Agree with 1 and 3.

Not with 2 though. The BTFP (not to be confused with BTFD :) ) program is removing completely the duration risk (for a year). This lets the FED raise the rates as high as they want without putting banks balance sheets at risk (barred some other unforeseen consequences).

> FDIC will probably have to be reformed

Why? Isn't the guaranteed deposits above 250k mainly 'insured' through Fed offering unlimited loans back by the nominal price of bonds owned by affected banks?

I should have explained better. My sense is that right now there is an implicit expectation in the market that the 250k threshold is no longer relevant, and that the FDIC is implicitly insuring everything that looks remotely like a deposit, regardless of the amount.

This doesn't work. The only way to draw a new line in the sand is some sort of reform.

The key issue is that the new line has to be "subgame perfect", meaning it has to be credible that if a bank steps over the new line, it will not simply be bailed out again.

> I should have explained better. My sense is that right now there is an implicit expectation in the market that the 250k threshold is no longer relevant, and that the FDIC is implicitly insuring everything that looks remotely like a deposit, regardless of the amount.

If rich people think that, I think they deserve to be taxed at more than 80%, because that's stupid.

FDIC move was perfectly rational and cost-optimized. Had they not done that, there would have been more bank runs, and they would have to actually pay out 250k/account on many more accounts than just SVB's, while ""saving"" SVB cost almost nothing.

You yourself just explained the reasoning as to why they would think that and seem to agree as well, not sure why you'd call it stupid.

Yes, now I wonder if anyone is allowed to fail. David Sacks complained that if the regionals aren't protected, then everyone will only bank with the big four. Yet if everyone is protected even when the bank makes poor decisions, that's a run on the FDIC itself. So as you say, where is this new line, and who can be trusted to allow those who cross it to fail?

<< Yes, now I wonder if anyone is allowed to fail.

That was one of the questions on the call/presentation I was recently on and no one has a clear answer at the moment ( I suppose it is not a surprise since we can't take Yellen at her word ). Some clarity will be needed and sooner rather than later if stated policy and rules are to be believed to be real policy and rules.

FWIW, odds are, just about every bank by now has either reviewed or scrambling to review their exposure.

I do not envy the weight of Yellen's decisions, because from where I sit it is still hard to tell if it was a 'less bad choice' available.

> odds are, just about every bank by now has either reviewed or scrambling to review their exposure

The lesson they learned is to shout global emergency when your regional bank can't meet withdrawals due to poorly managed finances.

Banks will not be more prudent, in the long run. They've just been taught that the government will protect depositors beyond federally insured limits. So now they can make riskier bets.

Keep in mind that SVB equity was totally wiped out. Everyone most certainly was not protected.

The people who make the poor decisions absolutely took a hit. The Board and management of the bank all took a hit and lost their jobs.

I don’t see a big problem with depositors being made whole. The bonds that backed their deposits are fully intact.

> The Board and management of the bank all took a hit and lost their jobs.

Right after they cashed out significant amounts of SVB stocks.

Don't be too surprised if the FDIC (or perhaps the SEC, since we're talking about equity) forces clawbacks of those payouts, not to mention salary and bonuses in general after December 2021.

What is the case against them? You can't claw back without demonstrating some law was broken. Making a bad financial decision that causes a business to fail isn't against the law unless you somehow profited from it. And, from what's publicly known, SVB's CEO didn't come away with more money from the bank's closure than he would have had he continued running the bank.

The question is, what would it take for a bank to be allowed to fail? The FDIC insurance line of $250k must've meant something.

SVB failed. You should look up the FDIC mission statement; it has nothing to do with drawing lines in the sand.

> The mission of the Federal Deposit Insurance Corporation (FDIC) is to maintain stability and public confidence in the nation's financial system.

I see nothing there about "we will guarantee deposits of any amount over $250k."

The decision to guarantee SVB may wreak havoc on the financial system as banks feel comfortable continuing to make risky bets and thus attracting more customers, knowing that the fed will rescue the customer deposits that backed those bets.

Greg Becker isn't going to jail, and he isn't going to be financially ruined. There are thousands of people willing to fill the role of extracting money from the government. The trick is to not give into their attempts to bend the rules.

