond funds and money market funds have liquidity fees and redemption gates. Mutual funds have the right to delay large redemptions that could "disrupt" the operation of the fund.

I'm slightly puzzled as to whether or not the language is still there--it used to be printed right in the bankbooks--but everything except checking accounts and the lowest tier savings accounts used to have fine print giving the bank the right to delay withdrawals for, maybe seven days. I don't know if that language is gone, or whether banks have never implemented a way to invoke it with online banking.

Yes, both banks and mutual funds have the nuclear option to halt withdrawals. Nobody is going to use that option. A primary purpose of banks and mutual funds is to provide daily liquidity. If you can’t meet a primary responsibility your train has really fallen off of the tracks. Your not getting up again. The number of banks and mutual funds that have had to this and were around the next month are very very few.

[Fallible]

Yes last year I bought several 3 and 6 month T-Bills for the first time and was surprised how easy it was. Was very happy with them. But toward the end of the year the rates didn't seem all that far off from Schwab MMkt so this year haven't bought any so far.

Now that the rates have dropped, I wish I had gotten some 1 year T-Bills.
Oh well, maybe things will turn around again.

I do still buy my annual I-Bonds.

Trying to time the bond market is just as hard as timing the stock market. Best to just have a plan and stay the course.

I've been following this thread from its start, but had nothing worthwhile to add - until I read the above and it reminded me of this: in the end, bottom line, when all is said and done, no matter what or how you look at it, in the last analysis, having a good plan and staying the course is what matters.

[technovelist]

I agree. This thread has grown quite long, mostly discussing a very basic reality of our banking system that most seem to either not realize or just ignore: EVERY bank would be perceived illiquid if a sufficient run its deposits would occur. EVERY bank.

Except for custodial banks, the former banking where you deposited your money/assets into the banks safe for safekeeping, but paid a fee for the banks services/insurance.

I'm not sure why this is considered unthinkable. Maybe it's an educational problem because people don't know enough about the history of banking?

[technovelist]

...I think part of what is new is the ease in which panic can spread due to social media, combined with the ease at which withdrawals can be made due to mobile technology...

And that's a problem doesn't seem to be receiving much attention, and it could be addressed.

The stock market has circuit breakers. Bond funds and money market funds have liquidity fees and redemption gates. Mutual funds have the right to delay large redemptions that could "disrupt" the operation of the fund.

I'm slightly puzzled as to whether or not the language is still there--it used to be printed right in the bankbooks--but everything except checking accounts and the lowest tier savings accounts used to have fine print giving the bank the right to delay withdrawals for, maybe seven days. I don't know if that language is gone, or whether banks have never implemented a way to invoke it with online banking.

Yes, both banks and mutual funds have the nuclear option to halt withdrawals. Nobody is going to use that option. A primary purpose of banks and mutual funds is to provide daily liquidity. If you can’t meet a primary responsibility your train has really fallen off of the tracks. Your not getting up again. The number of banks and mutual funds that have had to this and were around the next month are very very few.

Correct. That would guarantee everyone would put in notice to withdraw their funds at the earliest available time.
The only way to prevent bank failures due to runs is to match maturities of deposits and assets, and at present there don't seem to be any banks that do that.

[exodusing]

I'm slightly puzzled as to whether or not the language is still there--it used to be printed right in the bankbooks--but everything except checking accounts and the lowest tier savings accounts used to have fine print giving the bank the right to delay withdrawals for, maybe seven days. I don't know if that language is gone, or whether banks have never implemented a way to invoke it with online banking.

Even if they followed that course, checking accounts were exempted and the vast majority of deposits are checking accounts or the functional equivalent. Those with large deposits almost certainly have the money in banks precisely because they can withdraw or distribute immediately, otherwise they'd be in something a bit less liquid and higher yielding.

[Tanelorn]

Unimpressed

https://deepknowledgeinvesting.com/does ... ver-again/

Literally every institution and warning system that failed in 2008 is still failing in the same way. As always, there’s no point in getting upset. However, we recommend withdrawing all trust from every one of these institutions until they demonstrate an ability to do their jobs with some degree of seriousness.

