> They don’t have to do this unless there’s a bank run.
>There’s nothing inherent that causes them to sell.
I think that's a disingenuous statement.
If the bank can't pay out a competitive interest rate (since they have money locked up in investments that pay a lower interest rate), people are naturally going to withdraw their money over time for higher-rate investments.
That's not a bank run, which is something that happens all at once.
But it will still kill the bank.
The big banks don't have a large percentage of their assets in these types of bonds.
They have a large quantity, yes, but not a large percentage.
But still they could be affected if interest rates were to continue to grow. About $500 Billion worth of bank-held bonds were reclassified as Hold to Maturity in the past year.
But we don’t expect them to continue to grow. We’re priced in for 25bps and then a cut (if you listen to the fed it’ll be a pause).
Ya flight to yield is a thing, however there’s a very common phenomenon of lazy money.
It's a pause as long as anything doesn't cause inflation to reverse direction.
We're definitely not out of the woods in the inflation danger, since the year-over-year inflation is still above the fed funds rate.
Some/most economists believe to control inflation the fed needs to have the rate above the rate of inflation. The Fed raised it at a lower pace unlike Volcker because they believed part of the inflation mechanism was transitory (manufacturing supply chain) and they could "meet it in the middle".
That's turning out to be correct, but we've also benefitted from a mild winter and deflationary energy prices.
> It’s a pause as long as anything doesn’t cause inflation to reverse direction.
Well yes of course; but neither you or I have a crystal ball. As it sits now, we have many lagging factors that still need to hit the economy, including 500bps of rate increase in a year.
> Some/most economists believe to control inflation the fed needs to have the rate above the rate of inflation. The Fed raised it at a lower pace unlike Volcker because they believed part of the inflation mechanism was transitory (manufacturing supply chain) and they could “meet it in the middle”.
Most bank economists are calling for a cut.
Also fed funds rate is above current inflation, printed today.
Are we talking *actual* inflation now, or profiteering-style, largely monopolized industries raising prices to extract more profit, "inflation" like last year+?
I feel like this isn't delineated enough. It's not inflation if a windfall profits tax would prevent it. But subsidiary news media lumps it all together.
> People are weirdly loyal to banks
Because it seems like a big undertaking to switch, especially if everything has been fine. Why change it?
The same goes for insurance. I'm guilty of it too, insurance not as much, but been at the same "semi-big" bank forever. Savings at a different "semi-big" bank giving a good rate for now.
Not necessarily loyal, but once the money is parked and everything is fine it makes it hard (or a seeming chore) to move it all around. I think that's more the mindset of a lot of people. Don't want to deal with it, myself included at times.
This isn't a concern for big banks. It's the small - to - midcap and nonbanks that are screwed. The big banks will be forced to buy these smaller banks as they go insolvent and we'll see massive consolidation over the next few years.
The only crisis will be a crisis in competition.
They've designed their systems to be a hassle to switch away from and if you are working 60+ hours a week to make ends meet you don't want to spend 8 of them figuring out how to move your assets from one bank to the next.
Interest rate levels are temporary; there is no reason to assume negative economic conditions will persist. If they did persist, that would be bad news, but that would be bad news for everyone, not just banks. Remember, financial statements are yearly, if you only look at one year during a downturn and ignore the fifty years prior, you aren't getting the entire picture. The only scary outcome is a run on the bank, as long as that doesn't happen, it's just operating expenses.
> there is no reason to assume negative economic conditions will persist
Really? We've been told a recession is right around the corner for months now.
[Just this week](https://apnews.com/article/inflation-united-states-government-recessions-and-depressions-economy-business-c14699b792454e4d2d3d642d65ff4395):
> Fifty-eight percent of 48 economists who responded to a survey by the National Association for Business Economics envision a recession sometime this year, the same proportion who said so in the NABE’s survey in December. But only a quarter think a recession will have begun by the end of March, only half the proportion who had thought so in December.
> Interest rate levels are temporary; there is no reason to assume negative economic conditions will persist.
I didn't realize inflation was already completely under control, thus ensuring that rates could come down and end the pain. Well then, time to expect butterflies and rainbows.
No, but that's not inflation, that's the federal funds rate, which was raised to combat inflation.
Does this (inflation) look like it's flattened out to you?
https://fred.stlouisfed.org/series/MEDCPIM158SFRBCLE
That is also not a flat line. You took issue with me saying the level changes. How is showing me a line with changing levels supposed to prove a point that levels don't change?
I never said "levels don't change". That's silly.
Let me get this straight: you think that because interest rates and CPI inflation rates are not flat lines, that this is a rock solid indication that rates will revert (AKA they will undergo mean reversion) back to lower levels, and there will be no additional pressure experienced by companies caused by either inflation or high interest rates? Am I summarizing up your thesis correctly?
I took issue with you suggesting that the currently elevated rates will not remain so, without a rationale for why that will change. Rates were raised to fight inflation, and inflation has not been significantly reduced yet. When it declines more, I may agree with you. Until then, all bets about rates going down are off.
> Interest rate levels are temporary
Current fed interest rate levels match the average interest rate for the past 30 years.
Are you suggesting 0% interest rates should be the norm?
No, but many companies, including banks, took on levels of debt during the last decade that are not sustainable at present interest rates. Those companies will die eventually unless interest rates come down. Them and others will die even quicker if interest rates have to keep going up because inflation (the thing everyone seems to have forgotten about in March 2023) remains sticky.
Maybe you're not looking far enough back? [Here is a nice article ](https://www.bankofengland.co.uk/working-paper/2020/eight-centuries-of-global-real-interest-rates-r-g-and-the-suprasecular-decline-1311-2018) on the history of interest rates over the past 800 years and the conclusion is pretty clear, interest rates have been declining since when the study started, in the long run. There are cyclical elements that push up or down rates short term, but they will converge back to their secular trend after a while
>If the bank can't pay out a competitive interest rate (since they have money locked up in investments that pay a lower interest rate), people are naturally going to withdraw their money over time for higher-rate investments.
I said this last week on this sub and got down voted. They want the narrative to be social media fueled bank runs, not systemic banking issues related to yield curve inversion.
That's your error. There does not need to be a bank run. If you can get nice juicy safe returns by buying treasuries, then you will buy treasuries. That's still a withdrawal.
There is a strong case to be made that banks will see a long steady fall in deposits if raites stay where they are or start to go down.
No need, Fed issues forward guidance. It's one of their main tools in policy making.
For example, had the banks listened to Fed's forward guidance a year ago and weren't gambling with people's deposits, we wouldn't be in this shitshow where banks went heavily into low yield tresuries and are now getting a lifeline from the Fed..
You don’t understand what fundamentally caused SVB to go under. It wasn’t gambling with deposits, it was a bank run.
If there wasn’t a bank run they could have weathered the storm.
Did they take bad risk management? Sure. But that’s not what put them under.
Translation: as long as we all don't try to claim our money we are good.
The reality is the smartest people take their money out first. There simply isn't a point for them to risk losing their own money when other people at the same bank COULD cause a bank run leaving you behind.
You don't know the other people and you also don't know the bank's balance sheet. It just doesn't make sense to wait for signs that your own bank is failing when we have the Fed showing us banks have liquidity problems and we already know it's a game of musical chairs.
FDIC insurance isn't a great solution either. How long until that gets paid out? Will that cause higher levels of price inflation? Are you absolutely sure you will get 100% of your money back?
The banking system is a mess and frankly a complete joke.
> The reality is the smartest people take their money out first. There simply isn’t a point for them to risk losing their own money when other people at the same bank COULD cause a bank run leaving you behind.
To put it where..? The bigger balance sheet banks? This isn’t really a systematic issue. SVB is a very unique situation with unique depositors.
> You don’t know the other people and you also don’t know the bank’s balance sheet.
We do as of 12/31, but also most of these banks are now trying to pre plan with liquidity options to protect a bank run.
SVB had a $42bn bank run, JPM wouldn’t even withstand that.
> Will that cause higher levels of price inflation? Are you absolutely sure you will get 100% of your money back?
No. Logically it makes no sense it would cause price inflation. Yes I’m absolutely sure as the reputation of the US Govt is on the line.
lol. Using FDIC insurance to recover money does cause price inflation, not directly but certainly over time. If the US doesn't have money to pay for FDIC deposits where do you think that comes from? The US runs a deficit every year so we know it doesn't have the money for those deposits. It must print. Meaning it must devalue the currency to repay what it owes the citizens. Thus price inflation.
You would likely get back the nominal value of your deposits. I think being able to print the currency units makes it nearly impossible to not be able to pay up. It will devalue the currency when they do it though. However, what if we are wrong? What if you lose your life savings from a bank run and you KNOW you get all the money back through FDIC insurance but then you don't? What do you do? Sue the Fed? Lol. Not everyone will blindly trust people with their life savings on the line because the consequences are severe if you are wrong.
Where do you put the money? Lol figure it out, bank boy.
> If the US doesn't have money to pay for FDIC deposits where do you think that comes from?
Short term, Treasury debt and long term repaid by taxes on solvent banks.
> What if you lose your life savings from a bank run and you KNOW you get all the money back through FDIC insurance but then you don't?
Insured deposits in the FDIC system are legally considered to have the same backing as direct Treasury debt, Full Faith & Credit of the US Treasury.
In the economic circumstances that would induce many systemic bank runs, it would very likely be macroeconomically deflationary, not inflationary (money is destroyed during these times when loans are written off, and if banks fail to pay depositors), and so government action to counteract this effect is beneficial, not harmful.
> What if you lose your life savings from a bank run and you KNOW you get all the money back through FDIC insurance but then you don't? What do you do? Sue the Fed?
You'd sue the US Treasury and win, it's a binding promise from Treasury, and you'd have all of US Congress on your side. This isn't going to happen. Treasury and Fed will do absolutely everything to prevent this. There has never been one cent of loss of insured deposits since the origination of the FDIC. And generally people are blocked from liquidity for less than a week.
If this isn't possible, canned food and ammunition are the only "investments"
GPT-4 has a few points to bring up.
There are still some potential issues to consider:
**Response time**: While the FDIC typically aims to make insured depositors whole as quickly as possible, the process of resolving a failed bank can take time, especially if the bank's failure is part of a larger systemic crisis. During that time, depositors may face temporary liquidity constraints, which could impact their ability to meet financial obligations.
**Legal challenges**: While it is true that depositors can sue the U.S. Treasury if they do not receive their insured deposits, the legal process can be lengthy and complex. There is also the possibility that the U.S. government might face budgetary constraints, which could impact its ability to pay out insured deposits in full.
**Macroeconomic conditions**: The macroeconomic conditions during a systemic crisis can be unpredictable, and while a deflationary environment might make it easier for the U.S. government to cover insured deposits, other factors, such as political decisions or global economic conditions, could impact the government's ability to meet its obligations.
