I don't usually link to podcasts without transcripts, but this is worth mentioning.
The MMT Podcast with Patricia Pino & Christian Reilly#162 Warren Mosler: Anatomy Of A Bank Run
I don't usually link to podcasts without transcripts, but this is worth mentioning.
The MMT Podcast with Patricia Pino & Christian Reilly
34 comments:
Warren says it was a “liquidity issue” in that the bank had insufficient reserve balances at the Fed to perform a withdrawal…
But the RRR (RBS/Deposits) is 0% so banks are not required to have any reserve balances as a % of deposits…
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Banks in normal countries have never had reserve ratios. Yet they clear transactions all the time via their settlement accounts.
The Fed cash letter was too tight. And then after the bomb went off, they altered it.
May have been some malfeasance too Neil…
If you watch that Navarro video below in the cold open Powell says they was what looked like coordinated activity..l
I think Theil came out and said get your money out,,,
So could be some sort of political differences maybe conservative SV had a disagreement with liberal SV and conservative SV all wanted to stop dealing with that bank all at once.,,
Or maybe it was foreign actors.,,
Has to be thorough investigation…
https://www.bloomberg.com/news/articles/2023-03-09/founders-fund-advises-companies-to-withdraw-money-from-svb
“ Founders Fund, the venture capital fund co-founded by Peter Thiel, has advised companies to pull money from Silicon Valley Bank”
Could be political vendetta….
Maybe Theil wanted more interest on his deposits?
They refused….
Or they tried to do it and they didn’t have the reserves to go RRP?
Have to look into it…
FD I have all my munnie in RRP thru a US govt MMMF…….
https://www.federalreserve.gov/newsevents/pressreleases/monetary20230322a1.htm
“ Conduct standing overnight reverse repurchase agreement operations at an offering rate of 4.8 percent and with a per-counterparty limit of $160 billion per day.”
Why take the risk of your bank getting shut down when you can get 4.8% APR with zero duration guaranteed 100% directly by the CB?
All you have to do is form a MMMF and when you hit the 160B limit just close that one to new deposits and form another one and put in more munnie in that new one.. rinse and repeat…
https://www.federalreserve.gov/mediacenter/files/FOMCpresconf20230322.pdf
“ We know that SVB experienced an unprecedentedly rapid and massive bank run. So this is a very large group of connected depositors, concentrated group of connected depositors, in a very, very fast run, faster than historical record would suggest. ”
Those “connected depositors” have to be investigated…
Who were those people and what were their motives?
Can’t blame them if all they wanted was just to go to the RRP for the risk free 4.8%…
Banks are required to settle transfers to other banks though. It was a liquidity issue
“Liquidity” is a figure of speech….
Reserve requirement ratio is 0%…
Banks are not required to possess any reserve balances…
If banks need reserve balances to settle withdrawals then why tell them they don’t need any?
If a customer requires a transfer of its deposit to another bank, the only way to settle the transaction is through reserves at the central bank. If the sending bank doesn't have enough reserves, the receiving bank will never receive any money. The transfer will fail. Banks don't need to end the day holding reserves for regulatory reasons, but they do need reserves to settle transactions between themselves.
Also, "liquidity" may be a word misused by journalists and some economists, but, in this context, they mean high quality liquid assets.
If you read BCBS' Liquidity Coverage Ratio (LCR) standard, it is well defined. The full definition has a lot of details and is covered by many paragraphs, but if you want a summary, "Assets are considered to be HQLA if they can be easily and immediately converted into cash at little or no loss of value".
With the ling technical and detailed definition of liquidity, I think it may be safe to say that it is not a figure if speech.
"If banks need reserve balances to settle withdrawals then why tell them they don’t need any?"
Because they don't need any *overnight*. Settlement is done during the day at the central bank against posted collateral.
There is no justification for reserve ratios. They are a peculiarly American obsession.
"If a customer requires a transfer of its deposit to another bank, the only way to settle the transaction is through reserves at the central bank."
That isn't true of course - as any correspondent bank will tell you.
The default mechanism is direct - the target bank takes over the deposit in the source bank and then the target bank marks up a deposit in its own books. No central bank and no reserves required.
Central banks and the 'reserve' concept is merely an optimisation of the point-to-point correspondent process.
What is a correspondent bank?