Despite some glaringly obvious problems with Silicon Valley Bancorp’s business model, when the company failed, only one of the 17 analysts who covered the company had a sell rating. That’s right – when a company that failed and was closed by regulators, only one of 17 indicated a problem. Congratulations to Morgan Stanley on this one. And if you’re reading research from any of the other 16 firms who covered $SIVB, we hope it’s for entertainment value.

Elsewhere

All that was necessary for this was simple regulatory supervision.

- The bank had disclosed huge losses in their filings, more than offsetting capital.
- Should have also been eye opening for regulators to notice the huge growth in deposits and be concerned with concentration. And then regulators should have easily noticed from the filings where the huge growth in deposits was going, matching those short term liquid against long term bonds.
- Regulators should have also been easily concerned to see the bank didn't have a chief risk officer for most of last year.
- One simple review of their asset/liability report should have been obvious concern to even the least tenured regulator. At least two analysts "found" this in their analysis, so regulators should have too.

Bank regulatory agencies have one thing to do - supervise and regulate banks - and they clearly failed. Management failed and we see they were all tossed out, why don't we do the same for those who were responsible for the overall supervision of this bank?

Who regulates the regulators?

[coachd50]

I agree. This thread has grown quite long, mostly discussing a very basic reality of our banking system that most seem to either not realize or just ignore: EVERY bank would be perceived illiquid if a sufficient run its deposits would occur. EVERY bank.

Except for custodial banks, the former banking where you deposited your money/assets into the banks safe for safekeeping, but paid a fee for the banks services/insurance.

I'm not sure why this is considered unthinkable. Maybe it's an educational problem because people don't know enough about the history of banking?

It isn't that it is unthinkable. It is that I do not believe that a custodial bank's model would be able to compete with the current commercial and retail banks to make it worthwhile. I don't think they would be able to garner enough customers willing to pay for the same services that others will give for free.

[GRP]

Some of the discussion in this thread is pointing towards this notion that this was easy to see coming. Any person, regulator or not, could have looked at these books and made a determination about imminent risk.

But how many people were clamouring about this before the brown stuff hit the fan? Why wasn't there a thread titled "Imminent and obvious bank failure discussion mega-thread"?

I think an important point to note here is that the economic machine has so many moving parts and so many facets that even apparently obvious stuff is easy to overlook. There are just too many parts of the market and the economy for all risks to really be foreseen, especially when easy money is involved.

The only solution I can see is to diversify widely.

[Tanelorn]

Some of the discussion in this thread is pointing towards this notion that this was easy to see coming. Any person, regulator or not, could have looked at these books and made a determination about imminent risk.

Well I’m short SBNY and SIVB but that’s just lucky risky market timing, right? who wants to hear about that here - this isn’t a stock picking board after all.

And I’m not the only one

https://www.ft.com/content/fbd9e3d4-2df ... e5de2c5053

BlackRock’s consulting arm warned Silicon Valley Bank, the California-based lender whose failure helped spark a banking crisis, that its risk controls were “substantially below” its peers in early 2022, several people with direct knowledge of the assessment said.

The January 2022 risk control report gave the bank a “gentleman’s C”, finding that SVB lagged behind similar banks on 11 of 11 factors considered and was “substantially below” them on 10 out of 11, the people said. The consultants found that SVB was unable to generate real time or even weekly updates about what was happening to its securities portfolio, the people said. SVB listened to the criticism but rebuffed offers from BlackRock to do follow up work, they added.

So they knew their risk controls were bad and did nothing. And the regulators didn’t either.

But how many people were clamouring about this before the brown stuff hit the fan? Why wasn't there a thread titled "Imminent and obvious bank failure discussion mega-thread"?

Do you think such a thread would be allowed under board policies?

I think the bigger issue is that people whose whole job and bureaucracy are charged with looking out for these risks both

1. Failed to see any issues here, and
2. Are not going to have any consequences of their failure and may be rewarded with more funding and oversight power

Insanity is doing the same again and expecting a different outcome.

[Beensabu]

I'm not sure why this is considered unthinkable. Maybe it's an educational problem because people don't know enough about the history of banking?

It isn't that it is unthinkable. It is that I do not believe that a custodial bank's model would be able to compete with the current commercial and retail banks to make it worthwhile. I don't think they would be able to garner enough customers willing to pay for the same services that others will give for free.