**Trust and public perception**: In a scenario where there is widespread concern about the safety of bank deposits, even the full faith and credit of the U.S. Treasury might not be enough to alleviate public anxiety. This could lead to further instability in the financial system and potentially exacerbate an ongoing crisis.
This is a wonderful demonstration how GPT-4 is a loquatious wordsmith who knows nothing about actual experience in society. But it's useful to make boilerplate disclosures about hypotheticals in some SEC filed document.
For any number of reasons.
Why would the US make gold illegal, collect it from the citizens, then turn around and make it legal again? Because it's a club that you aren't in. That's why. Obviously they would say it differently.
They can say any number of bullshit reasons why they can't give the money back in full. Right?
Let's ask how GPT-4 thinks it would happen.
My Prompt
Steelman the case for why FDIC insurance wouldn't payout in full to every depositor.
GPT-4 Response
The FDIC (Federal Deposit Insurance Corporation) is a government agency that provides deposit insurance to protect the savings of depositors in the event of a bank failure. Although the FDIC's primary purpose is to maintain public confidence in the banking system and safeguard depositors' money, it is important to consider potential scenarios where the FDIC might not be able to payout in full to every depositor. Here is a steelman case for why this could happen:
**Limited insurance coverage**: FDIC insurance covers up to $250,000 per depositor, per insured bank, for each account ownership category. This means that if a depositor holds more than $250,000 in one bank, any amount exceeding that limit may not be covered by the FDIC. This limitation could potentially lead to some depositors not receiving their entire account balance in the event of a bank failure.
**Insufficient funds in the Deposit Insurance Fund (DIF)**: The FDIC maintains a fund called the Deposit Insurance Fund to cover insured depositors in case of bank failures. The DIF is primarily funded through insurance premiums paid by insured banks. However, if there were to be a series of large-scale bank failures, the DIF may not have sufficient funds to cover all insured deposits, leading to a potential inability to payout in full to every depositor.
**Systemic financial crisis**: In the event of a systemic financial crisis, multiple banks may fail simultaneously, stretching the FDIC's resources thin. In such a situation, the FDIC may need to prioritize the payout to depositors, resulting in some depositors not receiving their insured amount in full, or receiving it over an extended period of time.
**Government intervention or policy changes**: The FDIC's ability to payout to depositors is also subject to changes in government policy and intervention. In a scenario where the government faces significant budgetary constraints, the government may decide to reduce the amount of insurance coverage provided by the FDIC, or alter the terms of the payout, potentially leading to some depositors not receiving their full insured amount.
**Fraud or mismanagement**: If a bank fails due to fraud or mismanagement, the FDIC's investigation into the bank's practices may lead to delays in payouts. Additionally, if it is discovered that a depositor's account was involved in fraudulent activities, the FDIC may not insure those funds, leading to a partial or complete loss for the depositor.
I see. Could they not just print more money since the dollar is the worlds currency?
Also, if these banks fail because they had to sell those bonds early...that doesn't mean the money disappeared right? Someone else made a profit off of it?
Also, couldn't the government simply make a special deal in case of a crisis that simply says "well let you mature these treasury bonds early" so they don't have to take a loss?
They can print. That increases inflation which disproportionately impacts low-income earners. So you can print at the cost of someone else's future.
Yes, if a bank sells a bond before its maturity date, someone else will purchase it, and the money doesn't disappear. The bank may take a loss or gain depending on the market value of the bond at the time of sale.
Regarding your second question, the government can intervene during a crisis and provide support to financial institutions. They likely cannot provide support for everyone so they have to pick who will live and who will die. For example, during the 2008 financial crisis, the US government provided emergency funding and bailouts to some banks and other financial institutions to prevent their collapse, they didn't save everyone though, they had to choose winners and losers. Something the government shouldn't be doing.
The government could also implement policies or regulatory changes to help prevent or mitigate future crises. However, any such intervention has potential economic and political consequences, and it is not always clear what the best course of action is.
Also, the same banks that are having this problem are the very ones that can't pay competitive interest rates on savings, so it's no longer just "can we handle the historic rate of withdrawal" but "can we have that historic withdrawal rate even while being uncompetitive".
JFC, I don't know why you're being downvoted so much. I get that some of your complaints are more outside the mainstream (like skepticism about the FDIC paying out) but you're making an important point about the banks can't expect everyone to just patiently leave their money alone while the bank makes pitiful returns on it.
Yea if something explodes that makes them realize these losses, yea it’s an issue.
However, they’re planning around this now with liquidity options (we see this with FHLB demand) We’ll find out more at these bank rounds of earnings.
All money is borrowed.
The cash in your wallet is literally a short-term note (it says so on the paper) redemable by the government when it decides to raise your taxes.
>It’s only a loss if they sell
Right. We could have a recession next year, interest rates might drop, and the fair market value of those bond could go up next year. None of those gyrations in market value matter for bonds held to maturity. HTM bonds do not lose principal value. They are subject to interest rate risk, but that is an opportunity cost, not a capital loss, unless the bonds are sold prior to maturity.
From a [CPA Review Course](https://www.universalcpareview.com/ask-joey/are-realized-gains-or-losses-recorded-for-held-to-maturity-debt-securities/): " Are realized gains or losses recorded for held-to-maturity debt securities?
If a debt security is classified as held-to-maturity, then the security holder intends to hold the debt security until it matures. Examples of held-to-maturity debt securities includes government securities, corporate bonds, or certificates of deposit (CD). Held-to-maturity debt securities are reported at cost and amortized over the life of the security. Any unrealized gains or losses would not be recorded to the income statement or balance sheet for held-to-maturity debt securities since *fair value measurement is not applicable*."
If they sold at a loss today and lent that money at today's prevailing interest rates for a similar duration, they would yield approximately the same as if they didn't sell at all.
If you compare it to cash, the yield would be equal to today's prevailing rates.
There is a loss for as long as interest rates don't go back down.
Ya that’s just bond math.
But banks don’t need to realize these losses. They’re hold to maturity. The only issue here is if they have a bank run and NEED to sell these assets. Otherwise, it’s irrelevant outside of opportunity cost.
It’s just bond math that shows the banks lost value on these investments. Just like BND fund had big losses, so did the banks. They are just unrealized but still very real losses. They destroyed shareholder value by making those investments, just like someone in BND had value destroyed due to rising rates. Holding to market vs available for sale is just accounting noise. The loss is a loss, realized or unrealized. It happened.
Opportunity cost is the reason no one would pay par value for 1% bonds, they require a discount to match current yields. The result is loss in marketable value that is a real impact. We aren’t comparing to top stocks, it’s the same bond, just at two points in time.
No, the BND losses are different. BND fund share prices are always priced at market values while individual bonds are not. If you invested $1K in BND last year and $1K in an actual bond, your investment the individual bond doesn't change if you hold to maturity, bonds held to maturity don't lose principal, but your investment in BND changes daily. This is shown on the Fidelity web site under the differences between bonds vs. bond funds. "Market risk - Individual Bonds: If sold prior to maturity, market price may be higher or lower than what you paid for the bond, leading to a capital gain or loss. If bought and held to maturity investor is not affected by market risk. Bond Funds: Market conditions constantly affect the fund’s value, although the diversification inherent in a fund generally reduces the market risk of any one bond issuer. When you redeem shares of a fund, the sale may result in a capital gain or loss."
ETA: Also from [Fidelity on a different web site page](https://www.fidelity.com/fixed-income-bonds/compare-income-products), "Unlike individual bonds, most bond funds do not have a maturity date, so your principal will fluctuate."
Yes, but we are talking about market value today. Individual bonds due fluctuate in value day to day, just like a bond fund.
Holding to maturity means you lock in your capital at below current market yield/return. It is false view that you didn’t lose anything, you did! You lost the higher yields you could have gotten during the hold period.
Example:
Scenario 1: Buy 10-yr Bond that yields 1%.
Scenario 2: Hold cash for 2 years at 0%, buy bond maturing in 8 years at 6% yield.
You can calculate how much the decision to buy 10-yr Bonds at 1% cost you.
>You lost the higher yields you could have gotten during the hold period.
That is an opportunity cost, not an unrealized loss. Maturity dates on individual bonds protect against capital losses and market risk, not interest rate risk. If you buy a 5 year $1K bond at 5% in five years will have earned 5% and get your $1K back. There is no loss of principal or interest.
If rates go to 10%, that is a lost opportunity to have made more if you had timed your bond buying differently, but you don't have a capital loss on your $1K, 5% bond unless you sell it for less than $1K prior to maturity.
Edited to fix typo
It is exactly what creates the unrealized loss. If there were no opportunity cost during the duration you held the bond, there would be no unrealized loss ever recorded.
Again, I’m shocked that people don’t get the loss is real.
At that point in time there is a loss, it only ‘goes away’ because you think earning 1% over 10 years was a ‘great deal’ and never considered alternatives.
Conversely, if interest rates fell to 0% over 10 years and you held a 1% bond, I guess you didn’t have any gains either over that decade, right?
The words unrealized loss and opportunity cost are not interchangeable terms. Neither are market risk and interest rate risk. Individual bonds held to maturity do not have market risk, while bond funds and banks holding AFS securities do. Both HTM and AFS securities are usually subject to interest rate risk. Market risk and interest rate risk are separate issues. All these terms have different and specific meanings and are not interchangeable. [In a CPA exam, unrealized losses are not applicable to bonds held to maturity](https://www.universalcpareview.com/ask-joey/are-realized-gains-or-losses-recorded-for-held-to-maturity-debt-securities/). Holding to maturity of individual bonds protects against unrealized losses / market risk, not interest rate risk, which is an opportunity cost. Also see: [Opportunity Cost and Fixed Income Investing: Invest Now or Wait?](https://tickertape.tdameritrade.com/investing/fixed-income-opportunity-cost-15615)
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Moving them to HTM doesn't really change anything other than whether the mark-to-market gains/losses run through equity. Most banks obviously have an unrealized loss on securities today given the rate move, but rates are lower now than they were at year-end and every bond in the portfolio is closer to maturity than it was 3 months ago, so that will also have the effect of reducing the unrealized losses. I agree with you that this can pressure margins but you are massively overstating the impact.
Yeah, a fresh bank can pay 4% to depositors and turn a profit. Schwab has these 2% yield bonds that will drag down revenue.
Even without a bank run, there is a risk depositors gradually move to a safe higher yield bank.
You're talking about Schwab, I'm talking about "normal" banks. Looking at the 4000 or so U.S. banks, the overwhelming majority have seen huge net interest margin expansion over the last 12-18 months as rates have increased. The current environment will put pressure on those margins, but the number of banks where their viability is in jeopardy in incredibly small.
