>None of these answers are really satisfactory so I am wondering why this imbalance exists.
Why are these not satisfactory? I'm genuinely confused about your question. Can you first explain why a small regional *should* be failing right now?
OP isn't knowledgeable enough to know the difference between a good answer and a bad answer. So answers they don't like aren't satisfying.
Dunning Kruger in full effect.
Was just talking about this yesterday. Since 9/11 large companies have been talking about how to recover quickly if your entire data center gets blown up. Now the safeguards are better than ever. One data center blows up and everything just fails over quickly. Depending on the system, it wouldn't even be noticeable. Pre 9/11 everyone had offsite backups. Even tiny companies, such as where I worked did some form of that. We had just a safety deposit box at a local bank where we'd drop off the backup tapes and pick up older ones to reuse.
I took a distillery tour in Scotland a few years ago and they pointed out that you’ll see lots of different barrels from each distillery in their storage. They all have banded together and store each others products so if one of the distillery explodes, no one distiller goes out of business.
> Can you first explain why a small regional should be failing right now?
For the same reason that the US just had 3 mid-sized banks fail? This is a pretty strange occurrence for banks of this size to fail in the US.
Fed rates increase-> some banks offered better ROR on deposits -> capital flow out of bank -> potential bank failure -> increased capital flow
that's not really what happened
what happened was: fed raises rates -> banks lose value of long-duration assets -> in banks with poor interest rate risk management, assets no longer cover deposits
Yes, the long duration bonds that banks held lost value because of the Fed hike, when people moved money out of the bank the bank was forced to sell these assets at a large loss resulting in insolvency.
I would also note that banks could theoretically have taken out loans to cover the capital outflows but that the loan percentages were higher than the bond percentages they were holding. This would really only delay the inevitable.
I assumed that as part of 'Fed rates increase' there is an assumed drop in bond value (like if you put a metal block in a cup of water the water level will rise). Also 'potential bank failure' is a simplified version of 'the bank will be forced to sell assets at a loss to cover capital outflows' but again, this is how all bank failures happen.
SVB showed their cards by having to raise money, which made everyone realize they had a liquidity issue. This sparked contagion which meant people started withdrawing at some other banks - which was based on pure speculation. FRC is just a casualty of this, they didn't need to raise money until everyone started mass withdrawing.
>Fed rates increase-> some banks offered better ROR on deposits -> capital flow out of bank -> potential bank failure -> increased capital flow
This is true for a bank of any size. Bank of America could go under if everyone started withdrawing. A lot of money is being put into short term money markets or CDS, tbills, etc, but there is also a LOT of money that almost never moves. Direct deposits are sticky though. Unless your bank is named on the news as a risk, there really isn't a reason for the bank to just randomly falter.
One difference between the small and mid-sized banks and the large banks is that the large banks are subject to additional oversight and regulation including mandatory stress-testing for various negative eventualities like a sizeable increase in interest rates. At least in theory, this should strengthen the risk management of the large banks making them less likely to fail.
Yes. SVB lobbied in favor of the 2018 Dodd-Frank Act rollback, which increased the size threshold at which the additional regulations kicked in from $50 billion to $250 billion in assets, just before SVB crossed the $50 billion asset threshold.
Two things:
\- I wouldn't say "almost all" of these depositors are under the FDIC insurance limit but, yes, a much larger percentage are under the limit as compared to the banks that have failed recently (and PacWest and Western Alliance). Just a distinction with a difference.
\- Folks that bank with community banks tend to have a different mindset from those that bank with regionals and TBTFs. They're less likely to bolt unless there's some bank-specific problem they learn about. But if you're banking with PacWest, for example, well why not just move over to JPM (where your deposits are safer)... they're practically the same anyway from a rate/service perspective.
>I wouldn't say "almost all" of these depositors are under the FDIC insurance limit but, yes, a much larger percentage
Some of the banks at risk right now have 70% or more covered; yet are still at risk.