Yeah. Maybe it's just not a viable business model for banks. At least not in this day and age. The "sound" bank that technovelist previously banked with and has been referring to in this thread is from 30-40 years ago, with a name they can't remember, that was acquired.

As consumers, what do we want from banks? For our deposits to be secure, and for them to give us loans.

As investors, what do we want from banks? A return on our investment.

If the banking business weren't profitable, why would anyone choose to go into that business?

So really, the question is: Do we want banks, or do we not want them?

It's clear from some posts here, that some people don't want them (or at least, they think they don't want them). But we do need them, don't we?

[Tanelorn]

More regulation failures. Sounds like the SF Fed found big problems, warned the bank, and then let them do nothing until they blew up.

https://www.bloomberg.com/news/articles ... rs-changed

The San Francisco Fed has a program for overseeing community and regional institutions, as well as a group trained to monitor big banks. As that one prepared to formally watch Silicon Valley Bank at the start of last year, examiners began sending the firm two types of warnings: matters requiring attention, or MRAs, and matters requiring immediate attention, or MRIAs.

While not disclosed to the public, MRAs and MRIAs are supposed to seize executives’ attention, requiring they fix problems to avoid more severe sanctions, known as consent orders. Those more stringent directives, once public, can send stocks tumbling by forcing banks to make costly improvements, pull back from certain activities or, in the extreme, stop growing.

The Biden administration found out about the full extent of SVB’s stack of MRAs and MRIAs on March 10, the day the firm was seized by regulators, according to people familiar with the matter.

So the failures seem to be at the top level of regulation, rather than the staff workers who flagged the issues correctly and in advance. The fact that the SVB CEO was on the SF Fed overseeing them might or might not have had anything to do with that lack of decisive action. One might likewise question the qualifications and priorities of the SF Fed president Daly (just like the SVB risk management).

[CuriousTacos]

I'm not sure why this is considered unthinkable. Maybe it's an educational problem because people don't know enough about the history of banking?

It isn't that it is unthinkable. It is that I do not believe that a custodial bank's model would be able to compete with the current commercial and retail banks to make it worthwhile. I don't think they would be able to garner enough customers willing to pay for the same services that others will give for free.

Yeah. Maybe it's just not a viable business model for banks. At least not in this day and age. The "sound" bank that technovelist previously banked with and has been referring to in this thread is from 30-40 years ago, with a name they can't remember, that was acquired.

As consumers, what do we want from banks? For our deposits to be secure, and for them to give us loans.

As investors, what do we want from banks? A return on our investment.

If the banking business weren't profitable, why would anyone choose to go into that business?

So really, the question is: Do we want banks, or do we not want them?

It's clear from some posts here, that some people don't want them (or at least, they think they don't want them). But we do need them, don't we?

That's quite an unfair characterization of the desires of others. On the contrary, I'd say some people want a system that isn't prone to systemic crises and think the current rules exacerbate them.

Regarding viability, if the government provides a backstop for various banking risks, then any bank/depositor that isn't taking those risks is missing out on the government subsidy, making it uncompetitive. So we don't know what people would do in the absence of the government subsidy on risk taking. It's fair for you to point out that I don't know for sure, but you can't claim that you know either.

But it gets even worse. Recently, a group led by the former head of research at the New York Fed has been trying to establish a bank (called The Narrow Bank) with the goal of being "a financial institution that issues demandable liabilities and invests in assets that have no nominal interest rate and credit risk." They would hold all deposits at the Federal Reserve, which now pays interest on those, making the business model even more lucrative than in a "free" market. The Fed has repeatedly dragged its feet and/or rejected the applications to sanction this bank (see The Safest Bank the Fed Won’t Sanction, Fed Rejects Bank for Being Too Safe). Again, I don't know for sure that the bank would attract enough depositors to stay in business, but I at least know that someone wants to try but is not even allowed to.

The Levine article even states "The New York Fed declined the account 'reportedly at the specific direction of the Board’s Chairman,' Jerome Powell. The Fed has not said what its objection is."

So the absence of such a bank is possibly due to government roadblocks as well as government subsidies on risk taking. It's purely speculation to say that a safe bank would be unprofitable without these things.

[rockstar]

I'm not sure why this is considered unthinkable. Maybe it's an educational problem because people don't know enough about the history of banking?