It’s possible for the bank to capture a % of the deposit insurance by taking profit neutral risks. This is achieved by just increasing the risk. For example the profit neutral bet:

  0.5: 1
  0.5: -1

And the bet is made of 80% deposits 20% capital.

For the bank the profit before paying interest to depositors:

  0.5 * 1 - 0.2 * 0.5 = 0.4

The bet is profit neutral but the banks profit comes from increasing the risk of triggering the insurance.

For the insurer the cost is: 0.5 * -1* 0.8 = -0.4

If you want to run a ‘scam’ bank that makes money from looting the FDIC fund then having your capital going to zero sometimes is part of the cost of doing business. This is why it’s important for the insurer to try and control risk and insure there is enough capital so the loot equation does not work.

The simplest answer is "excess deposits insurance". Banks charge a monthly insurance fee for balances over $250k that provides FDIC insurance over the $250k cap. This allows everyone else under the $250k cap to bank without paying fees (the bank already paying insurance on those as per FDIC), and provides greater coverage to those above the cap. Think of it like an Umbrella Insurance policy. Some banks might waive the fees for their most favored clients if they so choose, or embed the fee inside other services.

> Banks charge a monthly insurance fee for balances over $250k that provides FDIC insurance over the $250k cap

The thing is .. the FDIC is already funded by banks.

https://www.fdic.gov/about/what-we-do/index.html

"The FDIC receives no Congressional appropriations - it is funded by premiums that banks and savings associations pay for deposit insurance coverage. The FDIC insures trillions of dollars of deposits in U.S. banks and thrifts - deposits in virtually every bank and savings association in the country."

How the banks choose to pass that cost on to customers/shareholders is up to them.

It's instructive to read https://www.fdic.gov/analysis/quarterly-banking-profile/qbp/... for the last available quarter; the insurance fund is on page 24. I can quote you two numbers and you can decide whether they are big or small: there is $128 billion in the fund, and this covers 1.27% of total US banking deposits.

Yes that's correct. I'm suggesting an additional fee that is paid by the account holder who holds excess funds above the amounts that are already covered by the bank in their fees for FDIC insurance coverage. I'm aware of the existing bank-paid insurance that covers the mandatory $250k FDIC coverage up to the cap. The difference that I am suggesting is that the umbrella insurance is paid by the account holder to the bank for excess insurance coverage. This allows insurance coverage for account holders over $250k, of which there is no insurance coverage, optional or of any kind, available today.

I think we've just discovered that account holders over $250k _are_ (or can be) covered regardless?

Surely the logical counterparty for the insurance is not the bank, but the third party insurer? i.e. that people should explicitly have to pay for FDIC coverage themselves?

> of which there is no insurance coverage, optional or of any kind, available today.

This is basically a credit default swap for bank accounts, and if you wanted to insure the reported $450m that Roku allegedly had with SVB, someone would have sold you a product I'm sure.

edit: remembered "insured cash sweep", which is the product that everyone should have been using. See https://www.intrafinetworkdeposits.com/ or https://www.cbhou.com/Resources/Customer-Corner/entryid/237/...

I think this is a case of insurance coverage. The fact that there's some implicit coverage of excess amounts is not sustainable long-term. Just like we buy insurance in the unlikely event that our house is flooded or damaged by an earthquake, so too should companies with significant assets in banks purchase, on their own, insurance to cover the potential possible, but unlikely, situation of a bank bust causing them to lose most of their bank account funds. In this way the government can focus on insuring the general public, and those "too big to fail" can get private insurance to cover their own risks. This is just my opinion and a possibility. Certainly if governments want to come to the rescue or we have a "survival of the fittest" with the loudest, angriest parties getting their way, then we can run things that way as well.

Is FDIC, which is paid for by banks, "the government"?

Thank you, I’ve been confused about whether this product even potentially exists (as opposed to shotgunning your deposit across lots of banks to game the FDIC limit) and this is the first time I’ve seen it properly named.

Right now there aren't many satisfactory options for insuring excess deposits but here are a few strategies (including your aforementioned "shotgunning" approach): https://www.forbes.com/advisor/banking/ways-to-insure-excess...