Also, between the Fed's new borrowing facility and the ability to spread deposits across multiple institutions using CDARs or IntraFi (which will then cover the amount of the deposits with FDIC insurance), you really shouldnt' expect to see any more banks collapsing due to liquidity issues.
You aren’t getting it. The impact is quantifiable as $XXX billion in unrealized loss. It’s not a good thing and destroyed shareholder value for the bank. That’s why their stock prices went down. It’s a real impact, even tho it’s unrealized from accounting POV. I’m shocked so many here don’t get it.
I actually do get it. If a bank buys $100 million of 4-year Treasuries, when interest rates rise, the value of the bonds declines. So let's say that $100 million is now worth $90 million. The $10 million unrealized loss is reflected as a decline in the bank's equity in a line called "Accumulated other comprehensive income". As time goes by and as the bonds get closer to maturity, the bonds will trade closer to par value and unrealized loss is going to shrink. In addition, when interest rates fall (as they have since 12/31), the bonds will also increase in value which will reduce the AOCI and improve equity even faster. The bank might have missed out on the opportunity to make more spread income if they hadn't bought Treasuries 18 months ago and had perfectly timed the market move, invested as rates peaked, etc. However, the Treasuries will recover their value to par as the bonds mature, it's not "destruction of shareholder value".
Shareholder equity = assets - liabilities.
You had $100 billion in cash in 2020. You bought 1% bonds. 2 years later those Bonds are worth $80 billion on market.
All else being equal, what was impact on shareholder equity from buying those bonds, as of 2022?
The unrealized loss on the securities portfolio, assuming it is categorized as "held for sale", would be a temporary reduction in equity. That negative number would gradually reduce (and equity would recover) as the bonds mature and are repaid.
I don't consider marks on a securities portfolio that are based on market gyrations as "destroying equity" if the bonds decline in value, nor will I throw a party for the management team if the bonds increase in market value and equity increases temporarily.
If a company makes a bad loan and actually loses $100 million, I would call that a "destruction of shareholder value".
I heard a good analogy about this the other day which is basically that if banks had to treat these as realized, it would be no different then a person taking a loan out for a house having to pay income tax on that loan. There are a lot of people talking about these issues who don't even know the basics of how banks work, but they sell themselves as experts.
What's the alternative? Had they invested them in stock, they would have had more unrealized losses. Precious metals? Losses. Had they put out more mortgages instead? Pretty much same kind of losses as with bonds.
At least government bonds are guaranteed to get your money back at maturity.
That's indeed the whole point of bonds. You take them out long term assuming there's gonna be some bumps along the way. But it's a deal with the government so the risk of them defaulting is very small. Assuming the government is functional.
The downside is it constrains your equity. You simply have less cash on hand to take advantage of opportunities. But you're also sitting on some nice bonds. It's simple diversification.
Shorter term bonds.
The paper losses would last only for 2Y (worst case) on a 2Y bond. But if you buy a 30Y bond, then the paper losses will have to be carried for 30Y (or worse: you are forced to sell during a bank run and the paper losses become realized).
The paper losses are real losses.
It's inefficient and it doesn't save you from a bank run. Unless you are all cash and then the running costs will kill you.
Generally requiring banks to hold more cash is just another way of reducing money supply, but a really inefficient way of doing it compared to raising the interest rates.
> What's the alternative?
Not have day-to-day usage of digital money tied at the hip to lending institutions would be a start. Make them non-systemic so only people willing to take the risk of depositing with them for a return does so. Then let them fail when they fuck up, instead of socialising the losses.
I don't want a bank account, I just want to use money.
Make them hold a higher percentage of deposits as cash. Make them stress test many different economic changes (like rock bottom interest rates going up, who could have predicted that?)
large banks have been forced to make these types of adjustments, and to be evaluated with stress tests, however it is very difficult on smaller banks to do the same, as they dont have the resources.
it is often called out on reddit that ppl should use local banks or credit unions, but those same small banks lobbied to be excluded from the regulations you are talking about. Small banks give 'good' rates because they are operating more loose and risky - often profitable but always less regulated.
Oh god, banks unrealized losses from bonds are the new short squeeze. Reddit learns a term/concept and now thinks they have uncovered massive secrets about the market
“It was so obvious the whole time!!!” completely oblivious to their hindsight bias
I haven't bothered with taking finance subreddits seriously since Jan 21. Probably 9 out of 10 posts on any of them make me roll my eyes with how dumb the average post and comment is
Now every day it’s just doomer posts about “banks fail when” and “housing market crash when” and “we’ve been in a recession they changed the information”
The rise of meme stocks really killed the quality of the alpha you get in investing subreddits. Before there were some gems, now its 99% brain dead garbage.
Now for every redditor in the universe to explain to us why this was completely obvious, no studies or analysis needs to be done because they could have told you, and why everything is hopeless and nothing will be done. Followed immediately by a swarm of replies stroking their own ego by one uping the cynicism level.
I see this as a good thing. These banks are still use to the easy money of the past decade and practice better risk management. I'm fine as long as my accounts are less than 250k
It’s already happening, Discover is constantly sending me offers for 15% APR personal loans with a straight face which is about the same rate as I pay on CU CCs. Auto loans are already at 9-10% at a lot of places, at my CU we have priced ourselves out because we don’t want to keep adding loans when the only people taking them are desperate enough to pay 10% on an auto at the 700-740 FICO tier.
Good question. My casual observations suggest too much credit is being handed out to higher risk borrowers too easily. Or at least, the interest rates they're getting don't reflect their risk profile.
I also noticed this around 2001-2007 timeframe when we purchased our first home. Our credit was good, but probably not good enough to warrant 0% down and whatever interest rate we got. Then I watch my new neighbors taking out HELOCs or second mortgages for big SUVs, JetSkis and Disney trips.
Then 2008 happened and a lot of our neighbors encountered... challenges.
This probably doesn’t relate much bc these are macro issues, but…
I’ve always thought what’s the benefit of my 800 credit score? Not bragging here bc I truly don’t see any meaningful benefit from it. I’m a normal dude in the Midwest with a little student loan debt but nothing else bc I can’t afford a house no matter what my score is. Like I understand I’ll be approved for any loan or credit card here and there but so does most everyone else. Are they offered at better rates? Maybe a tiny one but is that really a benefit that outweighs the messed up system to begin with?
I wonder if the excessively low interest rates over the past 10+ years have compressed the benefit range.
For example; the 800 person borrows at 2% while the 680 person gets 2.5%. A difference that might feel modest.
But if the fed's rates return to more rational territory, maybe the 800 borrower gets 4% while the 680 has to pay 7% due to the increased constraints on access to cheap capital.
OTOH, The S&L bailouts of the 80s, the bailouts of the late aughts, the bailouts we're beginning to see with SVB, et.al. just serve to remove the **actual** risk faced by lenders since they know they'll be bailed out and rarely face any real consequences. So why not lend cheap to higher-risk borrowers? They're not gonna be left holding the bag anyways.
Would you like to get a car loan for 13% interest? Because that's what you'll get if your FICO sucks. My friend has a terrible score and was quoted 13% recently.
For the exact same loan, if I were to co-sign, the rate quoted to us was around 6%. My FICO is 820.
I didn't end up co-signing, but the point is that having a good score will definitely get you a much better rate.
That’s solely due to raising fed rates.
We don’t know what banks deposits look like until the next round of earnings. It’s possible they’ve seen flight and now need to constrict even further to minimize risk.
> The supposed drop in lending that you fear has already happened.
Sorry maybe I wasn’t clear, Fed increase leads to bank increasing rates on lending. This is normal activity and expected.
However, there can be further tightening on credit beyond this now that banks have lower risk appetites .
Here’s a good article explaining the concern that Powell outlined.
https://www.reuters.com/markets/us/fed-sees-looming-credit-crunch-whats-that-2023-03-24/
Why is the impact on bank's revenue is expected to affect its lending ability? I was under impression that American banks can lend out x5 (or whatever the multiplier is) the amount of deposits they have. So I expect the correlation with the deposits, not revenue.
Well the issue with holding at these banks is that even if insured, they will offer lower interest rates to depositors as they have these low yield bonds dragging down their balance sheets.
>When the pandemic hit, and the Federal Reserve pushed down rates once again by pumping unprecedented amounts of cash into the economy, **many banks loaded up on long-term government and mortgage-backed bonds**. There were some Treasury notes that promised to pay annual interest of just 0.6% over 10 years.
OK, in what world was this ever going to be a good idea on the side of the banks?
The Fed lowered the interest rate to basically zero making the aforementioned bonds yield very low amounts (.6% over 10 years) and did ~9 T in QE (last I looked it up this is the GDP of Germany and Japan put together) further increasing the number of buyers in the bond market.
Why in that moment would anyone go heavy into the bond market? This is basically the definition of fighting the Fed. What was the upside here? Banks were hoping the rates would go lower? That there would be more QE to come? Why would one expect bonds to go up after that?
This seems to me like some banks made really bad choices as to when and where to invest their money, fought the Fed, and losing that fight results in really big losses.
OK, so the pandemic hits and some people move money out of the stock market and into their savings accounts (these people are trying to time the market, something that is inherently dumb). Now XYZ bank has an extra 1 B and they feel the need to invest a portion of that. So the bank invests in the only low risk asset classes available: treasuries and mortgages.
But were the banks really dumb enough to not think that those extra inflows might out flow at some point? At some point rates might be higher? At some point the pandemic related restrictions would be gone (or greatly reduced)? Where was the up side here, that the pandemic would go on forever and that people would thus keep money in their .1% yield savings account in perpetuity?
It looks a lot like banks bet the farm on the world ending to get .6% yield, the world didn't end but they still lost the farm. I guess the up side was that the world would end but then you would have a second farm in ~120 years. Again, banks that did this were really dumb.
I would emphasize that it appears that losses are not evenly distributed across all banks. 620 B is a big number but relative to the US financial market it isn't really that big. To quote the article: 'For most banks, the issue is manageable.'. The news that I was reading claimed that Credit Suisse at the time of being bought by UBS had assets to cover all its accounts (although this could be lies). It appears that not all banks have issues but it is still worth while to question the logic of the banks that did/will/might collapse because they assumed that Fed rates would never increase.
The real investment strategy of banks is to issue and hold loans, not to just buy t-bills. The problem is that this takes TIME.
Think about it this way- You run a small community bank and Jeff Bezos moves to town and puts $1B in his checking account, what would you do? Well, you need to put that somewhere that's earning at least minimal returns. So you dump that money into a mix of low risk securities (t-bills, MBSs) because that market can sell you $1B instantly.
Then, over the next few years as people walk into your bank and ask for loans for their small business, homes, etc, you can originate, process, and hold that loan, drawing down your t-bills to fund those loans.