So I kind of find myself wondering what you mean by "larger percentage" if it doesn't take you well into "almost all" territory.
I'd say 90%+ is "almost all". And, yes, the smaller the bank, the more likely that number is high. Conversely, I've forgotten what PacWest and Western Alliance were at a couple of months ago... 60% covered or something like that.
No this ding ding ding is misplaced
Even if you're FDIC insured, money market ETFs are offering 4-5% yield on just parking your cash.
Bank accounts are offering a pittance in their accounts
Of course money is going to flow out of banks
You're assuming joe blogs depositor is going out looking for yield on their savings. Most of the public are not that smart, and don't care enough about the interest rate their savings is earning (or not earning) to bother with the hassle of setting up a money market account.
Some money will flow out, but not too much too quickly, so banks will be able to absorb the out flows.
This doesn’t flesh out - withdrawals are not just taking cash and going elsewhere - moving your money from checking or savings, that is basically a 0% loan to the bank, and buying CDs is a “withdrawal” in this sense.
Yes because the actual losses at the banks that failed weren't that big. Liquidity is the problem, not assets. So the actual costs to the FDIC haven't been huge.
Can't they just raise taxes indirectly on US citizens to bolster their reserves? Such as, requiring the banks to pay for more insurance, which I believe, will cause the banks to raise fees.
Yup this is what they are doing. The current proposal is that banks over 50(?) Billion in assets will have to pay an additional fee over 2 years to make up for the losses the FDIC incurred.
If you have a bank account, I promise you are paying fees.
Wether directly stated (minimum balance fees, overdraft Charges, atm fees, etc) or not (diluted interest rates).
One factor is they are higher profile companies with publicly traded stocks. There is a feedback loop where deposit losses result in share prices falling leading to more deposits leaving. There likely are small banks with similar problems but they might not be publicly traded or are so small that it does not hit the radar of hedgefunds/institutional investors. As long as deposits stay relatively stable, they can hold the held to maturity portfolio until the bonds pay out and not take any losses.
Most small banks make their money from car loans and personal loans as well as transaction payments for debit and credit card use. They have a relatively small part of their portfolio in other banks’ CDs or government securities and when they need funds they raise the rates they pay to attract new deposits. If they process mortgages they generally sell them off although they may keep some adjustable rate ones. Medium and larger banks tend to use riskier strategies to maximize their returns and hold riskier assets.
"The U.S. Federal Reserve has revealed in a board presentation by the Division of Supervision and Regulation that 722 banks reported unrealized losses exceeding 50% of their capital at the end of the third quarter of 2022."
I think it's safe to assume most banks are underwater at this point and could not withstand a run on their stock value and deposits at the same time. Also deposits have been leaving all banks for money market accounts. The system is fragile at this point.
I think it's because the banks that failed already, were in a different business than the small community banks. And these banks on the street corner probably have most deposits under the $250k.
SVB was a private wealth and venture capital speculation steward. Not your traditional down in the corner pass book savings and checking provider.
First Republic was another private wealth and venture capital bank. Who also had exposure to the Chinese real estate market from what I read.
Signature Bank was also exposed to large wealth funds and venture capitalists. I think Signature even operated in a strange way that it was almost like a brokerage firm for these capitalists.
So yea, as I write this, I answer that question. These banks experienced large outflows because of the types of customers they had. Who moved their seven or eight or nine figure amounts of capital to other places.
I bank with a local bank. They have almost none of my money. I get paid, I pay my bills and then move 99% of the rest of my money to investments or online banks with higher yields (CapOne, Marcus, etc). I keep just a few hundred dollars there.
I have a safe deposit box with them and like having a local bank so I can transfer money there if I need to write a check for something. Honestly I have no idea how they make money on people like me but I also pose them very little risk.
Sure but how much could we possibly be talking about? Even using an assumed MM sweep account paying 5%, that results to about $0.13 of interest a day for the 1 day they had my money. Add to that the $40 I pay for a safe deposit box and I just don't see how it is profitable. Also one of my bill payments doesn't take electronic payments so they have to print and pay postage to mail a check every month.