Insurance won’t matter because the insurer will be bailed out. Remember AIG? They sold insurance (CDS) which everyone bought then when it was time to pay out “oops bail us out please” and they were. So insurance is meaningless because who cares if the risk is priced correctly because the insurer will be bailed out themselves.

The money pipe was opened then and SVB showed it will never be closed. The capture is complete.

Clearly there needs to be some sort of reckoning when it comes to bailouts. That's a political problem for which I don't have any simple answer.

If we have to buy insurance to insure our money, the financial sector will just game that, too, and make even riskier bets. That we (taxpayers) end up paying for.

Potential solution? Make the bank board and C-suite pay for all the insurance out of their own compensation packages. And the the bank fails it comes direct out of their pockets.

When the bank fails, they end up living on the streets for their mistakes, and will never (hopefully) be able to do it again to another bank.

This was the "Lloyd's Names" situation: https://www.reuters.com/article/uk-financial-equitas-names-i... ; although they weren't decision makers, they were a special class of investors.

Is "keeping your money in a bank account" supposed to be a "bet"?

(or, as an argument I made earlier, if your company is completely dependent on a single other company to function, such as AWS, is there really any more risk in having only one bank account?)

I would say 'yes'. Banks should start offering fully insured accounts (maybe they already do) and those accounts should cost more and possibly have different liquidity profiles.

Fully insured by whom?

A re-insurance company probably, or the FDIC which would charge a premium for the excess insurance.

Why banks specifically? Should there be insurance for AWS and Github accounts?

> maybe they already do

"Insured cash sweep" (which is basically "RAID for banking")

There already is DR and business continuity insurance so non-financial assets have an entire industry around insuring against events there.

Cash sweep is insured but only to a limit, there's nothing magical there and the underlying securities have default risk (or breaking the buck).

at this point, who could doubt that AWS itself is faaar too big to fail?

North of $250,000 it's a bet. If you're Roku and you have hundreds of millions of dollars in a single bank, that's absolutely a bet. Companies can get private insurance to cover money in excess of the FDIC, but they didn't. And now no one will, because billionaires know they can threaten bank runs and violence to get bailed out.

This is the gaming of the system that is resulting in the government FULLY covering the bets of the rich. They could have bought insurance, but running a bank is cheaper.

Not necessarily. If insurance companies were allowed to set prices based on the bank you're deposited with, then what's currently a political process could become a market-based process. Have assets that are exposed to interest rate hikes? Higher insurance rates. Have assets that hedge against changes in the interest rate? Lower deposit insurance rates. Won't let us see your asset mix? Assume the worst case scenario.

So in this universe, when you go to get insurance at SVB, you see that it costs you 1% per year, which seems high to you. You go to the insurance company's website, and see that insurance for Chase is only 0.5%, so you switch to them instead. SVB is pressured to change to a less risky strategy by the market, not b the government.

(NB I'm not a libertarian, nor am I recommending this approach; I'm just saying that in theory such a system could work.)

You can sort of fix this in a free market system through reinsurance which spreads the risk out across multiple counterparties with deep capital reserves. But ultimately the only way to eliminate the risk is through insurance by a sovereign with the ability to levy taxes and print fiat currency.

FDIC already charges different amounts per bank. SVDI would buy reinsurance.

And insurance won’t even matter. Credit default swaps were suppose to be insurance and those holders were bailed out in 2008/9, remember AIG?

In 2008/9, The fact that a solidly red administration (Bush) wrote the check and a solidly blue administration (Obama) delivered it on bended knee to the banking industry made it clear who really ran things.

“Paying your bills is a moral hazard” - guy in the background of a tv interview that birthed the tea party in the US.

You're right. It can't just be about paying for insurance but also has to include undergoing and passing regular stress tests. Just because one buys fire insurance shouldn't give them a free pass to fill their house up with large amounts of flammable material and sparking wires.

They did have insurance... They had significant campaign contributions to the DNC.

> where large depositors can buy individual coverage

Q: Aren't large depositors already free to buy individual coverage from whomever offers it?

FDIC basically forces all depositors to have insurance in a generalistic hand-wavy way.