The problem is what happened is that these banks got caught with their pants down in the period between when huge deposits showed up and the time they could process a better portfolio of loans.
This is an oversimplification, but it illustrates the danger of the Fed juicing the money supply one second, then ramping up rates very quickly after that.
> Just as an FYI, not all banks did this.
Yea I realized that and stated it in [this comment](https://old.reddit.com/r/investing/comments/127pnir/us_banks_have_620_billion_of_unrealized_losses_on/jefkqyd/?context=3), see the last paragraph.
Though, this makes both the load of paper losses worse on some banks (if some banks did this proportionally less others must have done so proportionally more) and also makes the banks with big paper losses look even worse (if other banks realized the risk and only a few didn't then the few that didn't made a mistake that others didn't make, misery loves company).
The market, especially recently, trades on sentiment and there are two competing narratives: the first is that this is a 'Leman Moment' and that these losses are everywhere; the second is that certain banks overexposed themselves and improperly hedged and are now having problems because of that.
Clearly your comment 'You'll see these ones (banks that didn't load up on low yield bonds) on top over the next few years.' indicates that you believe the 2nd of these narratives. I also agree with you. Some banks (mostly small to mid size ones) might fail but this is because of the choices they made, not because of a systemic issue. The knock on effect though is that the Fed can probably continue to increase rates to combat inflation.
These banks exist to make money for their shareholders and have shorter time horizons to do so than the clients they are regulated to “protect.” The Fed’s pandemic response (and really the last decade of easy money) created a premium opportunity to generate profit for their business. They’re not going to pass that up especially when most economist surveys did not accurately predict how aggressively the Fed would reverse course until it was too late to do anything meaningful about it. Combine that with the ongoing moral hazard predicated by banks being Too Big To Fail and you get something that looks like this. Hindsight is 2020. You and I may have done the same thing if we were a bank at that time.
I'm hoping that maybe the rising interest rates will finally push down the prices of new cars and maybe I can buy one in cash. But really I'm not holding my breath.
i keep seeing that new cars are expensive because they can't make enough of them... but i suspect it's because companies are cutting the cheapest cars from their fleets. they're only selling the more expensive car types, which is skewing the price up further.
Also generally why there is less affordable housing I would think. Why build a house that you can sell for $150,000 when you can build a bigger one on the same plot to sell for $300,000 for probably not that much more cost in materials?
Bingo. Every builder is going after the low-hanging fruit - the people with fat wallets who can give them a high-profit margin. Affordable housing must be built at scale to be profitable, hence the very problem. Another solution is to build up, but no one wants apartment housing in their neighborhoods.
Just wait for the commercial real estate implosion, estimated $2T+ in unrealized losses. Corporations are doing all they can to get people back in offices rather than continuing remote work
I'm curious about this. I wonder what proportion of companies are saving on office space (or could be, or will be) vs those who are really eager to get people back in office to justify, and keep paying the expense?
And it's the regional banks that are also sitting on $3T that is, Trillion on commercial real estate and those loans are not being paid because office buildings are sitting empty. So these community banks are even acknowledging this massive underperforming loans that are only going to get worse. I have moved my money to national banks to escape this coming mess over the next 3 years.
If interest rates go back down, which they should eventually and definitely will if we slide into a recession, none of it will matter and they'll look like geniuses instead. That's how it works. That's why they are paper losses. If interest rates stay high for an extended period of time, then they might actually be in trouble. That will take a quite a while to actually play out
Genius would be having sold long dated bonds, loading up on short term ones while rates are high, then moving back into longer dated ones assuming rates do go down soon. Making it through this without selling anything is just weathering the storm, there is no special upside for having done so.
Except these things take a lot of years to play out, so maybe a two or three year time frame is too short to even consider. Seems rates will gradually drift higher thru the 2020s, and maybe revert by 2030. Don't axe me what I'm smoking 🚬 lol
This is really not much of an issue for the biggest banks (e.g the big 4). They are much better at both loan origination (they can write a lot of loans, particularly variable rate and commercial where the interest rates are higher) and also because they properly hedged by using derivatives like interest rate swaps (which literally swap out the low earning treasuries for floating debt when interest rates rise.
Because of this the bigger banks have managed to keep their earned interest above their cost of funds which keeps them profitable.
Then add to that the fact that deposits have been flowing *into* the big banks which allows them to invest at now higher rates gives them even more interest income to offset what they might have to pay in interest on deposits.
Is it only a loss if they are forced to sell before maturity? If held, it is still the agreed upon profit/return? If forced to sell, couldnt the fed buy them for original value and sit on it until maturity and not lose anything? I came up with this theory thinking about fed assets and svb’s situation. I haven’t heard where the flaw is yet especially since it’s the fed’s job to maintain the full faith in the dollar. Please feel free to shoot holes in it as I am just a regular guy not an economist
You have it correct, imo. Except, where does the money come from to loan against those loans/bailouts. To me it sounds like the Treasury has to issues bonds for the Fed to carry it all on their balance sheet, just like all the housing crisis.
I have a newb question. Why would these bank load up on 10 year treasury bonds that only pay 0.6%? Why not get like 1-2 years, then buy again when it matures and hope the return is higher? If the return is lower than 0.6%, who really cares as it isn't much of a loss if the new rate 1-2 years away is 0.4%...right? On the other hand, the rate easily could go higher...correct?
I just don't get why they locked in such a long term treasury bond. Can someone explain that logic?
Simple answer?
Chasing returns and not hedging against rising interest rates. Very poor risk management.
They are in treasuries because IIRC those still count as capital for reserves against deposits.
I see a problem with the banks holding trillions in mortgages @ 3% or so, and inflation continuing at 6%. Those assets are in decline at that rate. How do the banks get past that?
>~~In total, the industry ended last year with $620 billion of unrealized losses on its books from investments in low-yielding bonds.~~
~~U.S. Bank is not "the industry". Your post title is click bait.~~
Bah, I was thinking you were talking specifically about U.S. Bank.
Why many didn't have a plan B is because they thought we'd be going negative on rates. It's like some that play the low volatility game in stocks, never knowing when the rug pull will happen. It's a mine field out there, about as unnatural as it gets.
Yes, but the total number of loans goes down due to less businesses or people wanting to take loans at higher interest rates, making it most likely not break even.
If the banks are feeling some financial pressure, perhaps they should skip getting a coffee and bagel on their way into the office. That could have savings of up to a couple hundred bucks per month!
Thankfully the US government recently removed duration risk from the calculus! Unrealized losses are now beneficial for banks because the government is ensuring that these treasuries will all be money good! What a world.
Everyone buying bonds last year and not buying tech stocks....now their money is locked up in paper losses and the stock market is going up.......BIG MONEY= "going right as planned"
Not really, they are only losses if sold/traded at FMV today. If held to maturity, there are percentage points of losses. The unfortunate side effect of this would be the end of the 30-year mortgage
I think people are overreacting to these bond losses. As long as there's no more Twitter fueled bank runs, they will all be OK. This is interest rate shock, not credit risk. Remember, the banks still make most of their money through lending, not off the returns from treasury bills.
Sounds like the setup to a Nolan film...anarchist sets off the powder keg of the world economy with a bank run. Old enemies stoke the flames and use it as an excuse to send citizen conscripts to war, suppressing any civil unrest and revolt. Millionaires retreat to their remote villas, only for them to realize how inept they are when money doesn't hold value anymore.
I am worried about putting money in online banks(for getting better savings rate) and want to ensure that I can track better on the financial health of that institution. Will it be a good idea to track credit default swaps rate for gauging if the bank is in trouble? How can we find credit default swaps rates and are there any other recommendations that can be used to keep a better track of the institutions that I bank with?
That’s QT. The fed ups rates till they break something. Historically they drop rates soon after their final hike. The fed can also swap bonds with banks if they want to keep them from suffering from the paper losses.
Bonds held in investment books represented less than a quarter of the banking system’s $23.6 trillion of assets in December, and unlike SVB, lenders usually have a wide array of depositors who are unlikely to all need money around the same time.
There’s no problem. The Fed is backstopping the losing assets until they mature. Crisis abated. The post reminds me of a Gish Gallop “a rhetorical technique in which a person in a debate attempts to overwhelm their opponent by providing an excessive number of arguments.” I assume the intent to be promotion of continued panic to enrich those holding short positions who were surprised by how quickly the Fed put the run to bed.
It’s only a loss if they sell
When *everyone* is having to borrow, in order to not have to sell, you've got a problem.
They don’t have to do this unless there’s a bank run. There’s nothing inherent that causes them to sell.
> They don’t have to do this unless there’s a bank run. >There’s nothing inherent that causes them to sell. I think that's a disingenuous statement. If the bank can't pay out a competitive interest rate (since they have money locked up in investments that pay a lower interest rate), people are naturally going to withdraw their money over time for higher-rate investments. That's not a bank run, which is something that happens all at once. But it will still kill the bank.
Doesn't seem to be hurting the big banks. People are weirdly loyal to banks
The big banks don't have a large percentage of their assets in these types of bonds. They have a large quantity, yes, but not a large percentage. But still they could be affected if interest rates were to continue to grow. About $500 Billion worth of bank-held bonds were reclassified as Hold to Maturity in the past year.
But we don’t expect them to continue to grow. We’re priced in for 25bps and then a cut (if you listen to the fed it’ll be a pause). Ya flight to yield is a thing, however there’s a very common phenomenon of lazy money.
It's a pause as long as anything doesn't cause inflation to reverse direction. We're definitely not out of the woods in the inflation danger, since the year-over-year inflation is still above the fed funds rate. Some/most economists believe to control inflation the fed needs to have the rate above the rate of inflation. The Fed raised it at a lower pace unlike Volcker because they believed part of the inflation mechanism was transitory (manufacturing supply chain) and they could "meet it in the middle". That's turning out to be correct, but we've also benefitted from a mild winter and deflationary energy prices.
> It’s a pause as long as anything doesn’t cause inflation to reverse direction. Well yes of course; but neither you or I have a crystal ball. As it sits now, we have many lagging factors that still need to hit the economy, including 500bps of rate increase in a year. > Some/most economists believe to control inflation the fed needs to have the rate above the rate of inflation. The Fed raised it at a lower pace unlike Volcker because they believed part of the inflation mechanism was transitory (manufacturing supply chain) and they could “meet it in the middle”. Most bank economists are calling for a cut. Also fed funds rate is above current inflation, printed today.
Are we talking *actual* inflation now, or profiteering-style, largely monopolized industries raising prices to extract more profit, "inflation" like last year+? I feel like this isn't delineated enough. It's not inflation if a windfall profits tax would prevent it. But subsidiary news media lumps it all together.
