Bank share falls

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 Offwidth 10 Mar 2023

Anyone know more about how serious these big falls in bank shares could be?

https://www.theguardian.com/business/live/2023/mar/10/uk-gdp-economy-januar...

https://www.cnn.com/2023/03/09/investing/stocks-daily-update/index.html

https://www.coppolacomment.com/2023/03/silvergate-bank-post-mortem.html

It looks like intervention might even be needed  to prevent a potential domino effect... more taxpayer money bailing out poor bank management practice due to inadequate regulation?

14
 neilh 10 Mar 2023
In reply to Offwidth:

No more than what is going on in the stock market generally. Its been volatile for sometime.Up and down like a yoyo.

2
 mondite 12 Mar 2023
In reply to Offwidth:

Those two specific banks are screwed and due to how specialised they were that does cause problems for those specific market areas served by them (although in silvergates case that the sector was already screwed is why the bank is in trouble). However it does seem unlikely to turn into a wider problem for banking in general.

 henwardian 12 Mar 2023
In reply to Offwidth:

The little one was a pretty specialist case and yet another good object lesson in what happens when you open yourself up to the gigantic risks associated with the crypto sphere. It is a tiny bank that only had a few billion dollars, so the losses will be negligible but it will provide a good exemplar for everyone else of what happens when you use normal banking rules with crypto clients. And maybe that will help keep traditional banking away from the crime-ridden black tar heroin scam shi*pile that is crypto. (yes, still a bank run, but if all your depositors are crypto companies, you get what you deserve).

The bigger one was a bit different.

It wasn't due to poorly managed banking or lack of regulation, it was due to a run on the bank, necessitating the banks liquidation of certain assets at a very inopportune moment, resulting in big losses.

Any bank can be forced into liquidation if the run on the bank is sufficiently large, that is nothing to do with management of the bank or strength of regulation, it's an inevitability of the combination of mass panic and the model that all banks are run on.

Stripping all the complication away, banks take money from depositors like you and me and lend that money, or invest it, in governments and companies and other misc things. They keep enough of the deposits as cash at any one time to, hopefully, pay out for any withdrawals.

If you want a bank to 100% invincible, you need to keep 100% of the deposit money in cash so that if 100% of the customers want to withdraw all their money, they can. But the fundamental problem with this is that obviously the bank is not making any income, so it can't even pay an employee, let alone make a profit.

Banks only work because people believe they work

1
 lowersharpnose 12 Mar 2023
In reply to Offwidth:

The clever management as SVB invested a big chunk of customers' deposits in some US treasury bonds which fell over the last year or so (I don't know the particulars). 

As SVB customers made withdrawals, some of the bonds had to be sold at a loss ~$2b.

This weakens SVB, word gets out, more investors want out. etc

 neilh 12 Mar 2023
In reply to Offwidth:

It was a standard run on a bank when depositors got nervous. American regulators have stepped in which illustrates that the regulation works. 

1
OP Offwidth 12 Mar 2023
In reply to neilh:

Nothing to see here?

Funny that the chancellor and shadow chancellor both indicated the opposite on Kuensburg this morning. A potential big hit on many business startups that may need government intervention.

3
 lowersharpnose 12 Mar 2023
In reply to Offwidth:

The other bank was Silvergate. 

This was a crypto lender and a lot of that whole market has gone tits up following FTX and the revelation that 'The Emperor Was Wearing No Clothes' for most/all crypto.

The crypto fallout is not over. But, I think the effects in the wider, real world should be small.

 wintertree 12 Mar 2023
In reply to neilh:

> American regulators have stepped in which illustrates that the regulation works. 

It’s not so much “regulation” as “picking up the pieces” though, is it?  If their regulation worked, this wouldn’t have happened…

Not what tech start ups need after the knock on disruptions from covid and then recent inflation.  

 AJM 12 Mar 2023
In reply to wintertree:

> > American regulators have stepped in which illustrates that the regulation works. 

> It’s not so much “regulation” as “picking up the pieces” though, is it?  If their regulation worked, this wouldn’t have happened…

I don't know about the US banking regime, but financial regulation often isn't a "no failure" model, more of a "no disorderly failure" or "no contagion" sort of model.

Insurance is obviously more my bag, but if you look at the European solvency regime it's aimed at the 99.5th percentile (1/200) level with a whole bunch of stuff in place to get companies to do recovery/resolution (returning back to covering solvency/dealing with a permanent inability to restore solvency cover respectively) planning.

Ive not really followed the specifics of this case at all in terms of whether there's more or sooner things they could have done, this is only a general comment.

 neilh 12 Mar 2023
In reply to wintertree:

More articles on this subject are available with the New York Times. Worth reading to get a better view  of what happened and the regulatory steps etc which are going on there.this includes the  scheme which takes over management of the £175 billion on deposit in the US. 
 

I reckon the biggest impact will be in crypto currency , but that has always been financially risky in the first place. 
 

2
OP Offwidth 12 Mar 2023
In reply to wintertree:

Exactly. The organisations representing them are quite happy with proposed actions (and quite reasonably so), but inevitably some public money will probably go into some companies doomed to fail anyhow. One thing I was interested in but haven't seen info on yet was if this bank wss using leveraged bonds (as the pension funds that got into trouble after the Truss debacle were).

https://twitter.com/Coadec/status/1634841412931059714

Post edited at 14:41
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 mondite 12 Mar 2023
In reply to Offwidth:

>  One thing I was interested in but haven't seen info on yet was if this bank wss using leveraged bonds (as the pension funds that got into trouble after the Truss debacle were).

The main problem for the silicon valley bank seems to have been more to do with they had brought lots of long term bonds which would have been fine if they had been held to maturity plus a specialisation in the tech sector.

The raise in interest rates started to reduce the money being pumped into the start ups by VC companies. So the starts up had then started to draw more money out of the bank with the nasty sting in the tail that those same interest rate increase had reduced the immediate saleable value of the bonds.

So they took a rather large loss when selling some and once that got out voila banking run.

Whereas Silvergate was basically the crytobank so was just juggling bottles of nitroglycerin blindfolded.

Post edited at 20:26
OP Offwidth 12 Mar 2023
In reply to mondite:

Loving that last image.

 wintertree 12 Mar 2023
In reply to AJM:

> more of a "no disorderly failure" or "no contagion" sort of model.

That’s a good way of looking at it, thanks.

 lowersharpnose 12 Mar 2023
In reply to mondite:

UnHerd's Freedie Sayers : David Sacks: How bad will the Silicon Valley Bank collapse be?

youtube.com/watch?v=ipyybO_OCNE&

OP Offwidth 13 Mar 2023
In reply to lowersharpnose:

Cheers ( just wish it was in an article to read in a few minutes rather than a 45min video).

The line is similar to the logic I heard last year in various places ( including on the other channel) that there was an upper limit to the FED using interest rates to control inflation as at some stage it would start to hit the bond market and risk generating large losses in institutions and if that happened then government would need to back pedal fast. I'd heard more recently worrying stories that  bonds in US banks could already be looking at collectively half a $ trillion losses.....this now seems, according to these reported announcements, now realised (at $620 billion collective loses across US banks for just one bond category!).

I asked what I did in my OP as state intervention seems necessary, as fast as possible, as soon as any banks start to topple due to this problem with bonds. If this is happening it's a huge government and regulatory failure....  just another factor picked up in that video is this bank was A rated by Moodys last week.

I'm still reeling from finding many of our UK pension funds had leveraged bonds, making a cautious investment have magnified risk..... the only good news being it did for Truss and co.

2
 neilh 13 Mar 2023
In reply to Offwidth:

Some of us will be looking at the opportunities this creates ….

4
 SDM 13 Mar 2023
In reply to neilh:

So many shares suspended this morning.

There'll definitely be some opportunities created for the brave and well informed. 

 SDM 13 Mar 2023
In reply to Offwidth:

Shows how little has been learned since 2008.

Have they not looked at all at the bond market for the last 2 years? It's been obvious for some time that any company with significant liabilities and significant exposure to long term bonds is in real trouble.

It was just a question of when it fell apart, not if. 

 dread-i 13 Mar 2023
In reply to Offwidth:

>... as at some stage it would start to hit the bond market and risk generating large losses in institutions

Not just institutions. Also soon to be pensioners in target date funds.

As one moves into retirement, they allocate more to bonds and gilts. Traditionally these are seen as safer than stocks. However, they have fallen sharply, taking lots of people money with them. 

Yet another reason to thank the tories and Ms Truss.

https://inews.co.uk/inews-lifestyle/money/pensions-and-retirement/pensions-...

