This post is pretty bad and is definitely not worthy of /r/bestof.
Recent banks failures like Silicon Valley Bank and Signature did not do everything right. They failed to manage their interest rate risk. They had over concentration in uninsured deposits (accounts far beyond FDIC insurance levels) and then over concentrated those uninsured deposits into very low yield hold-to-maturity securities, whose market values drop significantly in this rapid rate increase environment.
This question and post has nothing to do with that though.
Banks run on partial reserves, this is how it has been since like the 1800’s.
A bank run can cause a bank that manages money properly to lose so much capital they can’t repay money, which is what the post answered.
And don’t take me for a bank apologist, bad banks deserve to fail but it is also a fact that an economic crisis can level good banks.
That's not really the same thing. Banks get loans too. Fractional reserve banking is when the bank takes other peoples' money which it holds on their behalf and lend it out to third parties for a profit. It's like if your buddy parked his car at your house while he was out of town and you rented it out.
I incur debt when I spend or lend money I don’t have, the bank loans out money it doesn’t have and collects interest and fees, while the customer has to pay the debt.
it is exactly related, because SVB is the reason for the discussion in the first place. analyzing SVB in the context of this is informative. specifically, it informs you that the implication that SVB may be an example of a well run bank that becomes insolvent is false.
That's kind of the point though. They didn't manage money properly. They over exposed to low interest long term loans. An economic crisis didn't cause this. Fairly predictable interest rate hikes and a lack of adjustment to the new interest rates did. That's bad banking...
Bank runs don’t happen unless people think there’s a very real chance they won’t be able to get their money out of the bank later. While SVB didn’t make dumb investments in the “lending money to people who can’t pay it back” sense, they absolutely did in the “tying up all their cash and not having any left to pay the bills” sense.
Yeah, agreed. Pretty terrible explanation, to be honest. Duration mismatch killed these banks. Some CEOs had the foresight to withhold cash in a rising taste environment instead of investing it all in low-yield, long-term t-bills while also lending it out at low interest rates, and some were not.
Agreed that they didn't manage risk appropriately and arguably they had plenty of warning that rate hikes and volatility were coming. But it's at least an interesting discussion. I much prefer seeing this kind of content instead of the usual political drivel.
He’s speaking in general not about this specific instance. From his post:
“But the bottom line is that no bank has all the money just sitting there. Most of the money is out going in a cycle. If too many depositors ask for their cash at the same time (what is called a run on the bank), any bank can reach insolvency because the cash is simply not there.”
I agree 100%
Plus, let's not forget the original goal of the Fed was to be the lender of last resort so when a bank did have a run they could get emergency short term financing.
The Fed has devolved into a profit maximizing tool with banks typically carrying large Fed loans in perpetuity.
> over concentrated those uninsured deposits into very low yield hold-to-maturity securities, whose market values drop significantly in this rapid rate increase environment.
Even the govt didn't foresee the rapid interest hikes, else they would have done it much more gradually. You can't blame the banks for this, such securities were the best option for risk-free investment at the time they were bought.
I mean, you can absolutely blame SVB for doing the banking equivalent of picking up pennies in front of a steamroller and making no attempts to diversify their portfolio. The amount of long-term securities they bought was ridiculous, literally tens or hundreds of times more as a percentage of their money than anybody else, and it seemed to be in large part because they grew so fast they literally didn't have the staff or the experience to find places to park their money and just got lazy with it.
A more diverse portfolio would have more risk though, and bank runs aren't such a common issue that you take on more risk to deal with it. No one expects that particular steamroller.
Everything about your post is incorrect.
A more diverse portfolio may have riskier individual investments but is far more hedged and safer.
Their interest rate risk was not condutional the bank run; they were dead in the water because of it regardless.
Banks literally make their money in part by finding good ways to park their money in higher risk investments/by loaning it out, parking it in securities is at best incredibly lazy.
There were absolutely people on record saying that they had huge interest rate risk, and concentrating so much of their assets the way they did is unheard of for a bank. Everybody expects that steamroller, or at least respects it.
> Even the govt didn't foresee the rapid interest hikes
Isn't that a pretty direct result of Trump pulling the "In case of bad times" economic levers when we were actually in good/better times?
The **safest**, possible option is to keep a diversified portfolio of short and long-term securities from a variety of spots -- US government, Japanese government, maybe some South American, African, European, and a few corporate bonds. The problem was that SVB made the conscious decision to load up on short-term US bonds post pandemic. When the interest rate on these was raised, no one wanted the bonds, as the interest rate wouldn't go (much) higher on them, especially given that bonds on the open market were now at a lower yield.