It isn't that it is unthinkable. It is that I do not believe that a custodial bank's model would be able to compete with the current commercial and retail banks to make it worthwhile. I don't think they would be able to garner enough customers willing to pay for the same services that others will give for free.

Yeah. Maybe it's just not a viable business model for banks. At least not in this day and age. The "sound" bank that technovelist previously banked with and has been referring to in this thread is from 30-40 years ago, with a name they can't remember, that was acquired.

As consumers, what do we want from banks? For our deposits to be secure, and for them to give us loans.

As investors, what do we want from banks? A return on our investment.

If the banking business weren't profitable, why would anyone choose to go into that business?

So really, the question is: Do we want banks, or do we not want them?

It's clear from some posts here, that some people don't want them (or at least, they think they don't want them). But we do need them, don't we?

That's quite an unfair characterization of the desires of others. On the contrary, I'd say some people want a system that isn't prone to systemic crises and think the current rules exacerbate them.

Regarding viability, if the government provides a backstop for various banking risks, then any bank/depositor that isn't taking those risks is missing out on the government subsidy, making it uncompetitive. So we don't know what people would do in the absence of the government subsidy on risk taking. It's fair for you to point out that I don't know for sure, but you can't claim that you know either.

But it gets even worse. Recently, a group led by the former head of research at the New York Fed has been trying to establish a bank (called The Narrow Bank) with the goal of being "a financial institution that issues demandable liabilities and invests in assets that have no nominal interest rate and credit risk." They would hold all deposits at the Federal Reserve, which now pays interest on those, making the business model even more lucrative than in a "free" market. The Fed has repeatedly dragged its feet and/or rejected the applications to sanction this bank (see The Safest Bank the Fed Won’t Sanction, Fed Rejects Bank for Being Too Safe). Again, I don't know for sure that the bank would attract enough depositors to stay in business, but I at least know that someone wants to try but is not even allowed to.

The Levine article even states "The New York Fed declined the account 'reportedly at the specific direction of the Board’s Chairman,' Jerome Powell. The Fed has not said what its objection is."

So the absence of such a bank is possibly due to government roadblocks as well as government subsidies on risk taking. It's purely speculation to say that a safe bank would be unprofitable without these things.

What folks with more than $250k really need is a place to put their money that they'll need in a short period of time with zero risk of it not being available. Right now, the only place that makes sense to me is 1 month t bills. Now, if a bank existed that was non for profit that worked like t bills, that would be a good commercial alternative for things like lease payments and payroll.

[Harmanic]

The 250k cap is useless. You need to either have banking regulations that prevent all banks (not just the biggest banks) from going under. Or you need all banks to pay into insurance that will cover their depositors in a credit event including deposits over 250k. The banking industry must have confidence for depositors or it ceases to function. We have a combination of the above right now. Regulations enacted in 2009 prevent excessive risk taking by banks but are less strict on smaller banks.

In the 90 years of the FDIC, there has never been a period where all deposits were insured. So why now would the banking system cease to function if we continue to insure only mom and pop depositors?

Sounds like a knee-jerk reaction to the failure of a couple of unique banks

The banking system is extremely fragile right now with asset values falling far below deposits at many institutions. At the same time the Fed needs to keep rates higher for longer to kill inflation. Perhaps by insuring all deposits, it can reduce bank runs and continue to hike rates. The other alternative is to pivot and let inflation run hot. That would be better for the government as it inflates away the debt, but it doesn't help politicians who want to get (re)elected.

[rockstar]

The 250k cap is useless. You need to either have banking regulations that prevent all banks (not just the biggest banks) from going under. Or you need all banks to pay into insurance that will cover their depositors in a credit event including deposits over 250k. The banking industry must have confidence for depositors or it ceases to function. We have a combination of the above right now. Regulations enacted in 2009 prevent excessive risk taking by banks but are less strict on smaller banks.

In the 90 years of the FDIC, there has never been a period where all deposits were insured. So why now would the banking system cease to function if we continue to insure only mom and pop depositors?

Sounds like a knee-jerk reaction to the failure of a couple of unique banks

The banking system is extremely fragile right now with asset values falling far below deposits at many institutions. At the same time the Fed needs to keep rates higher for longer to kill inflation. Perhaps by insuring all deposits, it can reduce bank runs and continue to hike rates. The other alternative is to pivot and let inflation run hot. That would be better for the government as it inflates away the debt, but it doesn't help politicians who want to get (re)elected.