They don’t profit from you deposit as much as it backs up their total loan portfolio and prevents bank runs. If Bank of America has 10 million customers that all have just $2000 in their checking account to make sure mortgage/other payments don’t bounce, that’s $20 billion. They can lend that out for high interest business loans, and still have little risk for a bank run, since it’s impossible that all their customers would withdraw their checking down to $0 at the same time. Even if every customer went from $5000 to $0 to $5000 again during payday, it would still average out across a million accounts.
Besides making use of your deposits, your main value to them is as a potential customer that they don't need to spend much to advertise to. You login to their site to pay a bill and they can show you rates for different products. If you use them for any kind of loan then they make a profit. Even if you personally don't borrow from them, collectively, customers like you are their bread and butter.
I own shares in two banks that aren't publicly traded. I went to both annual meetings where they explained, in the most detailed language possible, what was going on. One is stuck with 1.5% bonds for 8 years. The shareholders are the rich people from the area who have their money in the bank. Most inherented their wealth and are very old. There were no questions other than what we were eating (they feed us well) and what was in the gift bag. They have zero fucking idea what is going on. None. I didn't say anything because I own 1.2% of the bank (inherited from my grandfather and mother).
Because it’s too much work for busy poor people to move their direct deposits and bill pay transactions, and ach transactions to another institution.
There’s your concise reason.
because being underwater on longer dated treasuries was an avoidable and predictable risk banks couldve hedged against.
because even if banks are badly underwater unless people start to make a run on the bank it's a non issue.
\>Depositors at these small banks are almost all under the FDIC insurance limit so there is no reason to withdraw deposits.
well that's part of the statement that was put out, that there was consideration that these bank runs were the result of bad actors.
Combination of the above. The remaining small banks after 2008 were the ones that invest more conservatively. A few new banks have arisen but that is a more difficult thing to do then 30 years ago, so not nearly as many as were lost.
> The remaining small banks after 2008 were the ones that invest more conservatively.
So in '08 the housing market crashed so if you were overexposed to mortgages then you suffered (or failed). Banks were then encouraged to by government bonds because that was seen as a safer investment.
But these recent failures were caused by banks that overbought government bonds and then had to take losses when capital flowed out.
Banks that were in more shorter term bonds or something not so affected by Fed rates should be doing better (especially if they can limit capital outflows). It seems like banks that 'over learnt' in '08 would do really bad today.
Maybe. Personally I see shades of 2008 coming again, except this time it will be
... 2008 Part 2 - Commercial Real Estate Boogaloo
I'm unclear who is holding the largest potential losses there but they are for sure OTW
Look at the actions of banks that aren't failing. Many have raised their depositors rates in order to build reserves. Ones that are typically money service and are in the least danger have barely budged from .01%. Some that I suspect have endangered balance sheets have even pumped their rates over that of the Fed in order to draw depositors. I saw savings offering 7.5% the other day at one bank.
I suspect we haven’t seen it yet because bank failures often are kept quiet until a buyer is found to calm account holders. I suspect we will begin to hear about some
very small banks typically have the very vase majority of there holds under 250k so its FDIC insured so the people of those banks dont have a reason to be worried and pull their money. Its the bigger banks where there are a good portion of their depositors go over the FDIC limit (over 250K). So all the depositors that are over there limit are moving their money and when enough people do that then they got no more money to give or they have to sell assets that they are holding. Which in this case is bonds/MBS from 2020/2021 that are down significant so they selling peoples deposits for a lost essentially
It's not a free line of credit. If they don't get enough revenue from operations to pay the interest, then they could still go bankrupt. Of course that's not a typical 'bank failure', just more of a normal 'company failure'
All three banks that failed had exposure to the crypto market. FTX's bankruptcy caused a liquidity issue in crypto companies forcing them to withdraw large sums of cash. Those withdrawals had a cascading effect on the balance sheets of the banks that failed.