Seems we also need to force others to have insurance because they can’t be bothered and will just get bailed out — next time probably with taxpayer dollars.

Well then there’s 4:

The regulators failed massively, allowing banks to mask their duration losses. Obviously this needs to change, but they probably need to fix the other banks first (that are still hiding their losses).

The regulators had the regulations changed out from under them by Congress (at behest of the banks). They can’t regulate what’s not in the law.

As far back as 2019 the FDIC was sounding the alarm about regional banks. In 2020, SVB’s risk committee told them to change their asset mix, they were over ruled because it would lower profits.

If we are going to allow lax regulations fine, then the market (including depositors) have to do the regulation, but you can’t blame regulators in that case.

Exactly. Let’s not be so quick to say “the regulators failed”, particularly when the case is that even if the regulators did somehow fail and not have stronger regulations removed by Congress leading to said failure, these financial firms as a business failed first by making poor business decisions.

> but you can’t blame regulators

When I read "regulators failed", I don't think of Joe Regulator phoning it in at work. If Congress creates and oversees regulations, then they are the regulators in my book. This may be what the comment you replied to meant as well.

The rollback of Dodd-Frank was at least nominally bipartisan.

Limiting the feds power is broadly popular with the population. This is one of the outcomes of those desires, Congress representing their constituents wishes seems hard to call a failure just because the outcomes have some negative outcomes (all laws have negative outcomes for someone).

Note that this is a state chartered bank rather than a national one.

Thus, state regulators are the ones with the oversight power and the ability to really do things.

California Financial Regulator Takes Possession of Silicon Valley Bank - https://dfpi.ca.gov/2023/03/10/california-financial-regulato...

> SAN FRANCISCO – The California Department of Financial Protection and Innovation (DFPI) announced today that, pursuant to California Financial Code section 592, it has taken possession of Silicon Valley Bank, citing inadequate liquidity and insolvency. The DFPI appointed the Federal Deposit Insurance Corporation (FDIC) as receiver of Silicon Valley Bank.

> Silicon Valley Bank is a state-chartered commercial bank based in Santa Clara and is a member of the Federal Reserve System, with total assets of approximately $209 billion and total deposits of approximately $175.4 billion as of Dec. 31, 2022. Its deposits are federally insured by the FDIC subject to applicable limits.

---

Note California and "state-chartered" in there.

My (limited) understanding is that a state chartered bank is still regulated at the federal level.

From https://en.wikipedia.org/wiki/Bank_regulation_in_the_United_...:

  a Nevada state bank that is a member of the Federal Reserve System would be jointly regulated by the Nevada Division of Financial Institutions and the Federal Reserve.

> State regulation of state-chartered banks and certain non-bank affiliates of federally chartered banks applies in addition to federal regulation. State-chartered banks are subject to the regulation of the state regulatory agency of the state in which they were chartered. For example, a California state bank that is not a member of the Federal Reserve System would be regulated by both the California Department of Financial Institutions and the FDIC. Likewise, a Nevada state bank that is a member of the Federal Reserve System would be jointly regulated by the Nevada Division of Financial Institutions and the Federal Reserve.

And from https://www.fdic.gov/about/what-we-do/index.html

> The FDIC directly supervises and examines more than 5,000 banks and savings associations for operational safety and soundness. Banks can be chartered by the states or by the Office of the Comptroller of the Currency. Banks chartered by states also have the choice of whether to join the Federal Reserve System. The FDIC is the primary federal regulator of banks that are chartered by the states that do not join the Federal Reserve System. In addition, the FDIC is the back-up supervisor for the remaining insured banks and savings associations.

Right, but in SVB's case, since they are a member of the Federal Reserve System (like the Nevada example), they were regulated by the Federal Reserve in additional to the State.

The California bank in that example is regulated by FDIC because it's not a member of the Federal Reserve System.

In the run up to the 2008-9 financial crisis, Sheila Bair at the FDIC and Brooksley Born at the CFTC were making alarums about the banks and the housing market, but the dudes at the Fed, Treasury, and the Comptroller of the Currency were like everything's fine, go back to the kitchen.