The problem is that the government will have to issue higher interest bonds as the lower interest ones mature. They’ll be swapping debt for higher interest payments with high inflation. The long run expectation as an investor is higher taxes. And of course, this will have a future economic impact. Raising rates is bad news as it ripples through. But higher rates won’t keep companies from raising prices as their labor demands higher pay. It’s basically dominos gone wild.

The domino to fall will be consumers demanding higher interest on their deposits. This should be happening. No idea why it isn’t yet. The spread between savings and t bills is huge.

[technovelist]

I agree. This thread has grown quite long, mostly discussing a very basic reality of our banking system that most seem to either not realize or just ignore: EVERY bank would be perceived illiquid if a sufficient run its deposits would occur. EVERY bank.

Except for custodial banks, the former banking where you deposited your money/assets into the banks safe for safekeeping, but paid a fee for the banks services/insurance.

I'm not sure why this is considered unthinkable. Maybe it's an educational problem because people don't know enough about the history of banking?

It isn't that it is unthinkable. It is that I do not believe that a custodial bank's model would be able to compete with the current commercial and retail banks to make it worthwhile. I don't think they would be able to garner enough customers willing to pay for the same services that others will give for free.

I suspect more people would be willing to do that if this crisis isn't over soon.

[technovelist]

I'm not sure why this is considered unthinkable. Maybe it's an educational problem because people don't know enough about the history of banking?

It isn't that it is unthinkable. It is that I do not believe that a custodial bank's model would be able to compete with the current commercial and retail banks to make it worthwhile. I don't think they would be able to garner enough customers willing to pay for the same services that others will give for free.

Yeah. Maybe it's just not a viable business model for banks. At least not in this day and age. The "sound" bank that technovelist previously banked with and has been referring to in this thread is from 30-40 years ago, with a name they can't remember, that was acquired.

As consumers, what do we want from banks? For our deposits to be secure, and for them to give us loans.

As investors, what do we want from banks? A return on our investment.

If the banking business weren't profitable, why would anyone choose to go into that business?

So really, the question is: Do we want banks, or do we not want them?

It's clear from some posts here, that some people don't want them (or at least, they think they don't want them). But we do need them, don't we?

That's quite an unfair characterization of the desires of others. On the contrary, I'd say some people want a system that isn't prone to systemic crises and think the current rules exacerbate them.

Regarding viability, if the government provides a backstop for various banking risks, then any bank/depositor that isn't taking those risks is missing out on the government subsidy, making it uncompetitive. So we don't know what people would do in the absence of the government subsidy on risk taking. It's fair for you to point out that I don't know for sure, but you can't claim that you know either.

But it gets even worse. Recently, a group led by the former head of research at the New York Fed has been trying to establish a bank (called The Narrow Bank) with the goal of being "a financial institution that issues demandable liabilities and invests in assets that have no nominal interest rate and credit risk." They would hold all deposits at the Federal Reserve, which now pays interest on those, making the business model even more lucrative than in a "free" market. The Fed has repeatedly dragged its feet and/or rejected the applications to sanction this bank (see The Safest Bank the Fed Won’t Sanction, Fed Rejects Bank for Being Too Safe). Again, I don't know for sure that the bank would attract enough depositors to stay in business, but I at least know that someone wants to try but is not even allowed to.

The Levine article even states "The New York Fed declined the account 'reportedly at the specific direction of the Board’s Chairman,' Jerome Powell. The Fed has not said what its objection is."

So the absence of such a bank is possibly due to government roadblocks as well as government subsidies on risk taking. It's purely speculation to say that a safe bank would be unprofitable without these things.

I thought I had seen a report of that but didn't know where I had seen it; thanks for the pointers.
So apparently someone is willing to bet that that there is a market for such a bank but isn't allowed to set it up for unspecified reasons.

To bring this back to actionable items: T-bills and t-bill money market funds serve many of the same purposes of a checking account, with a little more work needed. So anyone who is worried about the safety of their cash has those as alternatives to banks.