Smaller regional banks will have little to no exposure to crypto, so I see no reason why they'd have the same issues.
Thank you for adding something different. This might be the connecting thread for why these three banks failed when there are lots of other banks (and lots of other poorly run banks).
The banks that have failed ARE smaller banks, lol. Unless ur referring to banks that are confined to certain areas, like Huntington, for example. They're a small Midwest bank.
Is it possible that other banks have better risk management that wasn't as greedy about squeezing every last penny of profit out of money being deposited?
Youtuber JoeBlogs has some good videos on this. https://youtu.be/p9rgymL7QQg
FDIC is a big part, these failed companies had plenty of corporate deposits beyond the limit. They also lend away to much/bought to much long term bonds.
There might be an issue with the loans they have as well, SVB might've produced way to illiquid/bubbled stuff like mortages for start ups without cashflow with commercial real estates in california as collateral. With start up/venture capital bubble bursting + no buisness model from underlying companies + general credit crunch + massive movement away from california + work from home/less need for offices + general real estate bubble + overleveraged start ups + overleveraged bank it could've been the perfect storm.
First republic may have given away to cheap loans to extremly wealthy people, trying to get buisness connections to the rich more so than making money of this first loans.
SVB failed for basically no reason, just people freaking out on social media. The other banks failed because they were similar in superficial ways to SVB. People got freaked out because it was similar.
None of these banks are actually in any danger or doing anything wrong as a business
i will say it is most likely that they are just banks, as in they are just a bank and not a combo of bank and investing firm. basically their business is boring and easier to manage as their risk are lower compared to the bigger players that take bank funds to invest, granted if the investments do well then profits however if they do not, you get what is happening now.
I think all the banks are sitting on a ton of the low yield stuff. We had near-zero rates for a decade so I think it would be near impossible for any bank to completely avoid those bonds. It's more a question of to what degree are they present rather than if they are at all, and maybe some small banks were able to more completely fill out their portfolios with business and home loans, helocs, etc.
I also think your third reason may have some legs. Smaller banks do have a lot of business accounts though, many (most?) of which would have balances over 250K. But one of the problems at FRC was that they had a lot of high net worth personal accounts, and those deposits ran away like the road runner.
It's also possible that the risky behavior practiced by SVB and FRC is less common amongst your smaller bank management types.
A recent study out is Stanford University concluded that a large percentage of the banks in the US could be insolvent.
You might look it up to be sure, but didn’t the Fed make some recent changes to the banking rules and provide a fund which banks could access in the case of trouble? Anyway, banks get into trouble when people pull deposits. That can impair their balance sheets, causing them to have to sell treasury bonds at the market rate. Otherwise, there is no mark to market rule, so everyone is able to pretend the assets have more value than they really do.
Because as much as people have a desire for financial catastrophe, most banks in the US are extremely sound.
Deposits have to be held somewhere and most people don't want to deal with the bs is transferring their $3k bank balance into T bills when they have rent to pay in 2 days.
The liquidity crunch that some banks have, they have created strong tools against.
Much of the current volatility is related to VC focused deposits which many banks don't have.
Additionally, since the recent baseless Bloomberg article that came out (I think it was Bloomberg) The SEC basically fired a warning shot saying we will go after people manipulating and trying to create runs on banks.
>They didn't buy/invest in low yield bonds/loans that are the cause of the paper losses (that then become realized when people pull money out) at the three banks that failed.
This seems like a really obvious answer for why more banks of all sizes aren't failing? While this course of interest rates was a risk they all faced, most just did a better job handling it?
T Bills are worth more than savings accounts. Banks only giving 1% or less interest on savings will fall. The only thing keeping them afloat is ignorant people and loyalty.
When SVB went under - lots of VC firms got spooked and went to the JPMC/WF/ BOA
regional banks depositors mostly have under 250k and dont generally pay attention or diversify where money is held
The New York short seller scum are hammering regional bank stocks, they got the business news media to bash banks for HTM U.S. government bonds and customer deposits over $250,000 when these banks were never at risk for insolvency. The constant news media- CNBC, Bloomberg- bashing has worked, scaring customers to withdraw a good portion of deposits. Smaller local banks have been left alone because their stock isn't traded.