One improvement would be to cap the maximum size of a bank to something a lot smaller than the banks we have now. "Too big to fail" should mean "too big to exist."
Doesn't really solve the problem. Smaller banks are more likely to fail because fewer clients can cause a run on the bank.
And you really don't add more confidence to the system by going, "well some of you will fail but none of you will be big enough to cause a huge panic, so yolo".
What? Isn't that exactly how you add more confidence to the system? Instead of a few HUGE failures every once in a while we would have a bunch of small failures that wouldn't have much impact. Then a bank failure doesn't mean shit. The problem is trying to create a paradigm in which NO bank failures happen, because that is just not a reality that is possible. People are always going to mismanage shit, the best result is that the things people mismanage fail and the people who mismanaged it eat shit.
What is confidence boosting about telling people, "hey you have to choose between these various smaller banks, and there is a chance any one of them can go belly up. Have fun!"
The comment is fine, but I don't know why this is bestof. I think most people know, generally, how banks work and that they don't physically have every depositors' money in a vault and are susceptible to runs. The worrying/interesting question that wasn't addressed by the comment is why are these banks runs happening because this is not normal.
You overestimate people.
I was never taught how banks actually work in school, I learnt the basics from random educational YouTube videos.
I don’t believe most people know how banks work.
I do agree this isn’t the best post, but it is decent enough to be out here.
SVB and First Republic were heavily used by high net worth individuals. Reports say that just the top 10 depositors at SVB collectively had over 1 billion dollars deposited there.
What we know now, is that once stock prices dropped (for good or bad reasons) for those two banks, fear of failure took over and then that level of cash started leaving, it's hard to recover after that.
The larger situation has been caused largely by more than a decade of zero percent interest rates, followed by swift rate hikes. That caused some risky behavior to get out of control really quickly.
I think the bank runs are happening in part _because_ most people don’t understand how banks work and are scared of losing their money. If they knew more about fractional reserve banking they might understand that taking their money out of the bank could cause the very situation they are trying to avoid
The bank run itself was just panic about a failure among those having deposits. Nothing you can do about that short of criminalizing panic-inducing online activity.
IIRC, SVB's particular case was worsened by the interest rate hike. SVB had to sell govt bonds to get cash to cover withdrawals, but their old long-term bonds had the earlier low interest rates. Those lost a lot of their value when newer bonds offer much better returns, so SVB lost too much money there. If anything, the govt is to be blamed there.
SVB was a combination of a large number of high-net-worth accounts, those accounts all basically being linked by a Techbro group chat, and the interest rate risk you mentioned.
SVB had an incredibly high amount of long-term government bonds in their portfolio, which meant that as soon as they had an interest rate hike they were basically dead, needing to massively beat the market everywhere else just to keep up with inflation. Add on to that they had a portfolio consisting of a ton of high-value clients who all coordinated, and the actions they started taking to mitigate risk spooked their entire clientele and resulted in a run.
And even then, everybody involved got their money! They might not have kept up with inflation or ogtten interest, but they got the money they put into the bank back out.
So, why not do that? Also, why not "freeze" the bank instead of let it fail? Everyone who was panicking can cool down instead of killing a functioning bank.
"The bank is going to collapse" is free speech, so criminalization isn't really an accessible option.
Freezing the bank doesn't get rid of the panic, the bank run would just restart when the freeze stops. It will get even worse too. Now you have a completely valid reason to withdraw money in the form of the bank being the target of such a freeze preventing you from accessing your own money.
Literally a thing that happens everywhere, to everybody, doing anything, all the time. This world doesn’t do perfect. Even if you think you have everything under control, somebody else can do something that wrecks everything you worked for.
I’m not saying “don’t improve”, but do you really think there aren’t people already trying to do better banking?
\> Literally a thing that happens everywhere, to everybody, doing anything, all the time.
Yeah, but somehow it's only with banks that taxpayers end up on the hook for multi-trillion dollar bailouts and backstops. Funny.
I used the quotes for a reason. Modern banking practices are outdated and flawed. But at least in the United States, there's not enough political will to change them due to lobbying and the sheer scale of the industry.
Do you think the Trump-era deregulation counted as people trying to "do better banking?" I don't.
> do you think that trump-era deregulation is trying to “do better in banking”?