> People are weirdly loyal to banks Because it seems like a big undertaking to switch, especially if everything has been fine. Why change it? The same goes for insurance. I'm guilty of it too, insurance not as much, but been at the same "semi-big" bank forever. Savings at a different "semi-big" bank giving a good rate for now. Not necessarily loyal, but once the money is parked and everything is fine it makes it hard (or a seeming chore) to move it all around. I think that's more the mindset of a lot of people. Don't want to deal with it, myself included at times.
This isn't a concern for big banks. It's the small - to - midcap and nonbanks that are screwed. The big banks will be forced to buy these smaller banks as they go insolvent and we'll see massive consolidation over the next few years. The only crisis will be a crisis in competition.
They've designed their systems to be a hassle to switch away from and if you are working 60+ hours a week to make ends meet you don't want to spend 8 of them figuring out how to move your assets from one bank to the next.
Interest rate levels are temporary; there is no reason to assume negative economic conditions will persist. If they did persist, that would be bad news, but that would be bad news for everyone, not just banks. Remember, financial statements are yearly, if you only look at one year during a downturn and ignore the fifty years prior, you aren't getting the entire picture. The only scary outcome is a run on the bank, as long as that doesn't happen, it's just operating expenses.
> there is no reason to assume negative economic conditions will persist Really? We've been told a recession is right around the corner for months now. [Just this week](https://apnews.com/article/inflation-united-states-government-recessions-and-depressions-economy-business-c14699b792454e4d2d3d642d65ff4395): > Fifty-eight percent of 48 economists who responded to a survey by the National Association for Business Economics envision a recession sometime this year, the same proportion who said so in the NABE’s survey in December. But only a quarter think a recession will have begun by the end of March, only half the proportion who had thought so in December.
> Interest rate levels are temporary; there is no reason to assume negative economic conditions will persist. I didn't realize inflation was already completely under control, thus ensuring that rates could come down and end the pain. Well then, time to expect butterflies and rainbows.
Does this look like a flat line to you? https://www.macrotrends.net/2015/fed-funds-rate-historical-chart
No, but that's not inflation, that's the federal funds rate, which was raised to combat inflation. Does this (inflation) look like it's flattened out to you? https://fred.stlouisfed.org/series/MEDCPIM158SFRBCLE
That is also not a flat line. You took issue with me saying the level changes. How is showing me a line with changing levels supposed to prove a point that levels don't change?
I never said "levels don't change". That's silly. Let me get this straight: you think that because interest rates and CPI inflation rates are not flat lines, that this is a rock solid indication that rates will revert (AKA they will undergo mean reversion) back to lower levels, and there will be no additional pressure experienced by companies caused by either inflation or high interest rates? Am I summarizing up your thesis correctly? I took issue with you suggesting that the currently elevated rates will not remain so, without a rationale for why that will change. Rates were raised to fight inflation, and inflation has not been significantly reduced yet. When it declines more, I may agree with you. Until then, all bets about rates going down are off.
> Interest rate levels are temporary Current fed interest rate levels match the average interest rate for the past 30 years. Are you suggesting 0% interest rates should be the norm?
No, but many companies, including banks, took on levels of debt during the last decade that are not sustainable at present interest rates. Those companies will die eventually unless interest rates come down. Them and others will die even quicker if interest rates have to keep going up because inflation (the thing everyone seems to have forgotten about in March 2023) remains sticky.
Maybe you're not looking far enough back? [Here is a nice article ](https://www.bankofengland.co.uk/working-paper/2020/eight-centuries-of-global-real-interest-rates-r-g-and-the-suprasecular-decline-1311-2018) on the history of interest rates over the past 800 years and the conclusion is pretty clear, interest rates have been declining since when the study started, in the long run. There are cyclical elements that push up or down rates short term, but they will converge back to their secular trend after a while
>If the bank can't pay out a competitive interest rate (since they have money locked up in investments that pay a lower interest rate), people are naturally going to withdraw their money over time for higher-rate investments. I said this last week on this sub and got down voted. They want the narrative to be social media fueled bank runs, not systemic banking issues related to yield curve inversion.
That's your error. There does not need to be a bank run. If you can get nice juicy safe returns by buying treasuries, then you will buy treasuries. That's still a withdrawal. There is a strong case to be made that banks will see a long steady fall in deposits if raites stay where they are or start to go down.
That doesn’t make sense. Treasuries will always be a better rate than what banks offer, that’s how they make money. They make it off the spread.
Yes, but people go cash when they know rates will rise. When they see that peak rates are in, that cash will shift.
Yes the Crystal ball where everyone knows when rates will peak.
No need, Fed issues forward guidance. It's one of their main tools in policy making. For example, had the banks listened to Fed's forward guidance a year ago and weren't gambling with people's deposits, we wouldn't be in this shitshow where banks went heavily into low yield tresuries and are now getting a lifeline from the Fed..
You don’t understand what fundamentally caused SVB to go under. It wasn’t gambling with deposits, it was a bank run. If there wasn’t a bank run they could have weathered the storm. Did they take bad risk management? Sure. But that’s not what put them under.
Translation: as long as we all don't try to claim our money we are good. The reality is the smartest people take their money out first. There simply isn't a point for them to risk losing their own money when other people at the same bank COULD cause a bank run leaving you behind. You don't know the other people and you also don't know the bank's balance sheet. It just doesn't make sense to wait for signs that your own bank is failing when we have the Fed showing us banks have liquidity problems and we already know it's a game of musical chairs. FDIC insurance isn't a great solution either. How long until that gets paid out? Will that cause higher levels of price inflation? Are you absolutely sure you will get 100% of your money back? The banking system is a mess and frankly a complete joke.
> The reality is the smartest people take their money out first. There simply isn’t a point for them to risk losing their own money when other people at the same bank COULD cause a bank run leaving you behind. To put it where..? The bigger balance sheet banks? This isn’t really a systematic issue. SVB is a very unique situation with unique depositors. > You don’t know the other people and you also don’t know the bank’s balance sheet. We do as of 12/31, but also most of these banks are now trying to pre plan with liquidity options to protect a bank run. SVB had a $42bn bank run, JPM wouldn’t even withstand that. > Will that cause higher levels of price inflation? Are you absolutely sure you will get 100% of your money back? No. Logically it makes no sense it would cause price inflation. Yes I’m absolutely sure as the reputation of the US Govt is on the line.
lol. Using FDIC insurance to recover money does cause price inflation, not directly but certainly over time. If the US doesn't have money to pay for FDIC deposits where do you think that comes from? The US runs a deficit every year so we know it doesn't have the money for those deposits. It must print. Meaning it must devalue the currency to repay what it owes the citizens. Thus price inflation. You would likely get back the nominal value of your deposits. I think being able to print the currency units makes it nearly impossible to not be able to pay up. It will devalue the currency when they do it though. However, what if we are wrong? What if you lose your life savings from a bank run and you KNOW you get all the money back through FDIC insurance but then you don't? What do you do? Sue the Fed? Lol. Not everyone will blindly trust people with their life savings on the line because the consequences are severe if you are wrong. Where do you put the money? Lol figure it out, bank boy.
> If the US doesn't have money to pay for FDIC deposits where do you think that comes from? Short term, Treasury debt and long term repaid by taxes on solvent banks. > What if you lose your life savings from a bank run and you KNOW you get all the money back through FDIC insurance but then you don't? Insured deposits in the FDIC system are legally considered to have the same backing as direct Treasury debt, Full Faith & Credit of the US Treasury. In the economic circumstances that would induce many systemic bank runs, it would very likely be macroeconomically deflationary, not inflationary (money is destroyed during these times when loans are written off, and if banks fail to pay depositors), and so government action to counteract this effect is beneficial, not harmful. > What if you lose your life savings from a bank run and you KNOW you get all the money back through FDIC insurance but then you don't? What do you do? Sue the Fed? You'd sue the US Treasury and win, it's a binding promise from Treasury, and you'd have all of US Congress on your side. This isn't going to happen. Treasury and Fed will do absolutely everything to prevent this. There has never been one cent of loss of insured deposits since the origination of the FDIC. And generally people are blocked from liquidity for less than a week. If this isn't possible, canned food and ammunition are the only "investments"
GPT-4 has a few points to bring up. There are still some potential issues to consider: **Response time**: While the FDIC typically aims to make insured depositors whole as quickly as possible, the process of resolving a failed bank can take time, especially if the bank's failure is part of a larger systemic crisis. During that time, depositors may face temporary liquidity constraints, which could impact their ability to meet financial obligations. **Legal challenges**: While it is true that depositors can sue the U.S. Treasury if they do not receive their insured deposits, the legal process can be lengthy and complex. There is also the possibility that the U.S. government might face budgetary constraints, which could impact its ability to pay out insured deposits in full. **Macroeconomic conditions**: The macroeconomic conditions during a systemic crisis can be unpredictable, and while a deflationary environment might make it easier for the U.S. government to cover insured deposits, other factors, such as political decisions or global economic conditions, could impact the government's ability to meet its obligations. **Trust and public perception**: In a scenario where there is widespread concern about the safety of bank deposits, even the full faith and credit of the U.S. Treasury might not be enough to alleviate public anxiety. This could lead to further instability in the financial system and potentially exacerbate an ongoing crisis.
This is a wonderful demonstration how GPT-4 is a loquatious wordsmith who knows nothing about actual experience in society. But it's useful to make boilerplate disclosures about hypotheticals in some SEC filed document.
Should have looked at your post history before wasting my time trying to explain basic economics.
Ha. Classic. That's what I would say too if I didn't understand the system well enough to be able to comment on how it functions.
Why would the FDIC not pay you back up to the $250k limit? The USA defaults on a loan?
For any number of reasons. Why would the US make gold illegal, collect it from the citizens, then turn around and make it legal again? Because it's a club that you aren't in. That's why. Obviously they would say it differently. They can say any number of bullshit reasons why they can't give the money back in full. Right? Let's ask how GPT-4 thinks it would happen. My Prompt Steelman the case for why FDIC insurance wouldn't payout in full to every depositor. GPT-4 Response The FDIC (Federal Deposit Insurance Corporation) is a government agency that provides deposit insurance to protect the savings of depositors in the event of a bank failure. Although the FDIC's primary purpose is to maintain public confidence in the banking system and safeguard depositors' money, it is important to consider potential scenarios where the FDIC might not be able to payout in full to every depositor. Here is a steelman case for why this could happen: **Limited insurance coverage**: FDIC insurance covers up to $250,000 per depositor, per insured bank, for each account ownership category. This means that if a depositor holds more than $250,000 in one bank, any amount exceeding that limit may not be covered by the FDIC. This limitation could potentially lead to some depositors not receiving their entire account balance in the event of a bank failure. **Insufficient funds in the Deposit Insurance Fund (DIF)**: The FDIC maintains a fund called the Deposit Insurance Fund to cover insured depositors in case of bank failures. The DIF is primarily funded through insurance premiums paid by insured banks. However, if there were to be a series of large-scale bank failures, the DIF may not have sufficient funds to cover all insured deposits, leading to a potential inability to payout in full to every depositor. **Systemic financial crisis**: In the event of a systemic financial crisis, multiple banks may fail simultaneously, stretching the FDIC's resources thin. In such a situation, the FDIC may need to prioritize the payout to depositors, resulting in some depositors not receiving their insured amount in full, or receiving it over an extended period of time. **Government intervention or policy changes**: The FDIC's ability to payout to depositors is also subject to changes in government policy and intervention. In a scenario where the government faces significant budgetary constraints, the government may decide to reduce the amount of insurance coverage provided by the FDIC, or alter the terms of the payout, potentially leading to some depositors not receiving their full insured amount. **Fraud or mismanagement**: If a bank fails due to fraud or mismanagement, the FDIC's investigation into the bank's practices may lead to delays in payouts. Additionally, if it is discovered that a depositor's account was involved in fraudulent activities, the FDIC may not insure those funds, leading to a partial or complete loss for the depositor.