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 AJM 13 Mar 2023
In reply to dread-i:

One of the reasons funds move into bonds as people near retirement is because it's more similar investments to the types firms invest in to provide retirement annuities and therefore it acts to stabilise the value of the annuity you actually get.

The value of the bonds may fall but the annuity rate you can get when you convert to an annuity goes up and offsets it, in theory. 

OP Offwidth 13 Mar 2023
In reply to SDM:

It's hard to think otherwise in my view. Guardian business live is hardly the best barometer for such things but there are two notable items this morning:

Regional banks are identified as being at significant risk   (including  details on First Republic Bank liquidity issues requiring government assistance and it's shares having lost half their value). 

The impact on space for more rate hikes to control inflation...I'd heard quite a bit about this relating to bond risks last year (but didn't know anything about leveraged bonds being used in UK pensions, despite being very interested in DB pensions as a public good). Its the first time I've seen anything like this on Guardian live:

>Policymakers could now be warier of breaking something else in the financial system, by tightening monetary policy much further. That’s because the steep increases in borrowing costs over the last year or so have pushed up the yield (or effective interest rate) on government bonds and mortgate-backed securities, which lowers their price. That lead to SVB suffering a $1.8bn loss when it sold its $21bn package of securities last week, following an increase in customer withdrawals. Investors have cut their expectations for future interest rate rises on both side of the Atlantic. For example, another quarter-point rate rise by the Bank of England this month to 4.25% is only seen as a 66% chance this morning, from an almost certainty last week. Rates are no longer expected to rise above 4.5% this year. Expectations of future interest rate rises in the US have also been dampened, having jumped last week after hawkish talk by Federal Reserve chair Jerome Powell.

1
 dread-i 13 Mar 2023
In reply to AJM:

>The value of the bonds may fall but the annuity rate you can get when you convert to an annuity goes up and offsets it, in theory. 

Agreed, but in practice many people will be using drawdown.

I think the notion of safe(er) asset classes might require some revision. Not just amongst banks, but also anyone with a pension.

 AJM 13 Mar 2023
In reply to dread-i:

Yes, if what you want to do is stabilise the cash value of what you can draw down then logically you need to invest in cash (or bonds if you are only living off the income stream per below). But that rather defies the point of drawdown in the first place.

If you're happy to take the income spinning off your pot as the amount you draw down then prices don't matter, but most need to draw down the capital as well.

OP Offwidth 13 Mar 2023
In reply to dread-i:

Certainly when you take such safe(r) assets as UK DB pension funds did and then leverage them up to make them less safe than other so called risky assets in order to meet earnings requirements of a broken DB valuation methodology.

 mondite 13 Mar 2023
In reply to SDM:

> Shows how little has been learned since 2008.

Perhaps or perhaps given the CAO of silicon valley bank was the CFO of Lehman brothers when it collapsed possibly the wrong lessons were learnt.

OP Offwidth 13 Mar 2023
In reply to mondite:

Guardian live, latest (14.56 GMT):

>Biden fails to stop market selloff

>Joe Biden’s words of reassurance today have done little to calm markets as “worries raced around that other smaller US banks could become the latest dominos to fall”, says Susannah Streeter, head of money and markets at Hargreaves Lansdown:

>Streete explains: His admission that fresh regulations may be needed to stop further failures exposes weaknesses in the current system and now lawmakers will be asked to toughen the rules. So, even though the collapse has centred on a small tech-focused corner of the financial system, the fall-out risks spreading. The era of cheap money has hurtled to an end and investors are waking up to some dramatic highly unintended consequences. The wider banking system will bear the brunt of the bail out of banking customers, as the money will come from fees institutions pay into the deposit insurance fund. The realisation that regulatory action isn’t stopping the rot has led to sharp falls in some of Wall Street’s biggest banking names in early trade such as Wells Fargo down 7.5%, Citigroup down 6%, and Bank of America down 7%. Despite the pretty bold regulatory action investors have still been shaken by the events of the past few days and are highly nervous about spilling over and creating pools of fresh problems. The freefall of shares in a raft of smaller lenders including First Republic bank, Western Alliance Bancorp and PacWest Bancorp shows the extent of the contagion concerns with shareholder confidence evaporating.

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OP Offwidth 13 Mar 2023
In reply to mondite:

Robert Reich on poor regulation's impact on the current crisis.

https://www.theguardian.com/commentisfree/2023/mar/13/svb-collapse-2008-fin...

...and Joseph Stiglitz on a wider look at the malaise

https://www.theguardian.com/business/2023/mar/13/silicon-valley-bank-failur...

Post edited at 16:37
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OP Offwidth 14 Mar 2023
In reply to Offwidth:

Why Biden's 'non-bailout' is really a bailout and will impact tax payers.

https://www.theguardian.com/business/2023/mar/13/silicon-valley-bank-collap...

3
 mondite 14 Mar 2023
In reply to Offwidth:

Its been fun reading some of the tech press/forums. All those VCs who like minimal government suddenly deciding it does have a place when it comes to making sure the companies they had invested in and, in some cases, required to bank with SVB dont go under.

 neilh 14 Mar 2023
In reply to mondite:

Yep, classic.

 neilh 14 Mar 2023
In reply to Offwidth:

Bailout is a better used expression if the shareholders are protected and in this case they are going to lose and also face serious shareholder class actions.

I am not sure that protecting the deposits which are held by the bank can really be classed as a bailout. More just sensible practise unless you want all their commerical customers to go bust as they have no access to cash to pay the bills etc etc. I do not think that most people would want that scenario.

It is perhaps time that the regulatory authorities should make it clear that money on deposit is protected instead of this paltry limit of £85k and $250k in the USA.

1
 George_Surf 14 Mar 2023
In reply to mondite:

I wouldn’t bet this is an isolated case. Lots of banks are exposed to the same issue. It wasn’t a problem for SVB had they not had a run on the bank; sounds like they had the assets but were forced to sell slow maturing governments bonds early, at a loss (around 10% off the top of my head?) and that caused more concern which waterfalled to a full run on the bank. I wouldn’t be surprised if other banks exposed to the same situation fared the same. Sounds like the people with money in there will get it back but the fed isn’t bailing out the bank, if you get me. 
 

if you want to know what banks may be ok, this website might help;

https://www.saferbankingresearch.com/

SVB I think was said to have some problems but was not the riskiest of all. Apparently the stress tests the US gov uses to make sure it’s banks are safe are inadequate. It doesn’t take in to account unrealised losses on gov bonds and rise in interest rates has caused these assests to fall in value. Something like that anyway… 

Post edited at 11:33
 George_Surf 14 Mar 2023
In reply to Offwidth:

The FED can’t afford to stop raising interest rates until inflation is under control. They’ve said as much for over 6 months. If they pivot now Powell will look like he’s saying one thing and doing another. I thought 50bps was on the table last week but now people are saying a pause!! 25bps at least, anything less would be a joke 

In reply to Offwidth:

> Why Biden's 'non-bailout' is really a bailout and will impact tax payers.

Did you even read that? It says it won't unless things that haven't happened happen.

Please start reading about it in something more qualified to talk about it. Try here: https://12ft.io/proxy?ref=&q=http://www.ft.com/content/56a8df6b-3466-45...

OP Offwidth 14 Mar 2023
In reply to Longsufferingropeholder:

Yes I read it and the FT article applies the same sophistry. Whether it will be from a direct bailout (from government funds) or increases in the insurance fund (that looks flimsy on this scale of problem) or just extra regulatory costs on banks that get passed onto customers, taxpayers will pay. The critics never said the extra cost to citizens would necessarily be from extra tax. Shit regulation that leads to market failures that need a fix to avoid contagion costs us all money. 

2
 MG 14 Mar 2023
In reply to Longsufferingropeholder:

You mean the sky's not going to fall for the third time this month??

OP Offwidth 14 Mar 2023
In reply to George_Surf:

>The FED can’t afford to stop raising interest rates until inflation is under control.

They can't afford to 'bail out' more and more institutions facing liquidity issues through holding bonds or mortgage backed securities either. We will see who is right soon enough.

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OP Offwidth 14 Mar 2023
In reply to MG:

The sky doesn't fall because that's unthinkable, so governments act. The scaffolding to shore it up just gets more expensive.

3
 neilh 14 Mar 2023
In reply to Offwidth:

The sky would have only fallen on the tech sector in this case. Amongst that lot the strong tech companies would have survived anyway.

OP Offwidth 14 Mar 2023
In reply to neilh:

A whole swathe of US regional banks have similar weaknesses and not all with major tech deposits.

3
 neilh 14 Mar 2023
In reply to Offwidth:

yep it’s a strange system there. 