[coachd50]

I agree. This thread has grown quite long, mostly discussing a very basic reality of our banking system that most seem to either not realize or just ignore: EVERY bank would be perceived illiquid if a sufficient run its deposits would occur. EVERY bank.

Except for custodial banks, the former banking where you deposited your money/assets into the banks safe for safekeeping, but paid a fee for the banks services/insurance.

I'm not sure why this is considered unthinkable. Maybe it's an educational problem because people don't know enough about the history of banking?

It isn't that it is unthinkable. It is that I do not believe that a custodial bank's model would be able to compete with the current commercial and retail banks to make it worthwhile. I don't think they would be able to garner enough customers willing to pay for the same services that others will give for free.

I suspect more people would be willing to do that if this crisis isn't over soon.

Why do you suspect that? I bet it does not benefit the VAST VAST VAST majority of individuals, including 97+% of those here on the this forum to have to pay for a bank to hold demand deposits, process checks/ACH or EFT transactions etc.

I mean, if we want to really dive down the unstable economic rabbit hole--why are dollars worth anything? Why would someone give me goods or provide me services in exchange for dollar bills, or a negotiable note or electronic transaction representing a transfer of those bills? Just as everyone deciding they want their dollar bills from a bank (run on the bank) can crumble a banking system, everyone deciding that those same dollar bills are just arbitrary can crumble an entire economic system.

[rkhusky]

I use my bank as a bill payment service. Money comes in and goes out. I keep a thousand there on average to cover bills, sometimes the balance hits $5K for a few days. $250K insurance is way more than I need.

[CuriousTacos]

I use my bank as a bill payment service. Money comes in and goes out. I keep a thousand there on average to cover bills, sometimes the balance hits $5K for a few days. $250K insurance is way more than I need.

Exactly. I think most people and businesses could do something like this. Of course businesses have larger weekly/monthly cashflow needs, but still a lot of demand deposits would be more appropriate in something like a short term ladder/fund without meaningful liquidity or interest rate risk. Our economic system does not depend on demand deposits as opposed to those other choices, and we should not encourage risk taking to push people towards demand deposits.

[Lawrence of Suburbia]

I use my bank as a bill payment service. Money comes in and goes out. I keep a thousand there on average to cover bills, sometimes the balance hits $5K for a few days. $250K insurance is way more than I need.

I keep $9-10k in my Chase account; makes me nervous in light of this week's events ...

[theac]

Not really sure which thread this fits into best, but I guess this one will do.

This YouTube covers the basics for those of us concerned about what would happen if say Schwab or Vanguard were to hit the rocks for some reason. And how safe our money would be.

I have accounts at both, but the bulk is at Vanguard.
I'm not too worried about it overall, but still, "you never know!"

https://www.youtube.com/watch?v=wz64z1YuL0A

[seajay]

I agree. This thread has grown quite long, mostly discussing a very basic reality of our banking system that most seem to either not realize or just ignore: EVERY bank would be perceived illiquid if a sufficient run its deposits would occur. EVERY bank.

Except for custodial banks, the former banking where you deposited your money/assets into the banks safe for safekeeping, but paid a fee for the banks services/insurance.

I'm not sure why this is considered unthinkable. Maybe it's an educational problem because people don't know enough about the history of banking?

It isn't that it is unthinkable. It is that I do not believe that a custodial bank's model would be able to compete with the current commercial and retail banks to make it worthwhile. I don't think they would be able to garner enough customers willing to pay for the same services that others will give for free.

When money = gold (pre 1934) inflation broadly averaged 0%, here's a example of how 1830 inflation to 1890 was near 0% https://www.officialdata.org/us/inflati ... 0&amount=1 you could deposit surplus money (gold/hard currency) into banks for safe keeping and when you withdrew/spent that money it still had a similar amount of purchase power. From 1934 and there's predominately just been inflation, money was no longer gold, and could be printed/spent to benefit the printer at the cost of devaluation of all other notes in circulation. It no longer became viable to just leave bank notes/bills on shelves in banks vaults (for safe keeping), savers sought to maintain the purchase power of their money and depository banks, where the money you in effect lend to them (deposit with them) were a easy/accessible means. The hope is that the money you lend to (deposit into) banks will pay enough interest in order to offset inflation and taxation. As part of that 'loan' banks offer additional services, seemingly for free but only in the sense of up-front cost, behind that and the costs of those services aren't actually being provided for free.