There needs to be some kind of penalty for the C-suites for running a bank with no risk manager for 9 months too.

They had no interest rate risk hedges the entire time.

Edit: Downvotes with no replies. I hate it when that happens.

I think the risk manager think is a bit of a red herring, outside of pointing towards a culture that didn’t care in the first place.

SVB got blown up on a trade that is kind of at the core of what banks do (this is also why every bank is hurting). To even exist the bank has to be stuffed full of people very knowledgeable about rates risk at all levels of management. There should have been no shortage of people at any level, including executive, that understood the risks.

It wasn’t even like this was some weird bespoke product or something, they got blown up by plain treasuries afaiu. This is the sort of thing that’s “introduction to rates 101” material. They didn’t need a CRO to tell them this.

Why not buy a hedge? Their risk committee met 18 times.

Because HoldForMaturity assets can't be hedged? Or it cuts into profit and affects your stock and management bonuses which they weren't used to giving up, and your share losses due to the hedge imperil your company but just in a different way?

Oh to be clear I agree with the OP that they were incompetent/greedy, I just think that missing a CRO is at best a symptom and not a cause. Every single invite to a risk committee meeting should know exactly well what sort of rates risk they had.

As for the hedge, it’s probably a greed/returns question. If you buy then 10 year and sell everything between say 2 to 10 years as a curve hedge, you’ve basically bought the two year with extra steps. There’s no free lunch where you get returns of ten year without the risk on ten year.

You could imagine some imperfect hedge might be better but sort of same problem.

In this case, the SVB C-suite have all lost their jobs, and any equity (RSUs etc) they may have held has been zeroed.

The next SVB then knows to cash out early and treat the stock as zero-value.

What about claw backs and garnishment?

Did SVB do anything irregularly? How would the pre-2018 regulations have changed anything?

From what I’ve read, they would have to mark the portfolio to market (i.e. report its value in terms of current market prices), not say “we intend to hold this to maturity” and account it at face value. Like, the latter actually makes more sense to me, but only if you actually don’t need to sell which might be true for a university endowment (all assets, no liabilities or at least very predictable liabilities) not for a hedging institution.

Wouldn’t it have just made them insolvent earlier then? How does it actually prevent the problem?

Not necessarily, since the gap in finances accumulated over time. They would have had to acknowledge asset price drops on their balance sheet much sooner. Basically they were allowed to build up a bigger integration risk with their accounting if they ever did have to sell due to not having to MTM in the mean time.

Was the accumulation duration larger than the regulatory mark-to-market period? As I understand it, SVG was heavy on US Treasuries, which lost a great deal of value due to recent interest rate hikes. As a result of a higher than expected deposit withdrawal rate, SVG sold US Treasuries for less than what they would have received if they had held them to maturity.

If the gap in finances was discovered earlier, would they have just converted more equities and other long-term higher-yeild instruments into treasuries and then go under because they couldn't get returns to match their deposit interest rates?

Had they been marking their holdings regularly they would have sold their depreciated holdings sooner when losses were smaller, instead of waiting until they had to to cover withdrawals.

Deposit interest is not fixed so that wouldn’t make them go under, they’d have to reduce their interest paid.

Requiring that they provide more information earlier encourages them to behave more safely (by exposing them to scrutiny backed by sound evidence). And if they still go down, at least it happened sooner and there are fewer depositors to be harmed.

Banks are supposed to take duration risk like this - they borrow short-term (deposits) to lend long-term (business loans and mortgages). The thing that's new in the current environment is that the fed has hiked rates so aggressively that even banks that took sane levels of duration risk are in danger of insolvency if their assets get marked to market.

You have that backwards. You borrow long term, then lend short term. Trying to keep enough liquidity to match withdrawal rates to "keep money working".

Lending long (10 year) on money deposited for only a year is a recipe for disaster.

Every other institution borrows long to lend short. That's how money is usually made in a financial company, like a hedge fund or something similar. Banks are the counterparty (in a cosmic sense) to that trade: they borrow short to lend long. It is an inherently unstable business model, but it works if you trust them enough.