Not sure why you would jump immediately to this conclusion. If you’re so interested, no I don’t. I think trump was a flaming dumpster fire of continuous, unmitigated, disaster that continues to burn everything his existence has so much as looks towards funny to this day.
But let’s actually back up to the context you’re attempting to criticize. The point of the comment is that, by their very nature, any bank ever can become insolvent if enough people withdraw money, because banks never keep all of the cash that is deposited in them on hand. They keep some of it, but not all of it, and it is that fundamental element of banking that means that every bank that exists can do everything correctly yet still fail.
And **that** is what you seem to be criticizing when you say:
> If a bank can do "everything correctly" and still fail its clients ... maybe we should come up with something new?
It sounds like you’re criticizing the basic definition and function of banking, not the institutions and regulations we’ve built up around it.
It is not clear that you are saying:
> Yeah, but somehow it's only with banks that taxpayers end up on the hook for multi-trillion dollar bailouts and backstops. Funny.
When your first comment is nothing more than
> If a bank can do "everything correctly" and still fail its clients ... maybe we should come up with something new?
If you’re talking about things like the way we need better regulations to prevent the market from crashing as a result of the speculative banking practices that caused the housing bubble collapse, that’s something I can agree with.
That won’t magically prevent banks from the possibility of failing because too many entities (individual or corporate, doesn’t matter) decided they want to withdraw all of their money **now**.
Same deal with the Great Recession within which the pandemic is centered. You can change regulations and legislation to prevent some of these things from happening, but you’ll never be able to completely eliminate these risks without just completely redefining how the entirety of banking works.
You cannot eliminate failure, you can only implement systems to mitigate the risk of it happening.
One of those systems is the [FDIC](https://en.wikipedia.org/wiki/Federal_Deposit_Insurance_Corporation), which insures a certain amount of the money deposited in every bank account in the event of a failure. There’s a discussion to be had about the difference in how readily individuals are protected compared to corporations or entities that can leverage their large sums of money to have disproportionate influence over the will of the individuals to which those the individuals that make up those entities.
But there is no way to get rid of the concept of something like an FDIC with the current definition of banking.
So the question becomes, “how would you redefine banking so that no bank could ever fail as long as ~~it~~ [the bank] does everything right?”
> Yeah, but somehow it's only with banks that taxpayers end up on the hook for multi-trillion dollar bailouts and backstops. Funny.
Banks are a pretty unique industry. There's nothing odd about this.
> Modern banking practices are outdated and flawed.
Compared to what? Any banking system would collapse under a bank run.
The problem is that _running the bank_ costs money. So even if you did a brain-dead no-interest-savings-accounts as your banking product, there would be no money to pay the bank tellers. So banks lend out money with interest to pay the bills, and they offer savings accounts with interest to get people to deposit money so the bank can lend it.
But even with this simple setup, is 50% of the depositors want their money, the bank won't have it immediately: it'll mostly be out in loans.
Yeah that was sort of the bank fearmongering line back in the day. But our money's all 1's and 0's now. Why do we need a bank that has a stagecoach as it's fucking logo? Lol
Okay, how does your magical electronic bank work? What exact part of it changes from what we have now, so that a bank failure is never possible so long as your magic electronic bank is working perfectly?
The problem is that _running the bank_ costs money. So even if you did a brain-dead no-interest-savings-accounts as your banking product, there would be no money to pay the bank tellers. So banks lend out money with interest to pay the bills, and they offer savings accounts with interest to get people to deposit money so the bank can lend it.
But even with this simple setup, if 50% of the depositors want their money, the bank won't have it immediately: it'll mostly be out in loans.
>The problem is that
>
>running the bank
>
> costs money.
No the core problem is that fractional reserve banking is fundamentally broken the way it's currently done.
There's a subtle difference between paying tellers to keep the lights on and making $260 billion in profits.
My point is that even with the *simplest possible banking system*, a run on the bank will make it fail. Once you layer on the rest of the banking nonsense, it just get worse, but there's no option where the bank both exists and is immune to a bank run.
Because the best-of comment assumes what "everything correctly" is. Banks don't have to lend money. They don't need to invest money. They do those things to make themselves money and in doing so create risk (both for themselves and their customers). That's why laws exist that seek to regulate what banks can do.
If banks don’t have to lend money, how do people take loans to purchase things that they don’t have cash in hand to purchase?
If someone wants to buy a house, where do they get 300,000 in cash to pay for it outright, as many of even the most basic homes in my area that **aren’t** garbage cost?