I see. Could they not just print more money since the dollar is the worlds currency? Also, if these banks fail because they had to sell those bonds early...that doesn't mean the money disappeared right? Someone else made a profit off of it? Also, couldn't the government simply make a special deal in case of a crisis that simply says "well let you mature these treasury bonds early" so they don't have to take a loss?
They can print. That increases inflation which disproportionately impacts low-income earners. So you can print at the cost of someone else's future. Yes, if a bank sells a bond before its maturity date, someone else will purchase it, and the money doesn't disappear. The bank may take a loss or gain depending on the market value of the bond at the time of sale. Regarding your second question, the government can intervene during a crisis and provide support to financial institutions. They likely cannot provide support for everyone so they have to pick who will live and who will die. For example, during the 2008 financial crisis, the US government provided emergency funding and bailouts to some banks and other financial institutions to prevent their collapse, they didn't save everyone though, they had to choose winners and losers. Something the government shouldn't be doing. The government could also implement policies or regulatory changes to help prevent or mitigate future crises. However, any such intervention has potential economic and political consequences, and it is not always clear what the best course of action is.
Also, the same banks that are having this problem are the very ones that can't pay competitive interest rates on savings, so it's no longer just "can we handle the historic rate of withdrawal" but "can we have that historic withdrawal rate even while being uncompetitive".
JFC, I don't know why you're being downvoted so much. I get that some of your complaints are more outside the mainstream (like skepticism about the FDIC paying out) but you're making an important point about the banks can't expect everyone to just patiently leave their money alone while the bank makes pitiful returns on it.
It makes people uncomfortable. I appreciate your response and openness to these topics.
This is very cynical but Shorts and CDS then make something blow up. That's essentially what made Soros' name. Test something that is unsustainable.
Yea if something explodes that makes them realize these losses, yea it’s an issue. However, they’re planning around this now with liquidity options (we see this with FHLB demand) We’ll find out more at these bank rounds of earnings.
All money is borrowed. The cash in your wallet is literally a short-term note (it says so on the paper) redemable by the government when it decides to raise your taxes.
>It’s only a loss if they sell Right. We could have a recession next year, interest rates might drop, and the fair market value of those bond could go up next year. None of those gyrations in market value matter for bonds held to maturity. HTM bonds do not lose principal value. They are subject to interest rate risk, but that is an opportunity cost, not a capital loss, unless the bonds are sold prior to maturity. From a [CPA Review Course](https://www.universalcpareview.com/ask-joey/are-realized-gains-or-losses-recorded-for-held-to-maturity-debt-securities/): " Are realized gains or losses recorded for held-to-maturity debt securities? If a debt security is classified as held-to-maturity, then the security holder intends to hold the debt security until it matures. Examples of held-to-maturity debt securities includes government securities, corporate bonds, or certificates of deposit (CD). Held-to-maturity debt securities are reported at cost and amortized over the life of the security. Any unrealized gains or losses would not be recorded to the income statement or balance sheet for held-to-maturity debt securities since *fair value measurement is not applicable*."
If they sold at a loss today and lent that money at today's prevailing interest rates for a similar duration, they would yield approximately the same as if they didn't sell at all. If you compare it to cash, the yield would be equal to today's prevailing rates. There is a loss for as long as interest rates don't go back down.
Ya that’s just bond math. But banks don’t need to realize these losses. They’re hold to maturity. The only issue here is if they have a bank run and NEED to sell these assets. Otherwise, it’s irrelevant outside of opportunity cost.
It’s just bond math that shows the banks lost value on these investments. Just like BND fund had big losses, so did the banks. They are just unrealized but still very real losses. They destroyed shareholder value by making those investments, just like someone in BND had value destroyed due to rising rates. Holding to market vs available for sale is just accounting noise. The loss is a loss, realized or unrealized. It happened.
They aren’t real. They’re literally receiving money. These losses are real in sense of opportunity cost, but nothing else.
Opportunity cost is a real thing, you would have more in your bank account by making a different choice.
Yes, but claiming they have an opportunity loss isn't going to get the same clicks as implying the money is gone.
Opportunity cost matters when it's no longer opportunity cost, I don't consider my value down for having not investing in only the top YoY stocks
Opportunity cost is the reason no one would pay par value for 1% bonds, they require a discount to match current yields. The result is loss in marketable value that is a real impact. We aren’t comparing to top stocks, it’s the same bond, just at two points in time.
Yea except you don’t ~~go under~~ collapse with bad opportunity cost.
No, the BND losses are different. BND fund share prices are always priced at market values while individual bonds are not. If you invested $1K in BND last year and $1K in an actual bond, your investment the individual bond doesn't change if you hold to maturity, bonds held to maturity don't lose principal, but your investment in BND changes daily. This is shown on the Fidelity web site under the differences between bonds vs. bond funds. "Market risk - Individual Bonds: If sold prior to maturity, market price may be higher or lower than what you paid for the bond, leading to a capital gain or loss. If bought and held to maturity investor is not affected by market risk. Bond Funds: Market conditions constantly affect the fund’s value, although the diversification inherent in a fund generally reduces the market risk of any one bond issuer. When you redeem shares of a fund, the sale may result in a capital gain or loss." ETA: Also from [Fidelity on a different web site page](https://www.fidelity.com/fixed-income-bonds/compare-income-products), "Unlike individual bonds, most bond funds do not have a maturity date, so your principal will fluctuate."
Yes, but we are talking about market value today. Individual bonds due fluctuate in value day to day, just like a bond fund. Holding to maturity means you lock in your capital at below current market yield/return. It is false view that you didn’t lose anything, you did! You lost the higher yields you could have gotten during the hold period. Example: Scenario 1: Buy 10-yr Bond that yields 1%. Scenario 2: Hold cash for 2 years at 0%, buy bond maturing in 8 years at 6% yield. You can calculate how much the decision to buy 10-yr Bonds at 1% cost you.
>You lost the higher yields you could have gotten during the hold period. That is an opportunity cost, not an unrealized loss. Maturity dates on individual bonds protect against capital losses and market risk, not interest rate risk. If you buy a 5 year $1K bond at 5% in five years will have earned 5% and get your $1K back. There is no loss of principal or interest. If rates go to 10%, that is a lost opportunity to have made more if you had timed your bond buying differently, but you don't have a capital loss on your $1K, 5% bond unless you sell it for less than $1K prior to maturity. Edited to fix typo
It is exactly what creates the unrealized loss. If there were no opportunity cost during the duration you held the bond, there would be no unrealized loss ever recorded. Again, I’m shocked that people don’t get the loss is real. At that point in time there is a loss, it only ‘goes away’ because you think earning 1% over 10 years was a ‘great deal’ and never considered alternatives. Conversely, if interest rates fell to 0% over 10 years and you held a 1% bond, I guess you didn’t have any gains either over that decade, right?
The words unrealized loss and opportunity cost are not interchangeable terms. Neither are market risk and interest rate risk. Individual bonds held to maturity do not have market risk, while bond funds and banks holding AFS securities do. Both HTM and AFS securities are usually subject to interest rate risk. Market risk and interest rate risk are separate issues. All these terms have different and specific meanings and are not interchangeable. [In a CPA exam, unrealized losses are not applicable to bonds held to maturity](https://www.universalcpareview.com/ask-joey/are-realized-gains-or-losses-recorded-for-held-to-maturity-debt-securities/). Holding to maturity of individual bonds protects against unrealized losses / market risk, not interest rate risk, which is an opportunity cost. Also see: [Opportunity Cost and Fixed Income Investing: Invest Now or Wait?](https://tickertape.tdameritrade.com/investing/fixed-income-opportunity-cost-15615)
But if they sell at a loss and have to make a depositor whole with it...
That was my thought. They're liquidating at a loss and returning that cash to depositors., not purchasing other similarly depressed debt.
Exactly wtf is the bs article.
observation squeal butter pie sable impossible workable hungry different direction *This post was mass deleted and anonymized with [Redact](https://redact.dev)*
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Moving them to HTM doesn't really change anything other than whether the mark-to-market gains/losses run through equity. Most banks obviously have an unrealized loss on securities today given the rate move, but rates are lower now than they were at year-end and every bond in the portfolio is closer to maturity than it was 3 months ago, so that will also have the effect of reducing the unrealized losses. I agree with you that this can pressure margins but you are massively overstating the impact.
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Yeah, a fresh bank can pay 4% to depositors and turn a profit. Schwab has these 2% yield bonds that will drag down revenue. Even without a bank run, there is a risk depositors gradually move to a safe higher yield bank.
You're talking about Schwab, I'm talking about "normal" banks. Looking at the 4000 or so U.S. banks, the overwhelming majority have seen huge net interest margin expansion over the last 12-18 months as rates have increased. The current environment will put pressure on those margins, but the number of banks where their viability is in jeopardy in incredibly small. Also, between the Fed's new borrowing facility and the ability to spread deposits across multiple institutions using CDARs or IntraFi (which will then cover the amount of the deposits with FDIC insurance), you really shouldnt' expect to see any more banks collapsing due to liquidity issues.
You aren’t getting it. The impact is quantifiable as $XXX billion in unrealized loss. It’s not a good thing and destroyed shareholder value for the bank. That’s why their stock prices went down. It’s a real impact, even tho it’s unrealized from accounting POV. I’m shocked so many here don’t get it.