Yellen has always been too quick to fold, and we saw that in her time as fed chair. Wall Street and silicon Valley insiders know this, which might be why they immedieately tried to put their PR campaign's focus on her (rather than Jerome Powell, who is a little bit steadier at the poker table).

Wow you managed to load a ton of sexism into a short comment!

I'm truly curious why you perceive the parent comment to be sexist? Apart from using "her" pronouns, I don't perceive any mention of gender... What am I missing?

Parent commenter mustn't have received the memo that women are immune to criticism?

If you saw sexism in that comment, then I'm pretty sure you're the one with the sexism issue

Are you a trader? I traded global rates markets from 2012-2020 and yellen was probably the best central bank head I saw. She was the most stable and consistent. I would argue she was the least beholden to market pressure out of any bank head, except perhaps Draghi, who just did not care much the last couple years. She was also the least likely to react to congress or press questions and cause unnecessary market volatility.

Yeah this previous comment is probably just good ol' fashioned misogyny. There's no consensus that Yellen is quick to fold from the previous crisis - these people also have real responsibilities so it's not necessarily 'folding' anyway to respond to stakeholders.

There is also no evidence that the previous comment was made due to misogyny.

I was in Wall St for the end of her tenure. I admired her handling of the beginning of her time as Fed chair (not raising rates too early when Wall Street was yelling for it), but IMO she ended up folding to pressure from politicians and Silicon Valley types to keep rates low for far too long. She was very good at not listening to the market (which is arguably a bad thing - when your rate target is 0-25 bps and rates are trading at ~20 bps, maybe you should listen?) or to the traditional Wall Street types, though.

Yellen was the 11th President of the SF Fed [1] and the current president is her protégé [2]. Greg Becker (SVB CEO & president) was in SF Fed board of directors until Friday [2]. He successfully lobbied for less regulations for his bank. The SF Fed looked the other way.

[1] https://en.wikipedia.org/wiki/Janet_Yellen

[2] https://en.wikipedia.org/wiki/Mary_C._Daly

[3] https://www.reuters.com/markets/us/ceo-failed-silicon-valley...

It would not be an exaggeration to say that Janet Yellen is probably the biggest individual contributor to the current economic crisis, and has made it much worse than it otherwise would have been.

Yellen “folded” bc risking the broader financial system in order to give it hard to a bunch of tech bros is itself a hazard of moralizing.

Changing the rules during the game (full deposit insurance, one off advantageous loans to troubled banks) also erodes the moral by standing firmly behind reckless and risky (risky for the masses not self!) behaviour and entities, unlike the rest! For the rest the ordinary rules apply.

Rules don't metter from now on or what?!

They didn't change any rules - they just followed the processes they already had - which was to declare the bank systemically important.

Tell it to other cases where deposits are lost above the insurance limit, tell them please to their face that the rules are the same and not changed ad-hoc.

I would, but I’ve been looking for a case where were over the limit deposits were lost and can’t find one. Also, if it’s before 2008, the laws were significantly changed and the rules wouldn’t be the same but not ad hoc either.

Except that there were no blanket federal guarantee in previous failures BEFORE some private institution acquired the remians of the failed bank and just then they CHOSE standing for full the deposit if they thought so (most of the cases). Not always, not for everyone. Private cas to case agreement not new central rule! The rule was only up to the limits of insurance and so The Enloe State Bank, Covenant Bank, NOVA Bank, Jasper Banking Company, Eastern Shore, Home Savings of America, and several more (all after 2008) where clients did not have the balance above the insurance limit. Do you have some incentive here attempting to mislead?

Banking stocks are down as unlike the 2008 bailout capital is now at risk. Rules may matter but the Trump signed roll-back of Dodd-Franks removed these. This created an invitation to load up on risky assets which on aggregate are estimated 600B under water. We have removed rules preventing systemic risk. Now we face systemic risk. Crying for narrow rule adherence is not situational adequate.

its just going to keep getting worse and worse because there's no competitive advantage to responsible behavior. At this point you're a fool if you don't take unreasonable risks with your money.

> You cannot guarantee everything, all the time.

Why not? What’s keeping the Fed from working with Treasury and the FDIC to provide unlimited liquidity as needed for deposits? No doubt there will be higher order consequences, but I don’t know of any operational reason why it isn’t possible so long as the current monetary regime exists at all.