 George_Surf 15 Mar 2023
In reply to Offwidth:

Im with you on the sky not falling. Just seems like theyre building an even bigger house of cards to me. At some point it won’t be maintainable 

In reply to Offwidth:

'The regulation/insurance fund for [sector] is paid for by the [sector] companies who will pass the cost on to their customers who are also taxpayers so therefore it's a bailout paid for by taxpayers' gets a raised eyebrow from me. Who pays for it in Offwidthtopia?

1
OP Offwidth 15 Mar 2023
In reply to Longsufferingropeholder:

I sincerely apologise for sticking up for the rights of the population to be presented with honest and clear information about the impact on them. Sophistry about it probably not being a direct tax impact (impossible to say anyway) seems wrong to me. 'Bailing out' depositors seems fair usage to me.

Current US capitalism seems to have maximised gouging from everyone but the super rich, thanks to the impact of Trump's deregulation and Biden having been rather grid-locked. That the odd banker or major shareholder loses a load of money or a genuine rich crook occasionally goes to jail isn't much of a recompense.

7
 neilh 15 Mar 2023
In reply to Offwidth:

Yep US capitalism is mysterious at times when it also  produces the likes of Patagonia and a resonable chunk of the work force in employee owned businesses. It is both dynamic and soul searching at the same time.

OP Offwidth 15 Mar 2023
In reply to neilh:

I guess my views have been coloured somewhat by witnessing armies of homeless on the streets of SW US cities and horror stories of seemingly financially solid middle class families facing sudden bankruptcy, due (thanks to insurance exclusions or redundancy) being unable to pay medical bills.

The idea we move further in that direction terrifies me, even thought things are hardly great for the poorer half of the population in the UK.

It's not all bad... I got to know a good number of  'mom and pop' businesses, around JT in particular, and their ethos (especially giving back to their community) was often admirable, despite tight margins.

In the meantime Credit Suisse's troubles has tanked shares again.

Post edited at 11:37
In reply to Offwidth:

Are you asking for more regulation or less? I can't tell. You seem convinced that one or other will sweep away all the downsides of capitalism, but from what you've said I can't work out which it is.

 neilh 15 Mar 2023
In reply to Offwidth:

Credit Suisse has been a long standing basket case.

Every big business is evil..........I think not.

 neilh 15 Mar 2023
In reply to Offwidth:

By the way there is an excellent article behind the paywall on the NYT about the demise of SVB- Inside the collapse of SVB.

The bank was not gouging profits, also the rating agency Moodys had put them on a health warning a week or so before the collapse( probably did not help in causing a run from those customers following Moodys).

Interesting article as always, NYT is just so much better for news.

OP Offwidth 15 Mar 2023
In reply to neilh:

Who claimed SVP were gouging? I think the US economy enables gouging of ordinary people from numerous fronts. Poor Americans have lost income and the middle income group, have seen significant declines since the 2008 crash.

https://www.pewresearch.org/social-trends/2020/01/09/trends-in-income-and-w...

I thought Moody's changed their rating last Wednesday ... a few days before the bank crashed the bank was still A rated.

4
OP Offwidth 15 Mar 2023
In reply to Longsufferingropeholder:

I'm asking for approproate regulation  (without which I think capitalism can't function)... including: a reversal of the changes Trump made on finance and related environmental protections; more regulation on smaller banks such that there is no incentive for depositors to run for the top 14 in times of trouble for those banks; and a good look at the impact of fiscal tightening on organisations with significant holdings of bonds. 

1
 redjerry 15 Mar 2023
In reply to Longsufferingropeholder:

More, but especially more active, regulation might help, but at this point I think it's fairly clear that our (the US that is) financial system is failing in its most basic functions.
This isn't a short term thing, we've had a long series of entirely avoidable financial system crises starting with the S&L debacle in the early 90's. The entire period has been marked by god-awfull asset allocation and risk management.
I think its long past time to start thinking about other types of institutions, modes of organization, etc. that could provide some of the same functions.

PS: Airing at the moment is a really good PBS Frontline on the build-up to the current mess.
"Age Of Easy Money"

Post edited at 15:15
 neilh 15 Mar 2023
In reply to redjerry:

Prior to that you rarely  heard of a banking crises until long after the event. Its only because of transperancy etc that you now hear of these things. Until then it was quietly sorted out with discreet meetings and behind closed doors deals to avoid bank runs.

I am still not sure which is the right way of dealing with these things.

 StuPoo2 17 Mar 2023
In reply to henwardian:

> The bigger one was a bit different.

> It wasn't due to poorly managed banking or lack of regulation, it was due to a run on the bank, necessitating the banks liquidation of certain assets at a very inopportune moment, resulting in big losses.

> Any bank can be forced into liquidation if the run on the bank is sufficiently large, that is nothing to do with management of the bank or strength of regulation, it's an inevitability of the combination of mass panic and the model that all banks are run on.

Respectfully, the root cause of the run on SVB was caused by gross mismanagement at the SVB end.  Primarily it was caused because the team at SVB failed, miserably, to asses and manage the risk caused by a mismatch in their assets vs liabilities. It's called duration risk and its 100% the fault of SVB - it's banking 101.   SVB took on masses of deposits in the post-covid boom, invested them in long duration treasury bonds bought at the peak of the bond market which then crashed in value in the one the most dramatic bond price crashes in recorded history leaving them with insufficient funds to cover their deposits.  Banking 101. 

But that isn't exactly why there was a run - for that we need to look at deposit insurance.  Banks, inc in the UK, have deposit insurance which means that if the bank rolls over the depositors will be made whole up to a certain amount.  SVB is however unique amongst banks - in that it banked almost zero retail customers and instead banked, primarily, small, growing & mature tech companies coming out of the bay area.  The deposit insurance in the US is $250k - meaning everyone with a balance up to $250k would be made whole again if a bank became insolvent.  The problem at SVB was that 93% of their customer base had a holding in excess of $250k and the vast majority to the tune of 10's or 100's of millions.  i.e. their deposited were not insured - they weren't going to get their money back.

So that begs the question:  In the situation where a bank is about to go under, because of gross mismanagement of duration risk (SVB's fault), and you have a balance in there of $10m and insurance for only $250k of it .. what do you do?  ANS = you get your money out of there ASAP .. and that's why they had a run.  

The last question is why did the FED et al step in and save all the depositors of SVB when they had insurance anyway?  What was the point in the $250k insurance cap if they FED is going to step in and save everyone anyway?  ANS is 2x fold.  1/ if they didn't step in they were about to cripple the US tech start up community coming out of California and 2/ they wanted to stop the very same thing happening at every other small regional bank across the US.  On 1/ they were certainly successful, on 2/ there is a flight to safety on now ... only time will tell whether they were successful.

I expect we will see the depositor insurance ceiling lifted significantly on the back of this.  £250k is useful only for retail customers - they need non-individual depositor insurance that is many fold higher.

SVB definitely at fault.

Post edited at 11:54
OP Offwidth 17 Mar 2023
In reply to StuPoo2:

I'd say the FED and regulators were more at fault for ignoring the impact of fiscal tightening on bonds, for A rating SVB, and for allowing banks to such make 101 errors, especially in such a nationally crucial investment area. Banking 101 should apply more to those regulating the industry, let alone the stupidity of being bullish about no limit to the use of interest rises to tackle inflation (in the face of warnings about the impact of those rises on the risks to bonds and mortgage-backed securities).

Truss claims no one told her government about the UK DB pension industry risks due to bonds.

3
 StuPoo2 17 Mar 2023
In reply to Offwidth:

How about we agree that SVB were guilty of gross mismanagement and the US regulatory framework/bodies guilty of failing to spot a bank(s) failing right in front of them.

I don't necessarily agree that its the FED's responsibility to manage duration risk at an individual bank - that's the banks responsibility and they have people who's day job it is to do so.  But we can agree to disagree on that one.

A much higher depositor insurance ceiling for non-individuals (companies) would likely have avoided this situation happening altogether.  I expect that we'll see that change taken onboard in the coming years. 

Think about this - monthly payroll for even a small tech start ups will be way in excess of the depositor insurance.  Ave 140k pa for software engineer in silicon valley.  $11.5k monthly salary => monthly pay roll alone for 50 engineers = $570k per month.  Its no where close to what's needed.

 henwardian 17 Mar 2023
In reply to StuPoo2:

Since my post, I've read and listened to a bit more about SVB and I agree that I didn't foist enough blame onto SVB, having too many long-dated treasuries does sound like a risk-assessment failure. What I would say is that if their intention was genuinely to hold the bonds to completion and if they were able to do so, they would not in fact have lost money. There was a specifically defined and guaranteed known point in the future where they would have been able to exit their position, regain 100% of their capital and keep the small percentage interest payments they were getting. Blaming them for buying bonds at the top of the market is just the 20:20 hindsight bias, it's the same thing as questioning why people were buying stocks just before a crash. I do accept that buying too many bonds over too short a time period because of the huge influx of deposits was an error... I'm not sure what the best way to smooth out the risk when you suddenly have a huge amount of extra cash to invest in a very short time is but I'd expect a bank to know.

