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NO BANK is totally immune to a run in deposits. It's simply the innate nature of the beast. It's a bug, not a feature, and this is not a secret.
From Matt Levine, in his Bloomberg Money Stuff column:
Banking is a confidence trick. You put money in the bank today because you are confident you can take it out tomorrow; to you, a dollar that you have deposited in the bank is just as good — just as much money — as a dollar bill in your wallet. If you show up at the ATM at any time of day or night, you expect it to give you your dollars.
But the bank doesn’t just put your dollars in a box and wait for you to take them out; the bank uses its depositors’ money to make loans or buy bonds, and just keeps a little bit around for people who need cash. If everyone asked for their money back tomorrow, the bank wouldn’t have it.
But everyone is confident that, if they ask for their money back tomorrow, the bank will have it. So they mostly don’t ask for it, so when they do, the bank does have it. The widespread belief that banks have the money is what makes it true.
This is obvious stuff. Also obvious, and famous, is that it is an unstable equilibrium. If people stop believing it, it stops being true. If everyone stops believing in a bank, they will all rush to get their money out, and the bank won’t have it, and their lack of belief will be retrospectively justified. Whereas if they had kept believing, their belief would also have been justified.
Isn’t this ridiculous? But there is a deep social purpose to the confidence trick. Banking is a way for people collectively to make long-term, risky bets without noticing them, a way to pool risks so that everyone is safer and better-off.
You and I put our money in the bank because it is “money in the bank,” it is very safe, and we can use it tomorrow to pay rent or buy a sandwich. And then the bank goes around making 30-year fixed-rate mortgage loans: Homeowners could never borrow money from me for 30 years, because I might need the money for a sandwich tomorrow, but they can borrow from us collectively because the bank has diversified that liquidity risk among lots of depositors.
Or the bank makes small-business loans to businesses that might go bankrupt: Those businesses could never borrow from me, because I need the money and don’t want to take the risk of losing it, but they can borrow from us collectively because the bank has diversified that credit risk among lots of depositors and also lots of borrowers.
But the basic problem remains: the confidence trick, where trust in banks makes them trustworthy and distrust in banks makes them fail.
Bankers and bank regulators tend not to talk in these terms... because talking about it ruins the magic. But they know it in their bones; at a deep level they understand that preserving that confidence is their most important job.
More specifically they know that if there is a run on a bank, and that bank goes bust and doesn’t pay depositors, then there will be a run on other banks. And they know that the run can start with a bank that is bad, that is undercapitalized and made poor decisions and in some sense deserves to fail, but that it can spread to other banks that are good.
And they know that “good” and “bad” are not really the things that matter: What makes a bank good is not just its capital ratios and liquidity position but also confidence, and however good the ratios it is hard for a bank to survive a loss of confidence. They know that they are all interconnected, that they are players in an essentially social game, and that the goal of the game is not to win but to keep playing.
The above are edited excerpts from Matt Levine's Money Stuff column of March 17, 2023. Text emphasis has been added.
Wonder if there is other issues with other regional banks that have not been uncovered?
Not so much “uncovered” as not “made public”. A lot of veiled suggestions to that effect from some of the anchors and a guest or two on Bloomberg TV. Nothing definitive of course. I thought Yellen’s public statement this morning rather unusual.
"I thought Yellen’s public statement this morning rather unusual"
But the basic problem remains: the confidence trick, where trust in banks makes them trustworthy and distrust in banks makes them fail. Bankers and bank regulators... know it in their bones; at a deep level they understand that preserving that confidence is their most important job.
I watched that too and her speech was meant to calm the market. That why I ask if there is something else I missed.
First Republic Bank got a whole lot more problem than just “run on the bank”. Over the weekend, several large banks pledged $30 billions as a lifeline. Looks like several other regional banks have sizable uninsured asset.
Bank of New York Mellon ____ 96.5% SVB Financial Group________. 93.9% State Street ________________ 91.2% Signature _________________- 89.7% Northern Trust _____________- 83.1% Citigroup __________________ 77.0% HSBC Holdings ____________ 72.5% First Republic Bank _____-___ 67.7% East West Bancorp ____..____ 65.9% Comerica ____________._____ 62.5%
I watched that too and her speech was meant to calm the market. That why I ask if there is something else I missed.
In another age it would have had a calming effect. But we live in an age of cynicism. The speech by itself is ISTM of questionable value. But if the government is really willing and able to stand behind chartered banks / credit unions / S&Ls across the nation and back all deposits as high as the sky for the full amount for as long as necessary, then it should work.
Beyond my pay grade or skill set - But a dovish Fed tomorrow, ISTM, would have the effect of loosening financial conditions, encouraging lending / liquidity flow and easing financial stresses. A hawkish Fed would have the opposite effect. The Fed would like to remain hawkish to counter inflation - but may have to take a more moderate approach in the face of the bank turmoil.
@hank- yes, I agree. That's why I'm guessing that the Fed may just do nothing tomorrow other than talk a lot, and then wait a few months to raise again. That shouldn't make much if any difference in the actual inflation situation... what's a few weeks or months going to matter?
These folks are a tough spot on whether to deal with the inflation while facing with the bank mess ant the same time. Clearly something broke. Even with this 25 bps rate hike, the market sold off for 1%. Guess Powell chose inflation over bank crisis. Will watch Powell speech this evening. Tomorrow will be interesting.
Market started to fall during the Q&A session when Powell vowed to use all available tools to keep the banking system sound, but reiterated the central bank’s commitment to reining in inflation. He already hinted they are on the verge of pausing in light of bank turmoil. I interpret that means more hikes and for longer period. Started dovish and turned hawkish situation. Tomorrow will be interesting.
Yellen message stated no “blanket FDIC coverage”. Will these depositors move to large banks instead and that can make the matter worse?
Comments
From Matt Levine, in his Bloomberg Money Stuff column: The above are edited excerpts from Matt Levine's Money Stuff column of March 17, 2023. Text emphasis has been added.
But the basic problem remains: the confidence trick, where trust in banks makes them trustworthy and distrust in banks makes them fail. Bankers and bank regulators... know it in their bones; at a deep level they understand that preserving that confidence is their most important job.
First Republic Bank got a whole lot more problem than just “run on the bank”. Over the weekend, several large banks pledged $30 billions as a lifeline. Looks like several other regional banks have sizable uninsured asset.
Bank of New York Mellon ____ 96.5%
SVB Financial Group________. 93.9%
State Street ________________ 91.2%
Signature _________________- 89.7%
Northern Trust _____________- 83.1%
Citigroup __________________ 77.0%
HSBC Holdings ____________ 72.5%
First Republic Bank _____-___ 67.7%
East West Bancorp ____..____ 65.9%
Comerica ____________._____ 62.5%
Source
Beyond my pay grade or skill set - But a dovish Fed tomorrow, ISTM, would have the effect of loosening financial conditions, encouraging lending / liquidity flow and easing financial stresses. A hawkish Fed would have the opposite effect. The Fed would like to remain hawkish to counter inflation - but may have to take a more moderate approach in the face of the bank turmoil.
+25--+25--hold--cut--cut--, etc.
We will know for sure TOMORROW.
By the way, Canada has decided to hold their rate for now as sighs of inflation cooling (faster than they expected).
Don't you love Matt Levine?
I sure he could explain quantum mechanics easily
Yellen message stated no “blanket FDIC coverage”. Will these depositors move to large banks instead and that can make the matter worse?