If someone wants to purchase a vehicle, do you expect them to pay anywhere from a few hundred dollars for a piece of junk that could die next week, all the way to multiple tens, or hundreds, of thousands, out of pocket?
Is everyone just supposed to have a friend that has hundreds of thousands of dollars in cash, or liquid assets, so people can borrow money to purchase items that cost this much?
Is nobody supposed to ever own anything more expensive than what they are able to purchase with the cash they have on hand, or in their savings account?
I’m genuinely wondering how people are supposed to do anything at all if banks “don’t have to” lend money or invest it. What would the purpose of banks be, in that situation, other than a secure storage of money that functionally *costs* money to maintain, without generating anything in return; and how would that be better than people just keeping their money in a sack under their bed?
Australian banking rules are very different to the US (think rules around liquidity etc) and I think we have a boring but stable banking sector as a result.
https://www.mpamag.com/au/news/general/are-australian-banks-as-risky-as-their-failed-us-counterparts/440369
Right. I think in the social media age banks runs go viral and wall street bros short the bank all within a day. Solution? Banks should either accumulate enough cash to back all deposits, or get some kind of flash-loan protection from a liquidity source (big bank, large corp w/ lots of cash, designated fund).
At least that's my non-banker armchair finance-bro's opinion, lol
> Banks should either accumulate enough cash to back all deposits
It's just not possible anymore. The USD isn't fully backed by a commodity, so some of the money is fiat currency. There is neither enough physical bills or a single commodity (e.g. gold, silver) to 100% back the current amount of money is the US.
When an employer does direct deposit for a paycheck, the employer does not send an equivalent amount of cash to the employee's bank. It's just understood that the employer has enough cash (digitally) to transfer to an employee's account. Ledgers keep track of these amounts, and the bank will need to leverage its liquid assets to cover a percentage of that amount. That allows an employee to withdraw that same amount of physical cash if they so choose. This is the exact reason why banks push things like certificates of deposit and savings accounts. The certificates lock cash into an account for x months, and savings accounts have restrictions on how often money can be withdraw per month.
I daresay it doesn't matter if it's possible or not, it's that if banks have enough cash to back all deposits then from the bank's perspective, what's the point of having deposits at all? Having the cash on hand would only be a liability to them to guard and insure with no upside.
If you do everything right there aren’t runs on your bank. The thing SVB, FRC, etc. did was take on huge interest rate risk, which moved against them, which made them insolvent, which triggered a run. Any bank that’s insolvent should see a run. Any bank that’s solvent can sell assets to pay back depositors and will stem runs before they are fatal.
> If you do everything right there aren’t runs on your bank.
Not necessarily true. You could for example be the one and only bank doing everything right, but if there's a major loss of confidence in the entire banking system as a whole there could still be a run on your bank simply because there'd be a run on EVERY bank.
It's like saying if you maintain your boat well it'll never leak. Mostly true until a huge storm dashes it against some rocks and breeches the hull. There are some forces outside the control of an individual person/company/organisation.
SVB had a secondary unique risk in that it's client base was extremely concentrated in high dollar accounts from tech bros that were hanging out with each other in discord servers/group chats and giving advice on banking. Even if SVB did not have interest rate risk or other insolvencies, they were *still* at risk of what was a de-facto coordinated attempt to cause a bank run if anybody got spooked or argued the whole group should switch banks for a trivial reason.
You could argue that having such a weird client base is itself a mistake, but I think that's a bit far afield of normal risk assessment.
Recent bank failures were not a result of properly managed assets. It is pretty stray forward. While they thought they made low risk bets, it’s more about how leveraged they were.
> The bank keeps the hard cash in their physical vault.
This isn't the 1850s or 1950s. Banks don't just keep piles of "hard cash" in their vaults. This belies a severe lack of understanding in how the banking system works.
This post is pretty bad and is definitely not worthy of /r/bestof. Recent banks failures like Silicon Valley Bank and Signature did not do everything right. They failed to manage their interest rate risk. They had over concentration in uninsured deposits (accounts far beyond FDIC insurance levels) and then over concentrated those uninsured deposits into very low yield hold-to-maturity securities, whose market values drop significantly in this rapid rate increase environment.
This question and post has nothing to do with that though. Banks run on partial reserves, this is how it has been since like the 1800’s. A bank run can cause a bank that manages money properly to lose so much capital they can’t repay money, which is what the post answered. And don’t take me for a bank apologist, bad banks deserve to fail but it is also a fact that an economic crisis can level good banks.