To me, if you are a small or growing tech business and you decide to leave 10s or 100s of millions in a deposit account at a small bank and worse yet you decide to leave almost all your money in one institution, all the while knowing there is no insurance (except the 250k), that is stupid and a failure of risk management too. My business banks with a small bank. I don't know or much care if it could fall over tomorrow because I don't keep more than £85k on deposit. If I had millions, I'd retire to a nice sunny.... wait.., I'd make sure it was somewhere safer with a really boring, really big bank and I'd also either a) spread it around a few banks or b) get some kind of insurance of the deposited money - I insure my company infrastructure, it is logical to also insure its cash.

SVBs assets are not worth nothing, after everything is liquidated, I'd expect the actual cost to make everyone whole will be relatively small. I expect that they will get a _lot_ of bang for their buck too; saving the California tech industry should yield a lot more profit/tax/whatever than it costs to top up SVB enough to make depositors whole.

There is a bit of a contradiction in your last statement. You have pointed out the errors in risk management that led to SVBs failure but you are worried that letting them fall without a net to catch them would result in a wave of other small bank collapses... Does this mean that there are small banks all over the place that also suck at risk management? If so, is it really that SVB failed by doing something badly, or did they just fail because they were doing what banks do and were unlucky?

If lots of different banks are ignoring risk-management or doing it badly in the name of greater profit, are we not rewarding this practice by catching any who fall? Where does the process end, because it sounds suspiciously like it might end with something like the 2008 crash where suddenly every bank is a sticky wicket because they all got too risky and the combined bill has a massive knock-on effect on society.

 neilh 17 Mar 2023
In reply to StuPoo2:

Also begs the question of those high paid individuals at their clients who did not manage their own treasury risks.

OP Offwidth 17 Mar 2023
In reply to StuPoo2:

Sure I'm not ignoring the blame for the bank (as well), but quite a few banks did the same thing and nearly all risked a domino effect in any panic due to the limit on deposit insurance causing customers to run to the big 14 (which is still happening a bit even now... see the First Republic rescue). As I said, the national strategic importance of SVB should also have meant a more careful regulatory view, especially when rates were on the rise.

Governments are responsible for regulation to avoid and mitigate crises (where they have proved to be too lax yet again) and clearly need to think more carefully about fiscal policy,  let alone trigger a problem (that on bonds and interest rates even I, as just an interested punter, first saw warnings about last year). I mainly blamed the FED on being bullish on interest rates, in the face of what should have been known associated risks....the EU have learnt from that mistake and can repeat it ! Finally, yet again, the ratings agency labels have proved to be a sick joke.

All this mess costs the public somewhere down the line, even if its due to lower growth or tighter lending.

1
 mondite 17 Mar 2023
In reply to Offwidth:

>  I mainly blamed the FED on being bullish on interest rates, in the face of what should have been known associated risks....the EU have learnt from that mistake and can repeat it !

The FED had been warning about their plans to put the rates up for a long time so I am not sure its reasonable to blame them for this banks incompetence.  As you say you saw the warnings last year so the professionals should have been all to aware.

It would be rather dangerous if the option to raise or lower interest rates was restricted because of some banks incompetent risk management.

 Toerag 17 Mar 2023
In reply to neilh:

> Also begs the question of those high paid individuals at their clients who did not manage their own treasury risks.

As is often the case, those at the top of the corporate tree aren't actually that smart.

 StuPoo2 17 Mar 2023
In reply to henwardian:

I ♥ UKC deep discussion. 

> Since my post, I've read and listened to a bit more about SVB and I agree that I didn't foist enough blame onto SVB, having too many long-dated treasuries does sound like a risk-assessment failure. What I would say is that if their intention was genuinely to hold the bonds to completion and if they were able to do so, they would not in fact have lost money. There was a specifically defined and guaranteed known point in the future where they would have been able to exit their position, regain 100% of their capital and keep the small percentage interest payments they were getting. Blaming them for buying bonds at the top of the market is just the 20:20 hindsight bias, it's the same thing as questioning why people were buying stocks just before a crash. I do accept that buying too many bonds over too short a time period because of the huge influx of deposits was an error... I'm not sure what the best way to smooth out the risk when you suddenly have a huge amount of extra cash to invest in a very short time is but I'd expect a bank to know.

I agree with your point re: held to maturity - however I don't agree this being the same as 20:20 hindsight after buying at the top of the market.  A bank is not an traditional investor who can simply sit on their investment to ride out a rough period and eventually turn a profit.  Instead a bank knows, when it is buying those treasuries, that it will need to liquidate them if their depositors ask for their cash back - and that risk is one of the most basic risks that every western bank needs manage on a daily basis.  Had SVB bought shorter duration, 2 yr, treasury bonds (which they could have) they would not have been anywhere near as exposed as they found themselves.  SVB choose to buy long duration bonds - it was their decision to do so.  

Secondarily in this - SVB did have a choice at the very beginning.  They had a choice about whether they wanted to accept the large inflow of deposits and in whether in doing so they could risk manage the situation this created for them.  You don't need to take the deposits/you don't need to open new accounts/you don't need to welcome new clients - SVB did - and they boasted about doing so.  For me - that's greed.

> To me, if you are a small or growing tech business and you decide to leave 10s or 100s of millions in a deposit account at a small bank and worse yet you decide to leave almost all your money in one institution, all the while knowing there is no insurance (except the 250k), that is stupid and a failure of risk management too. My business banks with a small bank. I don't know or much care if it could fall over tomorrow because I don't keep more than £85k on deposit. If I had millions, I'd retire to a nice sunny.... wait.., I'd make sure it was somewhere safer with a really boring, really big bank and I'd also either a) spread it around a few banks or b) get some kind of insurance of the deposited money - I insure my company infrastructure, it is logical to also insure its cash.

Couldn't agree with you more.  You're absolutely right.

> SVBs assets are not worth nothing, after everything is liquidated, I'd expect the actual cost to make everyone whole will be relatively small. I expect that they will get a _lot_ of bang for their buck too; saving the California tech industry should yield a lot more profit/tax/whatever than it costs to top up SVB enough to make depositors whole.

Yeah .. I probably agree with you there too.  Wise investment to bail that gang out.  They are likely the tax payers of the future.  (I can understand the moral outrage though too)

> There is a bit of a contradiction in your last statement. You have pointed out the errors in risk management that led to SVBs failure but you are worried that letting them fall without a net to catch them would result in a wave of other small bank collapses... Does this mean that there are small banks all over the place that also suck at risk management? If so, is it really that SVB failed by doing something badly, or did they just fail because they were doing what banks do and were unlucky?

ANS = Yes, there is/was a very real risk that if SVB had made this mistake then other small banks almost certainly had made the same mistake also.  Hence the flight to safety now happening as many depositors choose to exit the small US banks and get into JPM, BoA, Citi, Wells Fargo - the big systemically too big to fail banks that everyone know is guaranteed a bailout if anything goes wrong there.

The problem IMO is that lessons, after having been learned many decades ago, do not remain learned for ever.  The FED fund rates have been zero for the majority of the time since 2008, less 2016->Covid where they climbed in a very predicable fashion.  Since 2008 this hasn't been a risk the banks have had to worry much about.  Everyone unlearned that fact that the FED can tighten and it can tighten very fast when if it needs to - and that that is a risk as a bank you need to manage.  

> If lots of different banks are ignoring risk-management or doing it badly in the name of greater profit, are we not rewarding this practice by catching any who fall? Where does the process end, because it sounds suspiciously like it might end with something like the 2008 crash where suddenly every bank is a sticky wicket because they all got too risky and the combined bill has a massive knock-on effect on society.

SVB should absolutely have been allowed to fail, the directors should be prosecuted for gross mismanagement and share holders should loose 100% of their investment.  That's how capitalism works.

The problem this time round was depositor insurance.  It's not the depositors fault that their bank was mismanaged - so why should they lose their deposits - that would appear be an immoral outcome.  Depositor insurance is there so that we can allow banks to fail, allow share holders to be zero'd out, allow us to prosecute the directors who mismanaged the bank but protect the innocent depositors - up to a reasonable amount.  (Infinite deposit insurance cannot be the answer either .. that's the just the same as a bail out.  If you know 100% of your deposits are 100% safe then you have no incentive to behave - you'll take risks.  Deposit Insurance is meant to balance the need to make banks behave with the needs to make, most, depositors whole again when banks do not, while still allowing the banks to fail.)