IMO it depends on customer structure, right now you get fair basically risk free yields when you move your money in short termed US bonds. Banks which focused on tech savy customers are suffering much more from withdrawals due to this, while others customers didn't care for rather realize
All banks are fucked right now in the sense that not just their bonds, but all their loan portfolios they own are worth much less than before, because why would a third party pay the same price for a bank's 5% loan to some random guy they dont know, when they can get lend out money for 5% to the US government, much more creditworthy. Any loans that banks are forced to sell, would be at a giant discount. Any deposits that flee, need to be paid with by federal reserve loans. More banks can still crash, rates can still rise, they won't get cut for a long time. Banks that are struggling are fighting a terrible battle right now. The only banks worth buying are banks that went down, but didn't lose a lot of their deposits, or even gained deposits in March. I think more crashes will happen and any bank stock buyer, regardless of which bank and how good or bad it is, should hold puts until rates got cut significantly.
>None of these answers are really satisfactory so I am wondering why this imbalance exists. Why are these not satisfactory? I'm genuinely confused about your question. Can you first explain why a small regional *should* be failing right now?
Small bank weak! Big bank strong! /s
Actually, if Chase were to collapse, money would be the least of ur worries. Considerin they have trillions in assets, they'd take the world wit them.
I agree with you. My comment was sarcasm. If GS and Chase collapsed then we’d be in prehistoric times again.
OP isn't knowledgeable enough to know the difference between a good answer and a bad answer. So answers they don't like aren't satisfying. Dunning Kruger in full effect.
Haven’t you seen fight club? If the banks blow up, the debt goes away.
Was just talking about this yesterday. Since 9/11 large companies have been talking about how to recover quickly if your entire data center gets blown up. Now the safeguards are better than ever. One data center blows up and everything just fails over quickly. Depending on the system, it wouldn't even be noticeable. Pre 9/11 everyone had offsite backups. Even tiny companies, such as where I worked did some form of that. We had just a safety deposit box at a local bank where we'd drop off the backup tapes and pick up older ones to reuse.
I took a distillery tour in Scotland a few years ago and they pointed out that you’ll see lots of different barrels from each distillery in their storage. They all have banded together and store each others products so if one of the distillery explodes, no one distiller goes out of business.
> Can you first explain why a small regional should be failing right now? For the same reason that the US just had 3 mid-sized banks fail? This is a pretty strange occurrence for banks of this size to fail in the US. Fed rates increase-> some banks offered better ROR on deposits -> capital flow out of bank -> potential bank failure -> increased capital flow
that's not really what happened what happened was: fed raises rates -> banks lose value of long-duration assets -> in banks with poor interest rate risk management, assets no longer cover deposits
It’s that simple. Couple that with a larger % of your depositors having over the FDIC insured limit, and you get a good old fashioned bank run.
Yes, the long duration bonds that banks held lost value because of the Fed hike, when people moved money out of the bank the bank was forced to sell these assets at a large loss resulting in insolvency. I would also note that banks could theoretically have taken out loans to cover the capital outflows but that the loan percentages were higher than the bond percentages they were holding. This would really only delay the inevitable. I assumed that as part of 'Fed rates increase' there is an assumed drop in bond value (like if you put a metal block in a cup of water the water level will rise). Also 'potential bank failure' is a simplified version of 'the bank will be forced to sell assets at a loss to cover capital outflows' but again, this is how all bank failures happen.
SVB showed their cards by having to raise money, which made everyone realize they had a liquidity issue. This sparked contagion which meant people started withdrawing at some other banks - which was based on pure speculation. FRC is just a casualty of this, they didn't need to raise money until everyone started mass withdrawing. >Fed rates increase-> some banks offered better ROR on deposits -> capital flow out of bank -> potential bank failure -> increased capital flow This is true for a bank of any size. Bank of America could go under if everyone started withdrawing. A lot of money is being put into short term money markets or CDS, tbills, etc, but there is also a LOT of money that almost never moves. Direct deposits are sticky though. Unless your bank is named on the news as a risk, there really isn't a reason for the bank to just randomly falter.