“ Assets are considered to be HQLA if they can be easily and immediately converted into cash at little or no loss of value"”
They had them they had positive duration USTs which were at a unrealized loss due to the unprecedented interest rate increases by the Art degree morons at the Fed..,
Once they “converted them into cash!” (ANOTHER figure of speech) they had to realize the losses and regulatory capital was depleted and bank had to be shut down…
In US , HQLA are reserves, USTs and GSE bonds…
RRR was 10%, petulant Fed recently reduced RRR to 0% because they were too dumb Art degree morons to compute 10% of H.8 deposit liabilities so they just made it zero to avoid the 8th grade algebra.. Reserves were yielding 0.01%, non zero duration USTs and GSEs were yielding 2%… banks exchanged reserves for UST/GSE due to financial incentive created by new 0% RRR… Art degree monetarist morons in Biden Admin told Art degree monetarist morons at Fed to increase rates in unprecedented fashion to be seen trying to do something about their Art degree monetarist moron figure of speech “inflation!” as instability of prices became politically unpopular in election year…
Now overnight reserves, short term USTs and GSEs yielding much more than short term bank deposits so depositors are showing up telling the banks to move their munnie to MMMFs and creating bank runs…
“ There is no justification for reserve ratios. They are a peculiarly American obsession.”
US covers 9 time zones… not everyone is at normal work at all times of the day…
Not to mention tornadoes, hurricanes, floods, thunderstorms , earthquakes, volcanic eruptions, terrorists attacks, nuclear threats, etc you have to deal with…
System has to be resilient and survivable…
Requiring depositories to have an asset class = 10% of their deposit liabilities that is a direct CB liability doesn’t seem unreasonable…
"Requiring depositories to have an asset class = 10% of their deposit liabilities that is a direct CB liability doesn’t seem unreasonable…"
It's entirely unreasonable and unnecessary in any banking system. The central bank provides the intraday credit and it all clears by the end of the day in the interbank market.
Just in Time vs stocking. JIT is better and more efficient. All you need is a central bank that knows what it is doing.
The FX market can do it globally 24/7. I'm sure the Fed can.
System has to be resilient and survivable…
Right. This tends to be a big mistake in current thinking that prioritizes efficiency to the point of dangerously ignoring resilience.
Management by objectives is about effectiveness and efficiency in that order. To paraphrase Peter F. Drucker, efficiency is about doing things right and effectiveness is about doing the right things. Resilience is about doing the right things.
The EZ may be a Rube Goldberg machine, but at the time of crisis, ECB chief Mario Draghi stepped up and made it clear that the ECB would to provide resilience in extremis. That ended that crisis. It was a smart move.
Now the Fed has backed the national banking system into a corner on account of contragion that it had the power to preempt, even if its ill-conceived policy caused it in the first place.
The problem is that trying too assiduously to avoid "moral hazard" can result in more hazard by reducing resilience. Trust in the financial system is based on part on confidence in the system's resilience. Quickly adding resilience to a system is why emergency powers were developed.
As soon as a bank run began Powell should have come out and shouted loudly, "All deposits are money good and we have the power to make it so" — which they do using emergency powers.
Now we have an international financial crisis again based a good deal on the "there's too much debt" meme that is based largely on erroneous assumptions about how the system works — assumptions that MMT sets straight based on institutional analysis. BTW, MMT is no longer the province of economics and economists now that lawyers and law professors like Rohan Grey are adding their expertise about institutional frameworks that are legally based.
Just in Time vs stocking. JIT is better and more efficient. All you need is a central bank that knows what it is doing.
Neil is the expert here but in my understanding this is correct. Reserve requirements don't "add liquidity" but rather make banking less profitable. See Warren Mosler's analysis and proposals on this, for example. He argues that simplifying banking, including central banking, can make the financial system more effective and more efficient. This would make it more resilient too.
The primary reason for their being central banks at all is to provide liquidity to the system on as as-needed basis.
Contagion is the result of breakdown or trust in a system's resilience to perceived stress. The central bank is supposed to address that perception and it is provided institutionally (legally) with means to do so. (IIRC, the secretary of the treasury has the power to direct the Fed to do so if the Fed were to have cold feet, for example, about using "The Coin" when the executive branch had decided on it.)
For an interesting historical account, see What Was the Panic of 1907? Why Was It Important?.
The Panic of 1907 spurred greater oversight of the financial markets and would lead to the 1913 Federal Reserve Act, which established the Federal Reserve system as we know it. The Federal Reserve is in charge of managing the country’s monetary policies, regulating financial institutions and ensuring the stability of the financial markets.
The article implies that the reserve requirement provided liquidity, which in a sense it did under the gold standard of the time compared to now, under a floating rate system. But that is another story.