This only works if the deposit insurance is set at the correct level.  SVB exposed to everyone the truth that it is wildly too low - and that's why they had to step in and save the depositors at SVB.

Cheers

OP Offwidth 17 Mar 2023
In reply to mondite:

It's more dangerous to not act when poor risk management discovered in some institutions otherwise might lead to a crash. Better still to regulate and force them to improve liquidity in advance and alongside that cut the incentives for depositors to run to the big 14.

 StuPoo2 17 Mar 2023
In reply to Offwidth:

> Sure I'm not ignoring the blame for the bank (as well), but quite a few banks did the same thing and nearly all risked a domino effect in any panic due to the limit on deposit insurance causing customers to run to the big 14 (which is still happening a bit even now... see the First Republic rescue). As I said, the national strategic importance of SVB should also have meant a more careful regulatory view, especially when rates were on the rise.

Think I probably agree with you - that was their risk management miss.  By size of deposits, SVB wasn't considered strategically important, it had ~1% of total US deposits across all US banks.  That's not a big bank and it wasn't considered too big to fail before it was bailed out.  That's exactly the sort of size of bank you want to let fail - while still painful its small size likely meant it ought not to have massive ripples through the rest of the banking eco system.

Certainly agree that the definition of "too big to fail" is going to have to be changed going forward.  Ex: If a bank exclusively banks a sole sector of the economy (SVB = silicon valley tech start ups), then letting that bank fail, irrespective of the size of the deposit base, is unlikely to be a good idea unless you're willing to blow up an entire sector.  

> Governments are responsible for regulation to avoid and mitigate crises (where they have proved to be too lax yet again) and clearly need to think more carefully about fiscal policy,  let alone trigger a problem (that on bonds and interest rates even I, as just an interested punter, first saw warnings about last year). I mainly blamed the FED on being bullish on interest rates, in the face of what should have been known associated risks....the EU have learnt from that mistake and can repeat it ! Finally, yet again, the ratings agency labels have proved to be a sick joke.

I don't think it's a binary decision - it's a balance of least worst outcomes.  I think the FED/any central bank does think deeply about the impact of their rate changes on a great many actors before they vote for them.  However, in nearly every western central bank they have concluded that, at the moment, the least worst outcome is to raise rates and raise them very rapidly.  The choice was presumably this or letting inflation to continue to rise beyond the 11.5% it peaked at. Personally - I think stopping inflation was the greater good.

Cheers

OP Offwidth 17 Mar 2023
In reply to StuPoo2:

Of course it's complex but I'd chose a tad more inflation over a serious risk of a crash. I'd remind you what Stiglitz said in the link above....simple thinking about FED 'deep' thinking:

>The news about the second-biggest bank failure in US history came only days after the Federal Reserve chair, Jerome Powell, assured Congress that the financial condition of US banks was sound. But the timing should not be surprising. Given the large and rapid increases in interest rates Powell engineered – probably the most significant since the former Fed chair Paul Volcker’s interest-rate hikes of 40 years ago – it was predicted that dramatic movements in the prices of financial assets would cause trauma somewhere in the financial system.

>But, again, Powell assured us not to worry – despite abundant historical experience indicating that we should be worried. Powell was part of Donald Trump’s regulatory team that worked to weaken the Dodd-Frank bank regulations enacted after the 2008 financial meltdown, in order to free “smaller” banks from the standards applied to the largest, systemically important, banks. By the standards of Citibank, SVB is small. But it’s not small in the lives of the millions who depend on it.

 StuPoo2 17 Mar 2023
In reply to Offwidth:

> Of course it's complex but I'd chose a tad more inflation over a serious risk of a crash. I'd remind you what Stiglitz said in the link above....simple thinking about FED 'deep' thinking:

> >The news about the second-biggest bank failure in US history came only days after the Federal Reserve chair, Jerome Powell, assured Congress that the financial condition of US banks was sound. But the timing should not be surprising. Given the large and rapid increases in interest rates Powell engineered – probably the most significant since the former Fed chair Paul Volcker’s interest-rate hikes of 40 years ago – it was predicted that dramatic movements in the prices of financial assets would cause trauma somewhere in the financial system.

> >But, again, Powell assured us not to worry – despite abundant historical experience indicating that we should be worried. Powell was part of Donald Trump’s regulatory team that worked to weaken the Dodd-Frank bank regulations enacted after the 2008 financial meltdown, in order to free “smaller” banks from the standards applied to the largest, systemically important, banks. By the standards of Citibank, SVB is small. But it’s not small in the lives of the millions who depend on it.

Yeah .. I hear you.  I think we're only disagreeing on where we should draw that line.  For me ... inflation is bad bad stuff and I'm happy to see them hammering it down, while I accept it's painful.

I will highlight that increases in inflation can be directly correlated to negative health outcomes.  My point is that this is a difficult balancing act.  I'm glad I don't have to make these decisions.

https://www.ncbi.nlm.nih.gov/pmc/articles/PMC4716201/

Results

... A 1% rise in inflation rate was associated with significant deteriorations (p<0.05) in 4 population health outcomes, with the largest deterioration in male adult mortality rate (0.0033 rise per 1000 deaths). Lag analysis showed that 5 years after rises in unemployment and inflation, significant deteriorations (p<0.05) occurred in 3 and 5 mortality metrics, respectively. A 1% rise in GDP per capita was associated with no significant deteriorations in population health outcomes either in the short or long term ...

 henwardian 17 Mar 2023
In reply to StuPoo2:

> Secondarily in this - SVB did have a choice at the very beginning.  They had a choice about whether they wanted to accept the large inflow of deposits and in whether in doing so they could risk manage the situation this created for them.  You don't need to take the deposits/you don't need to open new accounts/you don't need to welcome new clients - SVB did - and they boasted about doing so.  For me - that's greed.

I'm pretty sure "banking" and "greed" mean the same thing. That is an interesting practical point, I certainly know it is common for hedge funds to close their funds because their approach only works up to a certain size of money pot, but for a bank to say "no more deposits"... I've not heard of that. I'm not sure how tenable that would be when you are a publicly traded company with a supposedly fiduciary responsibility to your shareholders... You might try to explain to them that the bank needs to grow more slowly to enable it to properly invest the incoming money but I don't think bank bigwigs would ever think that way and I don't think shareholders would allow them to stay in their jobs if the bigwigs tried to do what would be seen as deliberately slowing company growth.

In the end I might say that theoretically the bosses could and should have turned away depositor money but I don't think it's it was ever a realistic possibility.

> The problem IMO is that lessons, after having been learned many decades ago, do not remain learned for ever.  The FED fund rates have been zero for the majority of the time since 2008, less 2016->Covid where they climbed in a very predicable fashion.  Since 2008 this hasn't been a risk the banks have had to worry much about.  Everyone unlearned that fact that the FED can tighten and it can tighten very fast when if it needs to - and that that is a risk as a bank you need to manage.  

Sounds about right.

> SVB should absolutely have been allowed to fail, the directors should be prosecuted for gross mismanagement

I don't know if what they did amounted to that but I guess that's exactly why we have trials in the first place.

> and share holders should loose 100% of their investment.  That's how capitalism works.

Absolutely. I haven't heard any mumblings about the share holders getting any money back and I fervently hope and assume that they will not as the bank is wound down (unless, in the very unlikely event, the banks assets, after liquidation, turn out to be greater than its total liabilities or deposits and other bills).

> The problem this time round was depositor insurance.  It's not the depositors fault that their bank was mismanaged - so why should they lose their deposits - that would appear be an immoral outcome. 

Sort of. It's a bit more grey here for me. If you are going to give someone loads and loads of money, you do your work beforehand to determine whether they can be trusted. It is fair to say that as they were regulated by [American] FCA and that should give you some confidence but with the kinds of sums people were dealing with... well, I'm kind of re-treading my point about depositor due diligence.

> Depositor insurance is there so that we can allow banks to fail, allow share holders to be zero'd out, allow us to prosecute the directors who mismanaged the bank but protect the innocent depositors - up to a reasonable amount.  

> This only works if the deposit insurance is set at the correct level.  SVB exposed to everyone the truth that it is wildly too low - and that's why they had to step in and save the depositors at SVB.

Hmm... I wonder whether a graduated scale might not work better - 100% reimbursement up to $250k and then 90% or 80% or whatever for the next $1 million and than 50% for the next $x million, etc.... Might be a better way to not completely ruin companies that make one stupid decision but also still make them responsible for banking sensibly. The real world is less of a ball pit and more of a boxing ring.