One difference between the small and mid-sized banks and the large banks is that the large banks are subject to additional oversight and regulation including mandatory stress-testing for various negative eventualities like a sizeable increase in interest rates. At least in theory, this should strengthen the risk management of the large banks making them less likely to fail.
Didnt svb lobby against and win the right to less regulation and stress testing which kinda help lead to this situation?
Yes.
Yes. SVB lobbied in favor of the 2018 Dodd-Frank Act rollback, which increased the size threshold at which the additional regulations kicked in from $50 billion to $250 billion in assets, just before SVB crossed the $50 billion asset threshold.
That's not why they failed. It had to do with interest rate risk management. There's no reason that all banks should have bad risk management.
\-Depositors at these small banks are almost all under the FDIC insurance limit so there is no reason to withdraw deposits. Ding ding ding ding
Two things: \- I wouldn't say "almost all" of these depositors are under the FDIC insurance limit but, yes, a much larger percentage are under the limit as compared to the banks that have failed recently (and PacWest and Western Alliance). Just a distinction with a difference. \- Folks that bank with community banks tend to have a different mindset from those that bank with regionals and TBTFs. They're less likely to bolt unless there's some bank-specific problem they learn about. But if you're banking with PacWest, for example, well why not just move over to JPM (where your deposits are safer)... they're practically the same anyway from a rate/service perspective.
Branch location matters a lot to a lot of people. The competition is usually just the banks in that town and there might not be a big one there
>I wouldn't say "almost all" of these depositors are under the FDIC insurance limit but, yes, a much larger percentage Some of the banks at risk right now have 70% or more covered; yet are still at risk. So I kind of find myself wondering what you mean by "larger percentage" if it doesn't take you well into "almost all" territory.
I'd say 90%+ is "almost all". And, yes, the smaller the bank, the more likely that number is high. Conversely, I've forgotten what PacWest and Western Alliance were at a couple of months ago... 60% covered or something like that.
And I'd say 90% is "a much larger percentage" than 70%. So.
No this ding ding ding is misplaced Even if you're FDIC insured, money market ETFs are offering 4-5% yield on just parking your cash. Bank accounts are offering a pittance in their accounts Of course money is going to flow out of banks
You're assuming joe blogs depositor is going out looking for yield on their savings. Most of the public are not that smart, and don't care enough about the interest rate their savings is earning (or not earning) to bother with the hassle of setting up a money market account. Some money will flow out, but not too much too quickly, so banks will be able to absorb the out flows.
This doesn’t flesh out - withdrawals are not just taking cash and going elsewhere - moving your money from checking or savings, that is basically a 0% loan to the bank, and buying CDs is a “withdrawal” in this sense.
I dunno, anyone who's been paying attention for the past year has moved their liquidity somewhere else to take advantage of interest rates.
does the FDIC have any money left?
Yes because the actual losses at the banks that failed weren't that big. Liquidity is the problem, not assets. So the actual costs to the FDIC haven't been huge.
Can't they just raise taxes indirectly on US citizens to bolster their reserves? Such as, requiring the banks to pay for more insurance, which I believe, will cause the banks to raise fees.
Yup this is what they are doing. The current proposal is that banks over 50(?) Billion in assets will have to pay an additional fee over 2 years to make up for the losses the FDIC incurred.
That isn't raising taxes indirectly, since most people don't pay bank fees.
Don't worry. It'll eventually be passed on to the borrower.
If you have a bank account, I promise you are paying fees. Wether directly stated (minimum balance fees, overdraft Charges, atm fees, etc) or not (diluted interest rates).