Powell and Yellen put a system in place over the weekend where all banks can borrow against their bonds at par, thereby preventing any other bank runs.

The duration problem is that banks have bonds/CDOs on their books marked-to-maturity, but when faced with outflows banks are forced to sell them at market prices (much lower because interest rates went up). This turns an illiquidity problem into an insolvency problem if a bank bought too many low interest long duration bonds.

Last week, when a bank had balance sheet consisting of bonds with a market price of $75 but valued at $100 marked-to-maturity they would get into trouble when faced with too many withdrawals. Today, they can borrow $100 from the Fed at a modest interest rate with the bond worth $75 as collateral. This fixes the bank run problem, because the bank can go to the fed to get the money they need to cover any outflows. This deal only covers quality bonds and only those bought before last week. This fix is not an invitation to start lending recklessly, it's just a stopgap measure to allow banks to lose money slowly on the bad debt they already have.

This all means Powell can continue to raise interest rates without having to worry too much about bank failures.

So, the solution to bad assets is more debt? How are the banks going to cover that debt when their customers are fleeing and interest rates are rising? I fear this is only kicking the can down the road by a few months (or years) before even worse fallout occurs when the failed banks have to make substantially larger interest payments.

Edit: a better term might be Zombie Banks.

Welcome to Japan circa 1990s which is now why Japan has the economy it does today.

The idea is that when customers know a bank has effectively an unlimited line of credit to pay for outflows that there is no reason to panic. Conceptually, the credit line works perfectly even if it's never used.

I agree it's not a solution, but it's smart and effective stopgap measure.

Why would customers flee if there's no risk of the bank running out of money?

In a constant intereest rate environment the bonds' market value will tend towards par value the closer they get to maturity

I disagree. I worry that this structure may effectively tie Powell's hands and prevent him from raising rates further.

As you describe it, banks can post collateral with a market value of $75 in return for $100 of loans from the Fed. This is not a panacea. There is a reason why this is not normally done.

The problem arises when this loan has to be repaid. At that point, the bank will have to repay $100 to recover $75 worth of collateral. There is a gap between what the bank must repay and the value of the collateral it gets back. This means that, at that point, banks may find that they are insolvent and unable to repay the loans. This is the banking version of "jingle mail", sending the bank's keys to the Fed instead of repaying the loan.

The higher the rates, the lower the value of the collateral, the greater the gap, and the more likely the banks are to default on their loans when they come due ...

... silly me, of course not ... at that point the banks will expect the Fed to bail them out again and cover the gap through some "repurchase" voodoo where the banks can "repurchase" their collateral at market value and have their loans forgiven.

Banks generally do well in higher interest rate environments. It's in a ZIRP climate that banks struggle. By kicking the can down the road banks can use the profit they're making from the business they do today to pay off the dumb debt they acquired in the past couple of years.

In the US alone banks are underwater to the tune of 650bn (that we know of). It will take a while to pay off.

The banks might get an outright bailout -- it wouldn't be the first time -- but nobody wants that. Not Powell, not Yellen, not Biden, and certainly not you or me.

> Banks generally do well in higher interest rate environments.

It’s not about a high vs low interest rate environment. It’s about a falling versus rising interest environment. In a rising interest rate environment, a banks bond holdings is continually losing value.

> The problem arises when this loan has to be repaid. At that point, the bank will have to repay $100 to recover $75 worth of collateral.

This is not much of a problem if the Fed allows the loan to be rolled until the bond matures. Then, at maturity, the loan's principle is paid by face value of the bond.

The only issue is that, in the meantime, the bank does have to pay interest to the Fed on the loan. This is a tightening; it's just not as tight.

The face valve of the bond cancels the principle, the bond's coupon cancels some portion of the loan interest, and the only thing left at the end is a cashflow from the bank to the Fed representing the remaining interest. Heck, the Fed could make this cancellation explicit, create a bond representing this cash flow, and sell it to somebody else.

This also doesn't prevent Powell from raising rates further. If anything, it eliminates a reason why he couldn't.