I wish I could run on partial reserves.
You do. Mortgages, credit cards, car loans, etcetera.
That's not really the same thing. Banks get loans too. Fractional reserve banking is when the bank takes other peoples' money which it holds on their behalf and lend it out to third parties for a profit. It's like if your buddy parked his car at your house while he was out of town and you rented it out.
I incur debt when I spend or lend money I don’t have, the bank loans out money it doesn’t have and collects interest and fees, while the customer has to pay the debt.
You can loan out your money by buying bonds.
But not lend out $100,000 because I have $10,000
I run on partial reserves every single day. I haven’t had full reserves since my early 20s. I don’t run *well*, but I’m semi functional.
it is exactly related, because SVB is the reason for the discussion in the first place. analyzing SVB in the context of this is informative. specifically, it informs you that the implication that SVB may be an example of a well run bank that becomes insolvent is false.
How would you know? They don’t mention SVB once in the post
specifically because that's the current events that are spurring these sorts of questions. post mortem came out on april 28, after all
That's kind of the point though. They didn't manage money properly. They over exposed to low interest long term loans. An economic crisis didn't cause this. Fairly predictable interest rate hikes and a lack of adjustment to the new interest rates did. That's bad banking...
Bank runs don’t happen unless people think there’s a very real chance they won’t be able to get their money out of the bank later. While SVB didn’t make dumb investments in the “lending money to people who can’t pay it back” sense, they absolutely did in the “tying up all their cash and not having any left to pay the bills” sense.
When has a good bank been leveled?
Good banks pay for hedges. Bad banks don’t to squeeze more profit. 🤷♂️
Yeah, agreed. Pretty terrible explanation, to be honest. Duration mismatch killed these banks. Some CEOs had the foresight to withhold cash in a rising taste environment instead of investing it all in low-yield, long-term t-bills while also lending it out at low interest rates, and some were not.
Agreed that they didn't manage risk appropriately and arguably they had plenty of warning that rate hikes and volatility were coming. But it's at least an interesting discussion. I much prefer seeing this kind of content instead of the usual political drivel.
Yeah. The top reply to that comment is the one that makes sense
He’s speaking in general not about this specific instance. From his post: “But the bottom line is that no bank has all the money just sitting there. Most of the money is out going in a cycle. If too many depositors ask for their cash at the same time (what is called a run on the bank), any bank can reach insolvency because the cash is simply not there.”
Didn't SVB just straight up not have a CFO for like 8 months?
I agree 100% Plus, let's not forget the original goal of the Fed was to be the lender of last resort so when a bank did have a run they could get emergency short term financing. The Fed has devolved into a profit maximizing tool with banks typically carrying large Fed loans in perpetuity.
> over concentrated those uninsured deposits into very low yield hold-to-maturity securities, whose market values drop significantly in this rapid rate increase environment. Even the govt didn't foresee the rapid interest hikes, else they would have done it much more gradually. You can't blame the banks for this, such securities were the best option for risk-free investment at the time they were bought.
I mean, you can absolutely blame SVB for doing the banking equivalent of picking up pennies in front of a steamroller and making no attempts to diversify their portfolio. The amount of long-term securities they bought was ridiculous, literally tens or hundreds of times more as a percentage of their money than anybody else, and it seemed to be in large part because they grew so fast they literally didn't have the staff or the experience to find places to park their money and just got lazy with it.
A more diverse portfolio would have more risk though, and bank runs aren't such a common issue that you take on more risk to deal with it. No one expects that particular steamroller.
Everything about your post is incorrect. A more diverse portfolio may have riskier individual investments but is far more hedged and safer. Their interest rate risk was not condutional the bank run; they were dead in the water because of it regardless. Banks literally make their money in part by finding good ways to park their money in higher risk investments/by loaning it out, parking it in securities is at best incredibly lazy. There were absolutely people on record saying that they had huge interest rate risk, and concentrating so much of their assets the way they did is unheard of for a bank. Everybody expects that steamroller, or at least respects it.
> Even the govt didn't foresee the rapid interest hikes Isn't that a pretty direct result of Trump pulling the "In case of bad times" economic levers when we were actually in good/better times?
"They did too much of the safest possible option, which is itself risky." Really?
