Even if they go to the Fed to borrow reserves at par of their USTs they don’t have the capital to support the increase in reserve assets they borrow from the Fed…iow if they are sitting there in compliance with SLR of 0.10 …. A-L=C…. Use the SVB reported numbers…. 200-180=20… (A-L)/A = 0.10 ….. ok everything is fine.. somebody comes in and tries to withdraw 20… they don’t have any reserves as RRR is 0%… they pledge UST assets at par to borrow 20 reserves from Fed… now 220-200=20 … (A-L)/A = 20/220 = 0.09 …. ie SLR drops below threshold due to the Fed transaction and they have to be shut down and everybody there gets wiped out with all the chaos… 🤔
Andy Vermaut shares:U.S. Banks are sitting on $1.7 trillion in unrealized losses, research says. That's not a problem—until it is: "As long as people aren't all coming in at the same time and demanding that their deposits back, you're okay,… https://t.co/6ZAbd2rwnf Thank you. pic.twitter.com/EXv2JFDE4r
— Andy Vermaut (@AndyVermaut) March 23, 2023
8 comments:
so basically you can engineer bank runs by yelling fire and watching the depositors all pull their money into short dated treasuries...
looks like yes…
MMTs “no USTs greater than 90 days” might help…
Wouldn’t have the big unrealized losses as short duration wouldn’t ever trade much below par…
Other thing they might consider is allowing IOR receivable as a current asset…
Need to drop the stupid US version of the Supplementary liquidity ratio then.
The other option is that the Fed just clears the transfer on overdraft.
Then if a depositor leaves, the bank's account at the Fed just goes overdrawn. That's replacing one liability with another. That can then be refinanced to a longer term loan with collateral.
Still in compliance.
The other option is that the Fed just clears the transfer on overdraft.
Yes, the Fed should just declare that all USD are US currency backed by the full faith and credit of the US, not just cash.
The notion of making bank depositors creditors of a "private" bank and subject to the consequences of default is just dumb.
The purpose of equity holders and securities holders is supposedly to discipline risk-taking. It seems this should be sufficient without including depositors.
Actually, the basic issue is capitalism in a monetary production economy based on equity and debt (credit extension). The justification of profit for rentiers as recipients of economic rent is risk assumption, with dividends and interest being "just" compensation for it.
Why should this discipline apply to bank depositors when it risks contagion manifesting as bank runs? This appears to generate systemic risk without offering much in the way of discipline.
This is complicated by their being several different types of risk in a capitalistic system running a monetary production economy using a floating rate currency with banks permitted to increase the MI money supply by creating loans that put them at risk. For example, there is default risk on equity and debt, interest rate risk on securities, inflation risk for holding cash, etc. Financial professionals are supposed to understand this risk. Many if not most depositors don't have that level of awareness and believe, erroneously, that deposits are "money good."
What is the cost of the government not guaranteeing that all its money, including "bank money, is "money good."
The cost is erosion of trust, which is the reason for contagion.
Tom look at the Rasmussen poll… dearth of trust out there …nobody trusts anything…
Right, Matt. And there are good reasons why. A lot of people are tired of getting played.
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