Do the banks actually have to repay the loans or can they just sign their bonds over to the Fed?

> The problem arises when this loan has to be repaid. At that point, the bank will have to repay $100 to recover $75 worth of collateral.

Assuming an absence of default, and the Fed being able to wait being paid back until the bond matures, then the collateral will be worth its par value (ie. $100).

> This deal only covers quality bonds and only those bought before last week.

> This all means Powell can continue to raise interest rates without having to worry too much about bank failures.

Do you think banks will stop buying bonds? Otherwise I don’t see how the latter follows from the former.

> - FDIC will probably have to be reformed. You cannot guarantee everything, all the time

You absolutely can (should is the question)?

The second question is whether you want depositors to care about the financial health of their banks or not. I'm on the no side of that conversation. So you let regulation take care of the capital requirements and so on whilst allowing people to feel safe with deposits.

its impossible to guarantee all deposits

Not for the United States government, the issuer of fiat currency. They can guarantee all deposits. Money is a concept.

> You cannot guarantee everything, all the time.

But it's not everything, not even close. It's only the amounts deposited in the standard class of bank accounts. Companies with large amounts of cash keep very little of that in bank accounts, it's in money market funds and other cash-equivalents.

It's certainly feasible and possible to have the "risk" part of the bottom of the risk-reward curve to be at the same level as the viability of the federal government. The risk isn't quite 0, but if the federal government collapses you have bigger problems anyways.

Especially in a high interest rate environment. Bank accounts essentially have a 0% nominal rate, which in a high interest rate environment is a very negative real rate so there is lots of margin for implicit or explicit insurance.

> Companies with large amounts of cash keep very little of that in bank accounts, it's in money market funds and other cash-equivalents.

https://www.nytimes.com/2023/03/13/business/svb-collapse-com...

"Roku, the maker of the streaming media player, said in a U.S. Securities and Exchange Commission filing on Friday that roughly $487 million, or 26 percent, of its $1.9 billion in cash was tied up with Silicon Valley Bank"

(this was not very clever of them! But it seems to have been encouraged among the SV community?)

> > Companies with large amounts of cash keep very little of that in bank accounts, it's in money market funds and other cash-equivalents.

Companies above a certain treshold (and all citizens for that matter) should be able to bank with the Fed, and have peace of mind that the money they deposit there is not being put to work in any way, shape or form.

What developed over the last week is a victory for those who long for CBDCs .

Companies can already buy recurring 3 month treasuries to hold their cash.

> Companies above a certain treshold (and all citizens for that matter) should be able to bank with the Fed, and have peace of mind that the money they deposit there is not being put to work in any way, shape or form.

Banks being able to lend out money is generally considered a good thing though.

There certainly are alternatives though for depositors that want to have more control in how their money is put to work: money market accounts, short term treasuries, etc

> > Banks being able to lend out money is generally considered a good thing though.

Banks are lending not their own money but depositors.

In a perfect world every citizen , small LLC and startup would be able to issue their own bonds if they need credit for purchases or entrepreneurial efforts

> Companies with large amounts of cash keep very little of that in bank accounts, it's in money market funds and other cash-equivalents.

Could banks learn something from companies here, and drop the volatile long term bonds from their assets in favor of money market funds?

> FDIC will probably have to be reformed. You cannot guarantee everything, all the time.

Why can't you when you can literally print money? Just banks will have to be forced to pick up the tab for that, by limiting their money printing ability so that in case of emergency it can be safely printed.

Dollar deposits in a bank should be 100% safe operation regardless of the amount.

And investors can burn. Every investor is reaponsible for their own risk.

Ever since the initial Covid shock wore off, this whole thing just feels like 2008 in slow motion.

2008 started back in 2006 and wasn't done until 2009

> FDIC will probably have to be reformed. You cannot guarantee everything, all the time.

FDIC does not guarantee everything all the time, that's the whole reason for what happened at these banks being controversial.

Yellen folded? What does this really mean? The “market” will test her how? The market is only interested in pnl. Insolvent banks are a great place to make a trade. Hardline central bank policy (Japan) would be a place to make a trade. Treasury secretary and deposit insurance? I don’t know what you see there.