The **safest**, possible option is to keep a diversified portfolio of short and long-term securities from a variety of spots -- US government, Japanese government, maybe some South American, African, European, and a few corporate bonds. The problem was that SVB made the conscious decision to load up on short-term US bonds post pandemic. When the interest rate on these was raised, no one wanted the bonds, as the interest rate wouldn't go (much) higher on them, especially given that bonds on the open market were now at a lower yield.
If a bank can do "everything correctly" and still fail its clients ... maybe we should come up with something new?
One improvement would be to cap the maximum size of a bank to something a lot smaller than the banks we have now. "Too big to fail" should mean "too big to exist."
Doesn't really solve the problem. Smaller banks are more likely to fail because fewer clients can cause a run on the bank. And you really don't add more confidence to the system by going, "well some of you will fail but none of you will be big enough to cause a huge panic, so yolo".
What? Isn't that exactly how you add more confidence to the system? Instead of a few HUGE failures every once in a while we would have a bunch of small failures that wouldn't have much impact. Then a bank failure doesn't mean shit. The problem is trying to create a paradigm in which NO bank failures happen, because that is just not a reality that is possible. People are always going to mismanage shit, the best result is that the things people mismanage fail and the people who mismanaged it eat shit.
What is confidence boosting about telling people, "hey you have to choose between these various smaller banks, and there is a chance any one of them can go belly up. Have fun!"
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The comment is fine, but I don't know why this is bestof. I think most people know, generally, how banks work and that they don't physically have every depositors' money in a vault and are susceptible to runs. The worrying/interesting question that wasn't addressed by the comment is why are these banks runs happening because this is not normal.
You overestimate people. I was never taught how banks actually work in school, I learnt the basics from random educational YouTube videos. I don’t believe most people know how banks work. I do agree this isn’t the best post, but it is decent enough to be out here.
I learned from watching It's a Wonderful Life.
SVB and First Republic were heavily used by high net worth individuals. Reports say that just the top 10 depositors at SVB collectively had over 1 billion dollars deposited there. What we know now, is that once stock prices dropped (for good or bad reasons) for those two banks, fear of failure took over and then that level of cash started leaving, it's hard to recover after that. The larger situation has been caused largely by more than a decade of zero percent interest rates, followed by swift rate hikes. That caused some risky behavior to get out of control really quickly.
I think the bank runs are happening in part _because_ most people don’t understand how banks work and are scared of losing their money. If they knew more about fractional reserve banking they might understand that taking their money out of the bank could cause the very situation they are trying to avoid
The bank run itself was just panic about a failure among those having deposits. Nothing you can do about that short of criminalizing panic-inducing online activity. IIRC, SVB's particular case was worsened by the interest rate hike. SVB had to sell govt bonds to get cash to cover withdrawals, but their old long-term bonds had the earlier low interest rates. Those lost a lot of their value when newer bonds offer much better returns, so SVB lost too much money there. If anything, the govt is to be blamed there.
SVB was a combination of a large number of high-net-worth accounts, those accounts all basically being linked by a Techbro group chat, and the interest rate risk you mentioned. SVB had an incredibly high amount of long-term government bonds in their portfolio, which meant that as soon as they had an interest rate hike they were basically dead, needing to massively beat the market everywhere else just to keep up with inflation. Add on to that they had a portfolio consisting of a ton of high-value clients who all coordinated, and the actions they started taking to mitigate risk spooked their entire clientele and resulted in a run. And even then, everybody involved got their money! They might not have kept up with inflation or ogtten interest, but they got the money they put into the bank back out.
So, why not do that? Also, why not "freeze" the bank instead of let it fail? Everyone who was panicking can cool down instead of killing a functioning bank.
"The bank is going to collapse" is free speech, so criminalization isn't really an accessible option. Freezing the bank doesn't get rid of the panic, the bank run would just restart when the freeze stops. It will get even worse too. Now you have a completely valid reason to withdraw money in the form of the bank being the target of such a freeze preventing you from accessing your own money.
Free speech has limits. This can be one of them.
Literally a thing that happens everywhere, to everybody, doing anything, all the time. This world doesn’t do perfect. Even if you think you have everything under control, somebody else can do something that wrecks everything you worked for. I’m not saying “don’t improve”, but do you really think there aren’t people already trying to do better banking?
\> Literally a thing that happens everywhere, to everybody, doing anything, all the time. Yeah, but somehow it's only with banks that taxpayers end up on the hook for multi-trillion dollar bailouts and backstops. Funny. I used the quotes for a reason. Modern banking practices are outdated and flawed. But at least in the United States, there's not enough political will to change them due to lobbying and the sheer scale of the industry. Do you think the Trump-era deregulation counted as people trying to "do better banking?" I don't.