[seajay]

To bring this back to actionable items: T-bills and t-bill money market funds serve many of the same purposes of a checking account, with a little more work needed. So anyone who is worried about the safety of their cash has those as alternatives to banks.

Generally leveraged ETF's are frowned upon, however ...
PV 50/25/25 2x stock/T-Bills/Gold has aligned to 100% stock whilst having half of the total portfolio value in very low/no counter-party risk (assuming physical in-hand gold)



You could do the same/similar with thirds each 3x/TBills/Gold, reducing the risk/cost of a brokerage/nominee failure down to a third, unpleasant if that occurs, but not critical (in general and in some years a portfolio might lose a third via natural market movements).

If instead of 100% stock your preference is for 60/40 stock/bonds, then 20/40/40 3x stock/TBills/Gold PV has compared similarly since 2009, whilst having just 20% in counter-party risk (SPXL 3x stock)

A nice equal weighted balance of a thirds each 2x/TBills/Gold however PV compares to a 67/33 stock/bond choice, but where concentration risk is equally spread.

[PersonalFinanceJam]

I use my bank as a bill payment service. Money comes in and goes out. I keep a thousand there on average to cover bills, sometimes the balance hits $5K for a few days. $250K insurance is way more than I need.

I keep $9-10k in my Chase account; makes me nervous in light of this week's events ...

Genuinely curious why? That’s well below FDIC limits in a too big to fail bank.

[Harmanic]

The 250k cap is useless. You need to either have banking regulations that prevent all banks (not just the biggest banks) from going under. Or you need all banks to pay into insurance that will cover their depositors in a credit event including deposits over 250k. The banking industry must have confidence for depositors or it ceases to function. We have a combination of the above right now. Regulations enacted in 2009 prevent excessive risk taking by banks but are less strict on smaller banks.

In the 90 years of the FDIC, there has never been a period where all deposits were insured. So why now would the banking system cease to function if we continue to insure only mom and pop depositors?

Sounds like a knee-jerk reaction to the failure of a couple of unique banks

The banking system is extremely fragile right now with asset values falling far below deposits at many institutions. At the same time the Fed needs to keep rates higher for longer to kill inflation. Perhaps by insuring all deposits, it can reduce bank runs and continue to hike rates. The other alternative is to pivot and let inflation run hot. That would be better for the government as it inflates away the debt, but it doesn't help politicians who want to get (re)elected.

The problem is that the government will have to issue higher interest bonds as the lower interest ones mature. They’ll be swapping debt for higher interest payments with high inflation. The long run expectation as an investor is higher taxes. And of course, this will have a future economic impact. Raising rates is bad news as it ripples through. But higher rates won’t keep companies from raising prices as their labor demands higher pay. It’s basically dominos gone wild.

The domino to fall will be consumers demanding higher interest on their deposits. This should be happening. No idea why it isn’t yet. The spread between savings and t bills is huge.

Everyone I know is moving their money into HYSA, treasuries, and CDs and out of checking and low interest savings.

[empiricist]

Some of the discussion in this thread is pointing towards this notion that this was easy to see coming. Any person, regulator or not, could have looked at these books and made a determination about imminent risk.

Spot on. I think anyone with such a view should read How Complex Systems Fail. This isn't to say that this crisis was necessarily unavoidable or that nobody made errors, but these post-hoc analyses, especially ones that blame one particular thing, are really not fully understanding how complex systems fail.

[exodusing]

UBS Offers $1 Billion to Buy Credit Suisse
The discussions are part of urgent effort by Swiss and global authorities to restore trust in banking system

I'm not sure UBS paying $1 billion for a bank which had an $8 billion market cap on Friday would restore trust. It would seem to indicate that, upon examination, a major bank thought another major bank was overvalued in the market.

[Fremdon Ferndock]

[Thread merged into here --admin LadyGeek]

This is concerning, especially Citi.



https://awealthofcommonsense.com/

[jebmke]

Citibank is considered a money-center bank. I used them often with large business deposits that were all over the world.

[Hyperchicken]

Isn't this metric simply a function of having fewer accounts with larger balance vs. more accounts with lower balance? What is the significance of this metric? (Let alone its actionability and relation to personal finance.)