I've heard today that the EU banks are less profitable now precisely because they are really highly regulated, while non-systemic US banks are (god knows how) still basically riding around the wild west with a lasso and cowboy hat. I wonder if, especially with Biden in la maison blanche, there will be a new round of regulation of the smaller US banks. I for one can see very little reason why they shouldn't be regulated to hell and back when they are playing all their games with other people's money and expecting the state the provide liquidity if shi* starts to go sideways _and_ expecting to get all their problems taken off their hands by regulators if it all comes crashing down round their ears.

OP Offwidth 18 Mar 2023
In reply to neilh:

Glad to see you linking things that recognise there are serious structural problems here,  rather than this  just being normal market volatility.

 neilh 19 Mar 2023
In reply to Offwidth:

Touché , fair point.

Although It’s more nuanced than your view. I accept that every few years the stock market etc is going to throw a wobble as a result of issues like this or something else. That also presents opportunities. There will be another one in a couple of years time. 
 

As regards the structural issues, it’s part of the banking sector ( a small part as per the article) not all of it. And it may or may not be an issue. These things are never black and white.

I can think of alot more important structural issues that affect the U.K….productivity being far more important … than the regulations of the US banking sector. I am sure you can as well.  

1
OP Offwidth 19 Mar 2023
In reply to neilh:

I'd say you misread my view no skyfall just more scaffolding. I'm pissed off with public money burnt on bailing out banks and the hit on growth as lending reduces and fees increase. There may be more important  issues but banks should have been an easy fix. 

Post edited at 09:31
 neilh 19 Mar 2023
In reply to Offwidth:

I would guess that the overall cost of doing that is still less expensive than if the gov owned the banks and managed all those risks or even allowed the whole lot to fail.

1
OP Offwidth 20 Mar 2023
In reply to neilh: 

Coordinated action last night.

https://www.ft.com/content/12cde8bc-ddac-48ef-8563-ff4007fa7e9f

...but bank shares and oil prices still sliding  (and bitcoin up)

 elsewhere 20 Mar 2023

Are banks profitable for governments or is the tax income less than the periodic costs of bailouts?

OP Offwidth 20 Mar 2023
In reply to elsewhere:

Estimates of $25 trillion QE since 2008. That's a lot more than tax income from banks.

Larry Elliott hits the nail on the head

https://www.theguardian.com/business/2023/mar/19/silicon-valley-banks-colla...

1
 StuPoo2 20 Mar 2023
In reply to henwardian:

hello hello hello.

> I'm pretty sure "banking" and "greed" mean the same thing. That is an interesting practical point, I certainly know it is common for hedge funds to close their funds because their approach only works up to a certain size of money pot, but for a bank to say "no more deposits"... I've not heard of that. I'm not sure how tenable that would be when you are a publicly traded company with a supposedly fiduciary responsibility to your shareholders... You might try to explain to them that the bank needs to grow more slowly to enable it to properly invest the incoming money but I don't think bank bigwigs would ever think that way and I don't think shareholders would allow them to stay in their jobs if the bigwigs tried to do what would be seen as deliberately slowing company growth.

And yet ... that is exactly what all the banks were talking about 2 year ago ... it just wasn't being talked about outside of banking circles:

  1. https://www.wsj.com/articles/banks-to-companies-no-more-deposits-please-116... 9-JUN-2021
  2. https://www.economist.com/finance-and-economics/2021/03/18/americas-banks-h... 18-MAR-2021

The banks were definitely implementing techniques to reduce the amount of cash depositors were sitting upon:

  1. lower returns on cash (even talked about going negative!)
  2. Tier returns on cash i.e. 1x rate up to 1M, a different rate up to 5M, then 0% after that.
  3. Encourage clients to move out of cash into investment products i.e. money market funds - see below.
  4. Even up to and including encouraging clients to move funds into other banks.

And yes, shareholders are absolutely in favor of this behavior. Why?  Because servicing massively liquid cash depositors is not good for business - it makes the banks less profitable and investors in banks have never voted for less profitability .  1) Can't really invest cash deposits in anything in case they want it back tmw (or you can if you're SVB), 2) There is a cost to servicing cash i.e. people want to transfer it in/out, move it around, and its not easy to make any money on thatand 3) Banks typically need to hold a % of their deposit base in hard cash, i.e. 3%.  If their deposit base triples then they need triple the hard cash they hold on hand - and there is a cost to that too. 

Income zero + costs up = lower profitability.  Shareholders don't vote in support of lower profitability.

> In the end I might say that theoretically the bosses could and should have turned away depositor money but I don't think it's it was ever a realistic possibility.

While I can accept that they were likely trying not to offend clients in the process - they were 100% taking actions to reduce deposits in cash.  The exponentially enormous flow of funds into money market funds ~2020 was caused by exactly this action the banks were taking.

Take a look at this - Jan 2020 - total assets in US MMF pumped up practically $1tn /+25% in 3 months.  This was the banks starting to deal with the excess cash problem.

https://www.financialresearch.gov/money-market-funds/

> Sort of. It's a bit more grey here for me. If you are going to give someone loads and loads of money, you do your work beforehand to determine whether they can be trusted. It is fair to say that as they were regulated by [American] FCA and that should give you some confidence but with the kinds of sums people were dealing with... well, I'm kind of re-treading my point about depositor due diligence.

Yeah .. I agree with you.

> Hmm... I wonder whether a graduated scale might not work better - 100% reimbursement up to $250k and then 90% or 80% or whatever for the next $1 million and than 50% for the next $x million, etc.... Might be a better way to not completely ruin companies that make one stupid decision but also still make them responsible for banking sensibly. The real world is less of a ball pit and more of a boxing ring.

I think they'll split into 2x insurance schemes - individual and non-individual.  Existing scheme will be retained for individuals and then, as you suggest, different tiers for non-individuals with differing associated costs depending on how large your holding is.

> I've heard today that the EU banks are less profitable now precisely because they are really highly regulated, while non-systemic US banks are (god knows how) still basically riding around the wild west with a lasso and cowboy hat. I wonder if, especially with Biden in la maison blanche, there will be a new round of regulation of the smaller US banks. I for one can see very little reason why they shouldn't be regulated to hell and back when they are playing all their games with other people's money and expecting the state the provide liquidity if shi* starts to go sideways _and_ expecting to get all their problems taken off their hands by regulators if it all comes crashing down round their ears.

Yeeehaaw!!

Post edited at 15:31
 GEd_83 22 Mar 2023
In reply to Offwidth:

Big day today with the Fed rate decision (FOMC), things have started to break so it's a big decision. Do they taker a breather and pause rate rises, or do they plough ahead?

Personally I think they view high inflation as the biggest threat of all, more so than even a big recession, and so I think they'll do everything they can to keep normalising rates (I think they'll go with a 0.25% rise as expected), whilst also announcing measures aimed at at increasing confidence in the banks (rumour is they'll guarantee all deposits beyond the current limits).

OP Offwidth 22 Mar 2023
In reply to GEd_83:

I suspect the same. Problem is, it amounts to feet hard down on the brake and the accelerator at the same time. It's not just most US banks at risk, it's mortgages, pensions and various other economic areas... all dampening growth when recession is a real risk. It won't fool the markets either... loads of money to be made in spotting the next most vulnerable US bank.

Back in the UK, on a joke of mine about the country being run by psycho turnips, this morning's headline did raise a wry smile :

"Food price inflation at 45-year high of 18% amid vegetable crisis"

Post edited at 08:59
 GEd_83 22 Mar 2023
In reply to Offwidth:

Yeah, the central banks are in an almost impossible position, totally agree, they're trying to tread a very thin line. Like I said above, I think they view high inflation as the biggest threat, and so addressing it via interest rate rises (the only tool they have really) is the absolute priority. I don't think they're too concerned about a recession in that context, as I think they view a recession as the lesser evil compared with stubborn high inflation, and a recession was always inevitable anyway once the time came for the 08/09 emergency life support to be unwound. I actually think the central banks would welcome one in many ways. What they obviously don't want though is systemic banking instability. So I think they (the Fed) will go with a 0.25% rise (as doing anything less than this will cause the $ to tank and for inflation to therefore increase) whilst simultaneously announcing measures to increase confidence in the banking system. But difficult to call, it's also likely that they might pause for thought for a month or two as well.