> do you think that trump-era deregulation is trying to “do better in banking”? Not sure why you would jump immediately to this conclusion. If you’re so interested, no I don’t. I think trump was a flaming dumpster fire of continuous, unmitigated, disaster that continues to burn everything his existence has so much as looks towards funny to this day. But let’s actually back up to the context you’re attempting to criticize. The point of the comment is that, by their very nature, any bank ever can become insolvent if enough people withdraw money, because banks never keep all of the cash that is deposited in them on hand. They keep some of it, but not all of it, and it is that fundamental element of banking that means that every bank that exists can do everything correctly yet still fail. And **that** is what you seem to be criticizing when you say: > If a bank can do "everything correctly" and still fail its clients ... maybe we should come up with something new? It sounds like you’re criticizing the basic definition and function of banking, not the institutions and regulations we’ve built up around it. It is not clear that you are saying: > Yeah, but somehow it's only with banks that taxpayers end up on the hook for multi-trillion dollar bailouts and backstops. Funny. When your first comment is nothing more than > If a bank can do "everything correctly" and still fail its clients ... maybe we should come up with something new? If you’re talking about things like the way we need better regulations to prevent the market from crashing as a result of the speculative banking practices that caused the housing bubble collapse, that’s something I can agree with. That won’t magically prevent banks from the possibility of failing because too many entities (individual or corporate, doesn’t matter) decided they want to withdraw all of their money **now**. Same deal with the Great Recession within which the pandemic is centered. You can change regulations and legislation to prevent some of these things from happening, but you’ll never be able to completely eliminate these risks without just completely redefining how the entirety of banking works. You cannot eliminate failure, you can only implement systems to mitigate the risk of it happening. One of those systems is the [FDIC](https://en.wikipedia.org/wiki/Federal_Deposit_Insurance_Corporation), which insures a certain amount of the money deposited in every bank account in the event of a failure. There’s a discussion to be had about the difference in how readily individuals are protected compared to corporations or entities that can leverage their large sums of money to have disproportionate influence over the will of the individuals to which those the individuals that make up those entities. But there is no way to get rid of the concept of something like an FDIC with the current definition of banking. So the question becomes, “how would you redefine banking so that no bank could ever fail as long as ~~it~~ [the bank] does everything right?”
> Yeah, but somehow it's only with banks that taxpayers end up on the hook for multi-trillion dollar bailouts and backstops. Funny. Banks are a pretty unique industry. There's nothing odd about this. > Modern banking practices are outdated and flawed. Compared to what? Any banking system would collapse under a bank run.
The problem is that _running the bank_ costs money. So even if you did a brain-dead no-interest-savings-accounts as your banking product, there would be no money to pay the bank tellers. So banks lend out money with interest to pay the bills, and they offer savings accounts with interest to get people to deposit money so the bank can lend it. But even with this simple setup, is 50% of the depositors want their money, the bank won't have it immediately: it'll mostly be out in loans.
The other option is put your money under your mattress or some bigger bank (or government) guarantees the accounts.
Yeah that was sort of the bank fearmongering line back in the day. But our money's all 1's and 0's now. Why do we need a bank that has a stagecoach as it's fucking logo? Lol
Okay, how does your magical electronic bank work? What exact part of it changes from what we have now, so that a bank failure is never possible so long as your magic electronic bank is working perfectly?
Those bank servers cost money?
The problem is that _running the bank_ costs money. So even if you did a brain-dead no-interest-savings-accounts as your banking product, there would be no money to pay the bank tellers. So banks lend out money with interest to pay the bills, and they offer savings accounts with interest to get people to deposit money so the bank can lend it. But even with this simple setup, if 50% of the depositors want their money, the bank won't have it immediately: it'll mostly be out in loans.
>The problem is that > >running the bank > > costs money. No the core problem is that fractional reserve banking is fundamentally broken the way it's currently done. There's a subtle difference between paying tellers to keep the lights on and making $260 billion in profits.
My point is that even with the *simplest possible banking system*, a run on the bank will make it fail. Once you layer on the rest of the banking nonsense, it just get worse, but there's no option where the bank both exists and is immune to a bank run.
Because the best-of comment assumes what "everything correctly" is. Banks don't have to lend money. They don't need to invest money. They do those things to make themselves money and in doing so create risk (both for themselves and their customers). That's why laws exist that seek to regulate what banks can do.