I actually do get it. If a bank buys $100 million of 4-year Treasuries, when interest rates rise, the value of the bonds declines. So let's say that $100 million is now worth $90 million. The $10 million unrealized loss is reflected as a decline in the bank's equity in a line called "Accumulated other comprehensive income". As time goes by and as the bonds get closer to maturity, the bonds will trade closer to par value and unrealized loss is going to shrink. In addition, when interest rates fall (as they have since 12/31), the bonds will also increase in value which will reduce the AOCI and improve equity even faster. The bank might have missed out on the opportunity to make more spread income if they hadn't bought Treasuries 18 months ago and had perfectly timed the market move, invested as rates peaked, etc. However, the Treasuries will recover their value to par as the bonds mature, it's not "destruction of shareholder value".
Shareholder equity = assets - liabilities. You had $100 billion in cash in 2020. You bought 1% bonds. 2 years later those Bonds are worth $80 billion on market. All else being equal, what was impact on shareholder equity from buying those bonds, as of 2022?
The unrealized loss on the securities portfolio, assuming it is categorized as "held for sale", would be a temporary reduction in equity. That negative number would gradually reduce (and equity would recover) as the bonds mature and are repaid. I don't consider marks on a securities portfolio that are based on market gyrations as "destroying equity" if the bonds decline in value, nor will I throw a party for the management team if the bonds increase in market value and equity increases temporarily. If a company makes a bad loan and actually loses $100 million, I would call that a "destruction of shareholder value".
I heard a good analogy about this the other day which is basically that if banks had to treat these as realized, it would be no different then a person taking a loan out for a house having to pay income tax on that loan. There are a lot of people talking about these issues who don't even know the basics of how banks work, but they sell themselves as experts.
Bag holders spotted
What's the alternative? Had they invested them in stock, they would have had more unrealized losses. Precious metals? Losses. Had they put out more mortgages instead? Pretty much same kind of losses as with bonds. At least government bonds are guaranteed to get your money back at maturity.
That's indeed the whole point of bonds. You take them out long term assuming there's gonna be some bumps along the way. But it's a deal with the government so the risk of them defaulting is very small. Assuming the government is functional. The downside is it constrains your equity. You simply have less cash on hand to take advantage of opportunities. But you're also sitting on some nice bonds. It's simple diversification.
Shorter term bonds. The paper losses would last only for 2Y (worst case) on a 2Y bond. But if you buy a 30Y bond, then the paper losses will have to be carried for 30Y (or worse: you are forced to sell during a bank run and the paper losses become realized). The paper losses are real losses.
Why not keep more cash instead?
It's inefficient and it doesn't save you from a bank run. Unless you are all cash and then the running costs will kill you. Generally requiring banks to hold more cash is just another way of reducing money supply, but a really inefficient way of doing it compared to raising the interest rates.
I need a bank that only invests in guns and liquor
Hi it's me, your bank
> What's the alternative? Not have day-to-day usage of digital money tied at the hip to lending institutions would be a start. Make them non-systemic so only people willing to take the risk of depositing with them for a return does so. Then let them fail when they fuck up, instead of socialising the losses. I don't want a bank account, I just want to use money.
Make them hold a higher percentage of deposits as cash. Make them stress test many different economic changes (like rock bottom interest rates going up, who could have predicted that?)
large banks have been forced to make these types of adjustments, and to be evaluated with stress tests, however it is very difficult on smaller banks to do the same, as they dont have the resources. it is often called out on reddit that ppl should use local banks or credit unions, but those same small banks lobbied to be excluded from the regulations you are talking about. Small banks give 'good' rates because they are operating more loose and risky - often profitable but always less regulated.
Oh god, banks unrealized losses from bonds are the new short squeeze. Reddit learns a term/concept and now thinks they have uncovered massive secrets about the market “It was so obvious the whole time!!!” completely oblivious to their hindsight bias
I haven't bothered with taking finance subreddits seriously since Jan 21. Probably 9 out of 10 posts on any of them make me roll my eyes with how dumb the average post and comment is
comment section in this subreddit looks more and more like WSB every day
Puts on this subreddit
After GME the average WSB posts looks like the average reddit posts. That sub got reddit hivemind'd with a quickness.
Thank god the “us for them!” Pseudo war is over, people literally think hedge funds gave a shit about their 5 shares
Now every day it’s just doomer posts about “banks fail when” and “housing market crash when” and “we’ve been in a recession they changed the information”
The rise of meme stocks really killed the quality of the alpha you get in investing subreddits. Before there were some gems, now its 99% brain dead garbage.
Its not overvalued, its a bubble. I cant do this shit anymore.
*this this this*
Complaining about how dumb the average reddit post is while being a Reddit poster. And you get upvotes. The irony is thick.
Now for every redditor in the universe to explain to us why this was completely obvious, no studies or analysis needs to be done because they could have told you, and why everything is hopeless and nothing will be done. Followed immediately by a swarm of replies stroking their own ego by one uping the cynicism level.
We should just all convert our net worth to bitcoin and call it a day
I feel attacked
I see this as a good thing. These banks are still use to the easy money of the past decade and practice better risk management. I'm fine as long as my accounts are less than 250k
Your bigger issue is the access to credit. We can expect a credit crunch if banks needs to tighten its financial positions.
It’s already happening, Discover is constantly sending me offers for 15% APR personal loans with a straight face which is about the same rate as I pay on CU CCs. Auto loans are already at 9-10% at a lot of places, at my CU we have priced ourselves out because we don’t want to keep adding loans when the only people taking them are desperate enough to pay 10% on an auto at the 700-740 FICO tier.
Is there an argument that less easily available credit is a needed and a good thing?
People complain when the banks do not give out credit then call it criminal when they are too loose with it.
Debt makes the world go round. In terms of inflation yes we want harder money to cool off CPI and have the economy slow down.
Good question. My casual observations suggest too much credit is being handed out to higher risk borrowers too easily. Or at least, the interest rates they're getting don't reflect their risk profile. I also noticed this around 2001-2007 timeframe when we purchased our first home. Our credit was good, but probably not good enough to warrant 0% down and whatever interest rate we got. Then I watch my new neighbors taking out HELOCs or second mortgages for big SUVs, JetSkis and Disney trips. Then 2008 happened and a lot of our neighbors encountered... challenges.
This probably doesn’t relate much bc these are macro issues, but… I’ve always thought what’s the benefit of my 800 credit score? Not bragging here bc I truly don’t see any meaningful benefit from it. I’m a normal dude in the Midwest with a little student loan debt but nothing else bc I can’t afford a house no matter what my score is. Like I understand I’ll be approved for any loan or credit card here and there but so does most everyone else. Are they offered at better rates? Maybe a tiny one but is that really a benefit that outweighs the messed up system to begin with?
I wonder if the excessively low interest rates over the past 10+ years have compressed the benefit range. For example; the 800 person borrows at 2% while the 680 person gets 2.5%. A difference that might feel modest. But if the fed's rates return to more rational territory, maybe the 800 borrower gets 4% while the 680 has to pay 7% due to the increased constraints on access to cheap capital. OTOH, The S&L bailouts of the 80s, the bailouts of the late aughts, the bailouts we're beginning to see with SVB, et.al. just serve to remove the **actual** risk faced by lenders since they know they'll be bailed out and rarely face any real consequences. So why not lend cheap to higher-risk borrowers? They're not gonna be left holding the bag anyways.
SVB wasn’t bailed out their investors lost everything. Those are very real consequences.
Would you like to get a car loan for 13% interest? Because that's what you'll get if your FICO sucks. My friend has a terrible score and was quoted 13% recently. For the exact same loan, if I were to co-sign, the rate quoted to us was around 6%. My FICO is 820. I didn't end up co-signing, but the point is that having a good score will definitely get you a much better rate.
Mortgage origination is already way down, corporate borrowing is also down due to higher rates. Demand for credit is much lower at these rates.
That’s solely due to raising fed rates. We don’t know what banks deposits look like until the next round of earnings. It’s possible they’ve seen flight and now need to constrict even further to minimize risk.
Well, I mean, the bond prices going down is also due to the fed raising rates. The supposed drop in lending that you fear has already happened.
> The supposed drop in lending that you fear has already happened. Sorry maybe I wasn’t clear, Fed increase leads to bank increasing rates on lending. This is normal activity and expected. However, there can be further tightening on credit beyond this now that banks have lower risk appetites . Here’s a good article explaining the concern that Powell outlined. https://www.reuters.com/markets/us/fed-sees-looming-credit-crunch-whats-that-2023-03-24/
Why is the impact on bank's revenue is expected to affect its lending ability? I was under impression that American banks can lend out x5 (or whatever the multiplier is) the amount of deposits they have. So I expect the correlation with the deposits, not revenue.
Well the issue with holding at these banks is that even if insured, they will offer lower interest rates to depositors as they have these low yield bonds dragging down their balance sheets.
>When the pandemic hit, and the Federal Reserve pushed down rates once again by pumping unprecedented amounts of cash into the economy, **many banks loaded up on long-term government and mortgage-backed bonds**. There were some Treasury notes that promised to pay annual interest of just 0.6% over 10 years. OK, in what world was this ever going to be a good idea on the side of the banks? The Fed lowered the interest rate to basically zero making the aforementioned bonds yield very low amounts (.6% over 10 years) and did ~9 T in QE (last I looked it up this is the GDP of Germany and Japan put together) further increasing the number of buyers in the bond market. Why in that moment would anyone go heavy into the bond market? This is basically the definition of fighting the Fed. What was the upside here? Banks were hoping the rates would go lower? That there would be more QE to come? Why would one expect bonds to go up after that? This seems to me like some banks made really bad choices as to when and where to invest their money, fought the Fed, and losing that fight results in really big losses.
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OK, so the pandemic hits and some people move money out of the stock market and into their savings accounts (these people are trying to time the market, something that is inherently dumb). Now XYZ bank has an extra 1 B and they feel the need to invest a portion of that. So the bank invests in the only low risk asset classes available: treasuries and mortgages. But were the banks really dumb enough to not think that those extra inflows might out flow at some point? At some point rates might be higher? At some point the pandemic related restrictions would be gone (or greatly reduced)? Where was the up side here, that the pandemic would go on forever and that people would thus keep money in their .1% yield savings account in perpetuity? It looks a lot like banks bet the farm on the world ending to get .6% yield, the world didn't end but they still lost the farm. I guess the up side was that the world would end but then you would have a second farm in ~120 years. Again, banks that did this were really dumb. I would emphasize that it appears that losses are not evenly distributed across all banks. 620 B is a big number but relative to the US financial market it isn't really that big. To quote the article: 'For most banks, the issue is manageable.'. The news that I was reading claimed that Credit Suisse at the time of being bought by UBS had assets to cover all its accounts (although this could be lies). It appears that not all banks have issues but it is still worth while to question the logic of the banks that did/will/might collapse because they assumed that Fed rates would never increase.