 GEd_83 22 Mar 2023
In reply to GEd_83:

As an aside, thinking back to November-December, there was all this talk of inflation having peaked, and talk of rates dropping back down to emergency low levels again. I always thought that they would be proven to be wrong, and that inflation would prove to be very stubborn. Powell's super hawkish speech (basically rates are going higher and for longer) about 3 weeks ago backed up my suspicions from nov-dec that they were wrong on inflation having peaked, and now the latest UK figures also add weight to this.

As discussed above, the only thing that can halt this is if systemic instabilities that threaten the entire financial system start to surface (these small bank failures may or may not be the start of this, time will tell). The worst of all worlds would for us to be in a position whereby they can't raise rates any further without causing severe systemic instability/collapse, whilst being stuck with pretty disastrous 10%+ inflation due to that inability to raise rates any further. Lowering rates and printing money again would just exacerbate inflation. No idea what the answer would be in that scenario, I don't think there would be an answer to it, the consequences of inflation at 10% (or above) for years would be pretty unimaginable for everyone.

In that scenario, an end to the war via some kind of strategic international agreement between NATO and Russia/China, would be the only way out in my view. 

OP Offwidth 22 Mar 2023
In reply to GEd_83:

I have bigger worries. The US isn't Japan and the impact of stagflation in the face of significant populism could lead to awful political consequences. 

 LeeWood 22 Mar 2023
In reply to Offwidth:

great freudian humour

but you can't just blame UK politicians, fiscal and banking problems have propagated similarly in all countries where the dollar rules; it seems they are inevitable in a system where values are  based on speculation and lending, and/or stock manipulation (ie. gearing and hedging) and we must be prepared to face the consequences from time to time

what we need is a return to Real Values

OP Offwidth 23 Mar 2023
In reply to LeeWood:

Blanchflower says the BoE rate increase is an error in this tweet, with reasoning in following tweets.

https://twitter.com/D_Blanchflower/status/1638875222886547458?s=20

>Over the last two weeks the shenanigans that have gone on in global financial markets is basically equivalent to perhaps [a] two percentage points rise in interest rates. So that’s going to clamp down on the economy hugely.”

>“If you look at the Bank’s own forecasts, with what I’ve just said is [a] huge tightening in financial conditions around the world, they should be cutting rates, according to their own forecasts. So this is a big incoherence. And the problem is going to be, the data is going to actually swamp them, and I think what you’re going to see is rapid U-turns.”

Post edited at 14:23
2
In reply to Offwidth:

European banks in the cross hairs this morning. Deutsche Bank leading the way down 12% as I type

 GEd_83 24 Mar 2023
In reply to Offwidth:

It's definitely a time to have a think, if you haven't already, about the FCSC limit and keeping under it, and also the bank you are with (i.e. bigger and more established banks in general are probably safest, as they're more likely to have hedged against interest rate rises after 08/09, and if they haven't, they're more likely to be bailed out) as I can see this escalating with central banks being caught between a rock and a hard place. What's worse, very high inflation which threatens to really start running away, or a banking/financial crisis? 

OP Offwidth 24 Mar 2023
In reply to GEd_83:

What high inflation though? Core is below half the headline rate and fuel and energy prices are dropping. Public sector pay awards are way below inflation  (and only have a tiny effect on inflation according to the experts) and the true cost to government, after increased tax income, is only £5 billion for a 7% settlement for the whole public sector (according to the IFS ).

Who is explaining why Blanchflower, as an ex BoE rate setting committee member, is wrong? It looks like dangerous group think playing Russian roulette with financial organisations and adding to cost of living problems for everyone except the rich.

1
 GEd_83 24 Mar 2023
In reply to Offwidth:

The headline rate, CPI, is all that matters in my opinion, as it contains food (which is where much of the pain is being felt now), whereas core doesn't. The cost of living crisis is never out the headlines (for good reason) hence all the pay rise demands, and so I feel like 10.4 CPI is closer to reality than the core rate. Even if the core rate was closer to reality, 5.7% is still far too high - their target is 2%, so they're not even close. 

I don't pay much attention to Blancheflower. He's like one of these contrarian, minority view covid vaccine sceptics on youtube. Blancheflower may end up being right, be he is a minority view at the moment. His policies of ultra low rates and money printing forever (consequently pumping up asset bubbles all over the place and promoting malinvestment on a vast scale), are also one of the main reasons we're in the mess in my opinion too. The consensus is rates need to rise, and that's reflected in all the world's central banks doing exactly that. They're the current experts, and they all feel the need for rates to normalise to tackle inflation. I agree with them. But of course, there is a chance they're all wrong, and he's correct. Time will tell, but my view is rates cannot stay at emergency lows, coupled with QE which debases our currency, forever. These measures were supposed to be emergency life support, temporary measures, not permanent. 

Finally, he puts a lot of emphasis on the BoE's own forecasts, yet their forecasts have been woeful for years. Look at their forecasts from 2 years ago, and you'll see they won't have any of this high inflation on those forecasts. You could blame Ukraine, but again, CPI started rising rapidly a full year before Ukraine kicked off. It had exceeded the BoE's target by July/Aug 2021. Their forecasts now, which Blanchflower hinges his arguments on, is that inflation will drop significantly soon. For what it's worth (not much), I think they'll be proved to be wrong, again, as inflation is usually very sticky. 

Post edited at 15:02
OP Offwidth 24 Mar 2023
In reply to GEd_83:

I'm not a massive fan of Blanchflower either but his argument is the banks own data would indicate a lot more caution, and for clearly specified reasons. Comparing him in that respect with covid sceptics seems incredibly unfair: macro economic prediction is one of the trickiest subjects going, very much unlike epidemiology. 

My bigger concern is these rate rises could cause contagion as banks and other institutions come under various liquidity pressures. The only ways of preventing a crash I am aware of end up with ordinary tax payers losing out somehow.

Why is this happening given all the reassurance about EU banks:

>Concerns are also deepening around Deutsche Bank after the cost of insuring against defaults on its debt spiked, with credit default swap prices soaring. Worries about contagion are again rearing up even though more deposits appear to have been flowing into the German lender since the banking scare erupted, and it is thought to have capital reserves well in excess of regulatory requirements.

1
OP Offwidth 24 Mar 2023
In reply to GEd_83:

I forgot to add it would be nice if the BoE looked into this area, in its efforts to keep inflation under control.

https://www.theguardian.com/business/2023/mar/24/greedflation-are-large-fir...

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 GEd_83 24 Mar 2023
In reply to Offwidth:

Don't get me wrong, I don't want a recession either, nobody does. I also don't want banks to start collapsing either. I just view persistent, or worse case spiralling inflation, as the greater evil, and I think the central banks view it the same way, which is why they're normalising monetary policy even at the expense of a recession. What they don't want obviously though, is to go too far and cause a systemic meltdown. So as we talked about yesterday, they're in this impossible situation of trying to stem inflation as quickly as possible because it's so dangerous, whilst also not causing a systemic financial collapse, which would be equally as bad. A normal recession in this context, would be a good result, as it means they've managed to tread that thin line, as a recession would help lower inflation, and we'd still have our financial system intact, albeit there would unfortunately be casualties as with any recession, but you can't protect everyone and everything at all times.

I think Blanchflower is right in urging caution, and I think the central banks are actually treading carefully, hence the small .25 rises this time. They only went ahead with these because most economic indicators (esp. in the US) have been positive, so that signals to them that they have further to go with rate rises before they trigger a recession, reduce demand, and therefore reduce inflation. IMO their strategy was to normalise rates and embark on QT  to get on top of inflation, until economic indicators started to go red, at which point I believe they would have paused whilst a recession reduced demand and did the work of reducing inflation even further for them. This new banking instability that has been triggered, is a bit of a fly in the ointment for them I think, an unintended consequence that gets right in the way of what they were trying to achieve.  So it will be interesting to see what they do from here. My best guess is they'll keep doing small increases for now whilst taking measures (if necessary) to increase confidence in the banking system. So called Doveish monetary tightening. Powell tried a bit of it with his speech yesterday. There have been rumours that their next step would be to guarantee all US deposits over the current limit. If that failed, they may then pause to re-assess maybe, but if inflation keeps pushing them from the other side, they're then in an impossible spot. No easy answers I guess.

With regards to Blanchflower, yes maybe I was a bit harsh, you're right, it is a ridiculously complex subject. Like I say, I do think he's wrong, but if he proves to be spot on, I'd obviously re-assess my opinion of him!

 LeeWood 24 Mar 2023
In reply to Offwidth:

Do you ever listen to Glen Greenwald - he seems to know whats going on

OP Offwidth 24 Mar 2023
In reply to LeeWood:

I much prefer articles (especially with good informative diagrams)... I'm used to taking information in quickly that way. Also can read stuff in small gaps between doing other things, whereas I often struggle dipping in many times to a podcast or YouTube links.