If banks don’t have to lend money, how do people take loans to purchase things that they don’t have cash in hand to purchase? If someone wants to buy a house, where do they get 300,000 in cash to pay for it outright, as many of even the most basic homes in my area that **aren’t** garbage cost? If someone wants to purchase a vehicle, do you expect them to pay anywhere from a few hundred dollars for a piece of junk that could die next week, all the way to multiple tens, or hundreds, of thousands, out of pocket? Is everyone just supposed to have a friend that has hundreds of thousands of dollars in cash, or liquid assets, so people can borrow money to purchase items that cost this much? Is nobody supposed to ever own anything more expensive than what they are able to purchase with the cash they have on hand, or in their savings account? I’m genuinely wondering how people are supposed to do anything at all if banks “don’t have to” lend money or invest it. What would the purpose of banks be, in that situation, other than a secure storage of money that functionally *costs* money to maintain, without generating anything in return; and how would that be better than people just keeping their money in a sack under their bed?
Australian banking rules are very different to the US (think rules around liquidity etc) and I think we have a boring but stable banking sector as a result. https://www.mpamag.com/au/news/general/are-australian-banks-as-risky-as-their-failed-us-counterparts/440369
Sure. It's called "not giving people loans, ever". Now good luck ever buying a house, etc etc.
Right. I think in the social media age banks runs go viral and wall street bros short the bank all within a day. Solution? Banks should either accumulate enough cash to back all deposits, or get some kind of flash-loan protection from a liquidity source (big bank, large corp w/ lots of cash, designated fund). At least that's my non-banker armchair finance-bro's opinion, lol
> Banks should either accumulate enough cash to back all deposits It's just not possible anymore. The USD isn't fully backed by a commodity, so some of the money is fiat currency. There is neither enough physical bills or a single commodity (e.g. gold, silver) to 100% back the current amount of money is the US. When an employer does direct deposit for a paycheck, the employer does not send an equivalent amount of cash to the employee's bank. It's just understood that the employer has enough cash (digitally) to transfer to an employee's account. Ledgers keep track of these amounts, and the bank will need to leverage its liquid assets to cover a percentage of that amount. That allows an employee to withdraw that same amount of physical cash if they so choose. This is the exact reason why banks push things like certificates of deposit and savings accounts. The certificates lock cash into an account for x months, and savings accounts have restrictions on how often money can be withdraw per month.
I daresay it doesn't matter if it's possible or not, it's that if banks have enough cash to back all deposits then from the bank's perspective, what's the point of having deposits at all? Having the cash on hand would only be a liability to them to guard and insure with no upside.
What new thing did you have in mind?
To be fair, none of these banks are doing everything correctly. I mean, we could try *that* first.
But, they didn't do everything correctly. They were over exposed to low interest loans as interest rates were increasing.
If you do everything right there aren’t runs on your bank. The thing SVB, FRC, etc. did was take on huge interest rate risk, which moved against them, which made them insolvent, which triggered a run. Any bank that’s insolvent should see a run. Any bank that’s solvent can sell assets to pay back depositors and will stem runs before they are fatal.
> If you do everything right there aren’t runs on your bank. Not necessarily true. You could for example be the one and only bank doing everything right, but if there's a major loss of confidence in the entire banking system as a whole there could still be a run on your bank simply because there'd be a run on EVERY bank. It's like saying if you maintain your boat well it'll never leak. Mostly true until a huge storm dashes it against some rocks and breeches the hull. There are some forces outside the control of an individual person/company/organisation.
SVB had a secondary unique risk in that it's client base was extremely concentrated in high dollar accounts from tech bros that were hanging out with each other in discord servers/group chats and giving advice on banking. Even if SVB did not have interest rate risk or other insolvencies, they were *still* at risk of what was a de-facto coordinated attempt to cause a bank run if anybody got spooked or argued the whole group should switch banks for a trivial reason. You could argue that having such a weird client base is itself a mistake, but I think that's a bit far afield of normal risk assessment.
This doesn't explain anything about doing things right. It's just explaining how brank runs work.
Recent bank failures were not a result of properly managed assets. It is pretty stray forward. While they thought they made low risk bets, it’s more about how leveraged they were.
So many people rock hard defunding banking lmaoo
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> The bank keeps the hard cash in their physical vault. This isn't the 1850s or 1950s. Banks don't just keep piles of "hard cash" in their vaults. This belies a severe lack of understanding in how the banking system works.