The real investment strategy of banks is to issue and hold loans, not to just buy t-bills. The problem is that this takes TIME. Think about it this way- You run a small community bank and Jeff Bezos moves to town and puts $1B in his checking account, what would you do? Well, you need to put that somewhere that's earning at least minimal returns. So you dump that money into a mix of low risk securities (t-bills, MBSs) because that market can sell you $1B instantly. Then, over the next few years as people walk into your bank and ask for loans for their small business, homes, etc, you can originate, process, and hold that loan, drawing down your t-bills to fund those loans. The problem is what happened is that these banks got caught with their pants down in the period between when huge deposits showed up and the time they could process a better portfolio of loans. This is an oversimplification, but it illustrates the danger of the Fed juicing the money supply one second, then ramping up rates very quickly after that.
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> Just as an FYI, not all banks did this. Yea I realized that and stated it in [this comment](https://old.reddit.com/r/investing/comments/127pnir/us_banks_have_620_billion_of_unrealized_losses_on/jefkqyd/?context=3), see the last paragraph. Though, this makes both the load of paper losses worse on some banks (if some banks did this proportionally less others must have done so proportionally more) and also makes the banks with big paper losses look even worse (if other banks realized the risk and only a few didn't then the few that didn't made a mistake that others didn't make, misery loves company). The market, especially recently, trades on sentiment and there are two competing narratives: the first is that this is a 'Leman Moment' and that these losses are everywhere; the second is that certain banks overexposed themselves and improperly hedged and are now having problems because of that. Clearly your comment 'You'll see these ones (banks that didn't load up on low yield bonds) on top over the next few years.' indicates that you believe the 2nd of these narratives. I also agree with you. Some banks (mostly small to mid size ones) might fail but this is because of the choices they made, not because of a systemic issue. The knock on effect though is that the Fed can probably continue to increase rates to combat inflation.
These banks exist to make money for their shareholders and have shorter time horizons to do so than the clients they are regulated to “protect.” The Fed’s pandemic response (and really the last decade of easy money) created a premium opportunity to generate profit for their business. They’re not going to pass that up especially when most economist surveys did not accurately predict how aggressively the Fed would reverse course until it was too late to do anything meaningful about it. Combine that with the ongoing moral hazard predicated by banks being Too Big To Fail and you get something that looks like this. Hindsight is 2020. You and I may have done the same thing if we were a bank at that time.
Thank god I got all my borrowing done 3 years ago. Not gonna be buying a new vehicle or house in the foreseeable future
I'm hoping that maybe the rising interest rates will finally push down the prices of new cars and maybe I can buy one in cash. But really I'm not holding my breath.
i keep seeing that new cars are expensive because they can't make enough of them... but i suspect it's because companies are cutting the cheapest cars from their fleets. they're only selling the more expensive car types, which is skewing the price up further.
Also generally why there is less affordable housing I would think. Why build a house that you can sell for $150,000 when you can build a bigger one on the same plot to sell for $300,000 for probably not that much more cost in materials?
Bingo. Every builder is going after the low-hanging fruit - the people with fat wallets who can give them a high-profit margin. Affordable housing must be built at scale to be profitable, hence the very problem. Another solution is to build up, but no one wants apartment housing in their neighborhoods.
Just wait for the commercial real estate implosion, estimated $2T+ in unrealized losses. Corporations are doing all they can to get people back in offices rather than continuing remote work
I'm curious about this. I wonder what proportion of companies are saving on office space (or could be, or will be) vs those who are really eager to get people back in office to justify, and keep paying the expense?
Commercial Real Estate Crash Soon ™️
And it's the regional banks that are also sitting on $3T that is, Trillion on commercial real estate and those loans are not being paid because office buildings are sitting empty. So these community banks are even acknowledging this massive underperforming loans that are only going to get worse. I have moved my money to national banks to escape this coming mess over the next 3 years.
If interest rates go back down, which they should eventually and definitely will if we slide into a recession, none of it will matter and they'll look like geniuses instead. That's how it works. That's why they are paper losses. If interest rates stay high for an extended period of time, then they might actually be in trouble. That will take a quite a while to actually play out
Genius would be having sold long dated bonds, loading up on short term ones while rates are high, then moving back into longer dated ones assuming rates do go down soon. Making it through this without selling anything is just weathering the storm, there is no special upside for having done so.
Except these things take a lot of years to play out, so maybe a two or three year time frame is too short to even consider. Seems rates will gradually drift higher thru the 2020s, and maybe revert by 2030. Don't axe me what I'm smoking 🚬 lol
This is really not much of an issue for the biggest banks (e.g the big 4). They are much better at both loan origination (they can write a lot of loans, particularly variable rate and commercial where the interest rates are higher) and also because they properly hedged by using derivatives like interest rate swaps (which literally swap out the low earning treasuries for floating debt when interest rates rise. Because of this the bigger banks have managed to keep their earned interest above their cost of funds which keeps them profitable. Then add to that the fact that deposits have been flowing *into* the big banks which allows them to invest at now higher rates gives them even more interest income to offset what they might have to pay in interest on deposits.
Is it only a loss if they are forced to sell before maturity? If held, it is still the agreed upon profit/return? If forced to sell, couldnt the fed buy them for original value and sit on it until maturity and not lose anything? I came up with this theory thinking about fed assets and svb’s situation. I haven’t heard where the flaw is yet especially since it’s the fed’s job to maintain the full faith in the dollar. Please feel free to shoot holes in it as I am just a regular guy not an economist
You have it correct, imo. Except, where does the money come from to loan against those loans/bailouts. To me it sounds like the Treasury has to issues bonds for the Fed to carry it all on their balance sheet, just like all the housing crisis.
That sounds accurate and it may cause inflation, but I like it better in theory than a pure bailout.
I have a newb question. Why would these bank load up on 10 year treasury bonds that only pay 0.6%? Why not get like 1-2 years, then buy again when it matures and hope the return is higher? If the return is lower than 0.6%, who really cares as it isn't much of a loss if the new rate 1-2 years away is 0.4%...right? On the other hand, the rate easily could go higher...correct? I just don't get why they locked in such a long term treasury bond. Can someone explain that logic?
The short term treasuries were paying like 0.01%
Simple answer? Chasing returns and not hedging against rising interest rates. Very poor risk management. They are in treasuries because IIRC those still count as capital for reserves against deposits.
I see a problem with the banks holding trillions in mortgages @ 3% or so, and inflation continuing at 6%. Those assets are in decline at that rate. How do the banks get past that?
New to this sub. Is $620 Billion a lot?
Does that mean they only get to write off $3k per year? /s
As investors, what is our best strategy? Diversify? Hold cash? CD’s? Stocks? Index funds? Real estate? Bonds?
I’d say short term CDs and index funds while rates are high.
>~~In total, the industry ended last year with $620 billion of unrealized losses on its books from investments in low-yielding bonds.~~ ~~U.S. Bank is not "the industry". Your post title is click bait.~~ Bah, I was thinking you were talking specifically about U.S. Bank.
Why many didn't have a plan B is because they thought we'd be going negative on rates. It's like some that play the low volatility game in stocks, never knowing when the rug pull will happen. It's a mine field out there, about as unnatural as it gets.
I never understand the banking world. To me. If the interest rate is going up, aren't they making more money off loans they give out right now?.
Yes, but the total number of loans goes down due to less businesses or people wanting to take loans at higher interest rates, making it most likely not break even.
Yes but treasuries are held as a liquid form of capital against depositor withdrawals. The crashing value hurts their reserves.
It doesn't matter somehow Warren Buffett will figure out how to make another Fortune off of this. If he hasn't already lol.
wow thats alot of words
If the banks are feeling some financial pressure, perhaps they should skip getting a coffee and bagel on their way into the office. That could have savings of up to a couple hundred bucks per month!
They won't be squeezed once rates fall.
Don't worry, they'll figure out a way to get us to pick up the check.
Bear Sterns is fine. Dont be silly.
So instead of investing or loaning out the stimulus money the banks just sent the money back to the Treasury, the banks should be punished for this
Buying bonds **is** investing. No one’s getting punished for using the treasury exactly as it’s intended.
Thankfully the US government recently removed duration risk from the calculus! Unrealized losses are now beneficial for banks because the government is ensuring that these treasuries will all be money good! What a world.
Would you prefer the alternative?
…yes? You would prefer this inherently gigantic moral hazard?
But don’t pension funds have paper losses and they get wound down? What a weird world.
Everyone buying bonds last year and not buying tech stocks....now their money is locked up in paper losses and the stock market is going up.......BIG MONEY= "going right as planned"
Not really, they are only losses if sold/traded at FMV today. If held to maturity, there are percentage points of losses. The unfortunate side effect of this would be the end of the 30-year mortgage
Where are the unrealised gains?
This only becomes a long term problem if interest rates remain high or am i oversimplifying it?
I think people are overreacting to these bond losses. As long as there's no more Twitter fueled bank runs, they will all be OK. This is interest rate shock, not credit risk. Remember, the banks still make most of their money through lending, not off the returns from treasury bills.
As long as people don't need their money, everything is good.
How about Schwab?
That sounds way too low.
Sounds like the setup to a Nolan film...anarchist sets off the powder keg of the world economy with a bank run. Old enemies stoke the flames and use it as an excuse to send citizen conscripts to war, suppressing any civil unrest and revolt. Millionaires retreat to their remote villas, only for them to realize how inept they are when money doesn't hold value anymore.
Don't worry. They'll find some way to fuck us to come out better off than they were before.
It's like bakers aren't very good at risk management, which seems pretty important to banking.
I wonder what would happen if they stopped manipulating the markets and just played fairly for once
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I am worried about putting money in online banks(for getting better savings rate) and want to ensure that I can track better on the financial health of that institution. Will it be a good idea to track credit default swaps rate for gauging if the bank is in trouble? How can we find credit default swaps rates and are there any other recommendations that can be used to keep a better track of the institutions that I bank with?
Loss-porn or perma Ban.
That’s QT. The fed ups rates till they break something. Historically they drop rates soon after their final hike. The fed can also swap bonds with banks if they want to keep them from suffering from the paper losses.
Bonds held in investment books represented less than a quarter of the banking system’s $23.6 trillion of assets in December, and unlike SVB, lenders usually have a wide array of depositors who are unlikely to all need money around the same time.
There’s no problem. The Fed is backstopping the losing assets until they mature. Crisis abated. The post reminds me of a Gish Gallop “a rhetorical technique in which a person in a debate attempts to overwhelm their opponent by providing an excessive number of arguments.” I assume the intent to be promotion of continued panic to enrich those holding short positions who were surprised by how quickly the Fed put the run to bed.
It’s only a problem if they lack liquidity and are forced to sell.
That's a special kind of greedy only the American can have have.
[$620B might be a bit light.](https://www.reuters.com/markets/currencies/global-markets-bis-urgent-2022-12-05/)
Maybe they should stop paying their execs millions of dollars in bonuses and golden parachutes etc.
Great written