It’s not a system that is fully staffed 24/7/365…
You have FRBNY in EST and Hawaii is 6 hours later and Guam even more…
Maybe Puerto Rico earlier than NYC…
USA covers 9 time zones …
“Just in time”
WHAT TIME? There are 9 of them…
I’m sorry the earth turns to make it more complicated but that’s the way it is…
People who work there have to sleep and have somewhat normal lives..,,
“Just in Time vs stocking. JIT is better and more efficient.”
Not when a global pandemic hits… obviously…
Neil what if terrorists figure out where the main communication trunks are between DC and NYC and walk in thru the Democrat open southern border and hit those in a few places on a Monday morning?
At least Depositories could do inter Depository settlements up to their previously known reserve positions until the Fed could get back on line…
I don't see an issue under Warren's proposal of unlimited liquidity provision. All drafts automatically clear immediately on presentation. The interbank rate is set at zero. It all done digitally these days.
There are proposals to switch to central bank digital money. In effect, all money is already digital other than the very small percentage of cash in use in the system presently.
If a bank is found to be insolvent it is closed on Friday at close and opens again on Money with new management.
This would obviate bank runs since deposits would not be at risk. The risk associated with deposits would be the same as that with holding cash, namely, inflation risk.
In a well-run banking system, there would not be insolvencies since regulators would be aware of developing conditions in that direction and would require action before the situation matured.
This would not obviate conditions developing as a result of other factors, such as a pandemic, that might result in non-performing loans that threatened the system. Then regulations could be modified in extremist and other emergency measures taken.
Absent this, crises will continue to occur in a capitalist system running a monetary production economy and a floating rate monetary system. However, if banking is treated as a public utility this can be minimized at least if not obviated.
This is known to be a weak leak in capitalism.
I don't know either what a correspondent bank is. I suppose it is something in the US or UK?
I'm assuming they are smaller banks that do not have direct access to reserves for some reason, so they are required to hold a deposit account at a bigger bank if they want to use payment services. In that sense, they would be similar to non-banking companies and natural persons, who also don't have direct access to reserves. So those smallers bank are not exactly core banking.
If that assumption is true, then my last sentence was incorrect and should be corrected to something like: If a customer requires a transfer of his/her deposit to another bank, the only way to settle the transaction is through reserves at the central bank - if the banks in question do not have a correspondent relationship.
Also, I'm assuming here that those correspondent banks are small (otherwise they would have direct access to reserves), but I'm guessing here. If that's the case, then most transactions in the economy would not involve correspondent banks, as usually 70% to 90% of transactions involve the biggest four or five banks in most countries.
Is that the case?
SVB had $ 16 b of capital and the requirement was $ 10. The losses they had by selling hold to maturity bonds was less than $ 2b. So the capital was not depleted. (I don't know if held to maturity bonds are HQLA in the US, I'm guessing that they are not)
What happened is that people started looking at the unrealized losses of the remaining held to maturity bonds, and started thinking what you happen if they were no held to maturity, and then started the bank run. The bank was solvent before the bank run
Fed allows hold to maturity but OCC/FDIC does not as those are the entities that would resolve the failed bank..,
Also capital doesn’t have to be completely depleted it just has to fall below threshold…
“” The interbank rate is set at zero.”
It’s NOT set at zero…. It’s like 5% right now…. It WAS set at zero…
This is a main problem… Monetarists at Fed increase the risk free rate and collapse the NPV of depository regulatory assets until the depositories are busted…
Same as Sep 2008 and March 2023 when monetarist Fed added Reserve assets “to lend out!” until the depositories were busted..,
Same as September 2019 when Fed reduced system reserves to point where depositories didn’t have 10% of system deposits and they were busted..…
Rinse and repeat … they do this shit ALL THE TIME..,,
THEY… CANNOT… APPLY… EIGHTH…. GRADE….. ALGEBRA….
THEY…. ARE…. FINGER …. PAINTING… ART… DEGREE…. MORONS….
Matt, if you read what I said closely enough, you will find that in context, "the interest rate is set at zero" applies to Warren's proposal to provision unlimited liquidity as needed to clear at zero interest, not the Fed's current policies. This would take the Fed out of the business of setting variable rates based on some dodgy rule.
"Also capital doesn’t have to be completely depleted it just has to fall below threshold…"
Yes but $ 4 bn above the regulatory minimum+ buffer is not that threshold.
The intervention happened because SVB run out of cash. We will now in the next weeks / months, with the forthcoming reports of the case, whether SVB had a chance to sell more HTM bonds to incur in more losses. My guess it that there wasn't enough time for losses or drop in equity, the cash outflow was too fast. It was illiquid much faster than insolvent (accountingwise)
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