...just realised you might mean Glenn Greewald who works for Guardian US... I've read several good things from him.

Post edited at 18:36
 LeeWood 24 Mar 2023
In reply to Offwidth:

> ...just realised you might mean Glenn Greewald who works for Guardian US... I've read several good things from him.

no, Glenn Greenwald

Multiple US Banks Collapse—Are “Bailouts” Needed to Avoid Catastrophe?

youtube.com/watch?v=Nylkb2YlDlA&

 neilh 25 Mar 2023
In reply to LeeWood:

I doubt anyone who posts videos on YouTube really knows what’s going on.  

Post edited at 09:17
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OP Offwidth 25 Mar 2023
In reply to neilh:

That made me giggle. Random dudes howling at the moon ( rather than integrated modern media outlets).

OP Offwidth 25 Mar 2023
In reply to LeeWood:

Sorry I misspelt his name..... it's the same guy.

I'd say the last 10 mins of that fairly short  link is well worth a watch even though I disagree with the views of the interviewee. It might open people's eyes to some of the terrible practice of company depositors in SVB. 

As much as I'd love to see greedy depositors get 'burnt' the contagion risk seemed to me more real than imaginary and business waiting for day to day necessities would be bad enough but millions of citizens waiting for deposit insurance payouts sounds nuts, let alone the impact of potential market chaos. The fundamental problem is Trump deregulated all but the biggest banks and that needs reversing.

Post edited at 10:24
 George_Surf 25 Mar 2023
In reply to GEd_83:

Yeah 3 weeks ago I made sure to tell my parents to check any account they have any real amount of cash in is covered by the FSCS. Many arent, because companies like Revolut aren’t considered banks and are therefor arent covered… watch out 

OP Offwidth 25 Mar 2023
In reply to George_Surf:

Differing levels of deposit insurance in different countries is quite interesting  (esp Ireland) plus some small print is not well known (I wonder how many here know the UK limit for a joint account is £170,000... or that most big insured companies trade under more than one brand, such that its not immediately obvious only one insured amount is being shared across those multiple brands).

https://en.wikipedia.org/wiki/Deposit_insurance

https://www.bankofengland.co.uk/prudential-regulation/authorisations/financ...

 MG 25 Mar 2023
In reply to Offwidth:

> Differing levels of deposit insurance in different countries is quite interesting  (esp Ireland) plus some small print is not well known (I wonder how many here know the UK limit for a joint account is £170,000... 

That's a lot of cash. I'd imagine most people with that much in cash would be aware of the issues. Perhaps also worth noting that if you do have large amounts for a short period (e.g. after a house sale), the limit is £1m.

OP Offwidth 25 Mar 2023
In reply to MG:

It's really not lot of money for my professional contemporaries and it covers investment  (like ISAs) as well as cash. Anyone who thinks it's a lot doesn't realise how badly things have changed for younger generations.

 MG 25 Mar 2023
In reply to Offwidth:

Pretty sure share it won't cover investments like shares in ISAs or not - if the value reduces, that's tough.   I doubt more than 1% of people have over £85k in cash (opposed to investments).

 GEd_83 25 Mar 2023
In reply to Offwidth:

Another reason not to hold large amounts of cash in any one banking group, is I think if there is another banking crisis, it's quite likely that instead of bailing the banks out, they will go with the option of bail ins instead. The precedent for this was set with Cyprus, where if I remember correctly any depositor with over 100k in cash took a serious haircut (I forget the %) and had a lot of their money essentially stolen. I know in the EU this was all legal etc, and I'm not 100% sure, but I'm pretty sure the BoE now also have the powers to do this as well. 

Post edited at 14:50
OP Offwidth 25 Mar 2023
In reply to MG:

Its easy enough to search and find it covers cash and investment ISAs so thanks for helping prove my point about widespead ignorance. Losing money in an investment due to market changes is very different from the investment vehicle failing (and that being insured).

Post edited at 14:30
1
 MG 25 Mar 2023
In reply to Offwidth:

You are misunderstanding what's covered.  Your cash within an ISA is, and if the ISA provider collapses your shouldn't lose out as a direct result.  The investments themselves aren't and it's misleading and ignorant to suggest otherwise.  To quote (my bold):

"When you invest in a stocks and shares ISA, the Financial Services Compensation Scheme (FSCS) protects your investments up to £85,000 per person, per firm you invest with. This means that even if your stock and shares ISA collapses, you will have £85,000 of your deposits protected. However, it’s important to note that this stocks and shares ISA protection only covers the holding company and doesn’t apply to losses from your actual investments. "

Post edited at 15:45
 MG 25 Mar 2023
In reply to GEd_83:

> Another reason not to hold large amounts of cash in any one banking group, is I think if there is another banking crisis, it's quite likely that instead of bailing the banks out, they will go with the option of bail ins instead. The precedent for this was set with Cyprus, where if I remember correctly any depositor with over 100k in cash took a serious haircut (I forget the %) and had a lot of their money essentially stolen. I know in the EU this was all legal etc, and I'm not 100% sure, but I'm pretty sure the BoE now also have the powers to do this as well. 

So in broad terms, rather than all tax payers paying to keep a bank afloat and then all depositors benefitting from getting their cash saved, it's the depositors with cash above a certain limit that pay, and as a consequence lose (some of) their money.  Is that about right?

 neilh 25 Mar 2023
In reply to GEd_83:

Let’s be realistic the risk of you losing your deposits are pretty low. You are  going to lose greater value through inflation by keeping such deposits sitting at a bank. But people overlook this glaringly obvious factfor a low risk event of a bank failure and their deposits being wiped out. 

Post edited at 16:16
OP Offwidth 25 Mar 2023
In reply to MG:

Which is exactly what I was saying when referring to the insurance scheme applying to an stocks investment ISA in the same way as a cash ISA or cash, being lost due to company failure. The insurance only applies in such circumstances and has nothing to do with market losses.

I've made silly statements here before, admitted my mistake, and apologised. I'm not saying you have done the same but you must have at minimum misread something pretty badly.

Back on pensioner assets I've seen figures of average savings over £300k for the over 65s and that's including a significant minority of genuinely poor pensioners. £170K is not a lot of money for (ex or currentl) professionals in their 60s amd 70s in savings and ISAs.

Post edited at 00:21
 MG 26 Mar 2023
In reply to Offwidth:

> Which is exactly what I was saying 

Well you disagreed with "Pretty sure share it won't cover investments like shares in ISAs or not - if the value reduces, that's tough" 

> Back on pensioner assets I've seen figures of average savings over £300k for the over 65s and that's including a significant minority of genuinely poor pensioners. £170K is not a lot of money for (ex or currentl) professionals in their 60s amd 70s in savings and ISAs.

But only a fraction will be in cash for any (sane) person.

 GEd_83 26 Mar 2023
In reply to MG:

Yeah that's my understanding of it, although in Cyprus I remember it being 'sold' as a one off tax levy on deposits over a certain amount.

https://www.investopedia.com/articles/markets-economy/090716/why-bank-baili...

OP Offwidth 26 Mar 2023
In reply to MG:

Yes because I was was talking about insurance limits and if your cash and ISA is held by the same company under different brands you combined insurance is just the one allocation. Frankly you are slipper than an eel.

 neilh 26 Mar 2023
In reply to Offwidth:

Anybody  who has lots of cash in ISAs  deserves a financial reality check imho and should suffer  the wrath of not being covered by any deposit insurance scheme. 
 

Only a personal opinion. 

4
OP Offwidth 26 Mar 2023
In reply to neilh:

I prefer to say being foolish (having lots in cash ISAs right now or whatever) will incur loses in any case. Wishing such people ill is just mean.

Middle class recently retired higher profesionals really do have substantial wealth and they have to keep it somewhere.... normally a house, pension and savings/investments. My guess for a mean would be close to a million in assets. I sincerely hope the young think on that and see just how much that they are being scr€wed compared to my generation.

ONS have some good data tools but sadly you can't choose two or more characteristics.

Mean graduate wealth is about £500k  (any age and any region)

Mean wealth of those in their sixties is £600k  (any education and any region)

Mean higher professional wealth is £600k  (any age and any region)

https://www.ons.gov.uk/peoplepopulationandcommunity/personalandhouseholdfin...

Post edited at 17:44
 neilh 26 Mar 2023

In reply to 

Not meant to be mean. Just find it interesting how people get lost when looking at the overall value of these thing.

.putting cash in an ISA us waste of a very valuable tax allowance. “Your cash isa will be worth less in 5 / 10 years time and there is little hope of it growing and you making a decent return “ should be it’s branding. 

Still an interesting discussion

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