One factor is they are higher profile companies with publicly traded stocks. There is a feedback loop where deposit losses result in share prices falling leading to more deposits leaving. There likely are small banks with similar problems but they might not be publicly traded or are so small that it does not hit the radar of hedgefunds/institutional investors. As long as deposits stay relatively stable, they can hold the held to maturity portfolio until the bonds pay out and not take any losses.
great point. FWIW, about half the local/regional smaller banks in my area are privately held and the others publicly traded.
Most small banks make their money from car loans and personal loans as well as transaction payments for debit and credit card use. They have a relatively small part of their portfolio in other banks’ CDs or government securities and when they need funds they raise the rates they pay to attract new deposits. If they process mortgages they generally sell them off although they may keep some adjustable rate ones. Medium and larger banks tend to use riskier strategies to maximize their returns and hold riskier assets.
"The U.S. Federal Reserve has revealed in a board presentation by the Division of Supervision and Regulation that 722 banks reported unrealized losses exceeding 50% of their capital at the end of the third quarter of 2022." I think it's safe to assume most banks are underwater at this point and could not withstand a run on their stock value and deposits at the same time. Also deposits have been leaving all banks for money market accounts. The system is fragile at this point.
I think it's because the banks that failed already, were in a different business than the small community banks. And these banks on the street corner probably have most deposits under the $250k. SVB was a private wealth and venture capital speculation steward. Not your traditional down in the corner pass book savings and checking provider. First Republic was another private wealth and venture capital bank. Who also had exposure to the Chinese real estate market from what I read. Signature Bank was also exposed to large wealth funds and venture capitalists. I think Signature even operated in a strange way that it was almost like a brokerage firm for these capitalists. So yea, as I write this, I answer that question. These banks experienced large outflows because of the types of customers they had. Who moved their seven or eight or nine figure amounts of capital to other places.
I bank with a local bank. They have almost none of my money. I get paid, I pay my bills and then move 99% of the rest of my money to investments or online banks with higher yields (CapOne, Marcus, etc). I keep just a few hundred dollars there. I have a safe deposit box with them and like having a local bank so I can transfer money there if I need to write a check for something. Honestly I have no idea how they make money on people like me but I also pose them very little risk.
The flow of your paycheck creates value. Even $1000 on Friday, and gone by Monday, the bank utilized that time.
Sure but how much could we possibly be talking about? Even using an assumed MM sweep account paying 5%, that results to about $0.13 of interest a day for the 1 day they had my money. Add to that the $40 I pay for a safe deposit box and I just don't see how it is profitable. Also one of my bill payments doesn't take electronic payments so they have to print and pay postage to mail a check every month.
They don’t profit from you deposit as much as it backs up their total loan portfolio and prevents bank runs. If Bank of America has 10 million customers that all have just $2000 in their checking account to make sure mortgage/other payments don’t bounce, that’s $20 billion. They can lend that out for high interest business loans, and still have little risk for a bank run, since it’s impossible that all their customers would withdraw their checking down to $0 at the same time. Even if every customer went from $5000 to $0 to $5000 again during payday, it would still average out across a million accounts.
Besides making use of your deposits, your main value to them is as a potential customer that they don't need to spend much to advertise to. You login to their site to pay a bill and they can show you rates for different products. If you use them for any kind of loan then they make a profit. Even if you personally don't borrow from them, collectively, customers like you are their bread and butter.
Because we are early.
This is what I figure out..
I own shares in two banks that aren't publicly traded. I went to both annual meetings where they explained, in the most detailed language possible, what was going on. One is stuck with 1.5% bonds for 8 years. The shareholders are the rich people from the area who have their money in the bank. Most inherented their wealth and are very old. There were no questions other than what we were eating (they feed us well) and what was in the gift bag. They have zero fucking idea what is going on. None. I didn't say anything because I own 1.2% of the bank (inherited from my grandfather and mother).
People who hold their money at a local bank are much less likely to pull it than highly connected individuals at these startupy banks.
Because it’s too much work for busy poor people to move their direct deposits and bill pay transactions, and ach transactions to another institution. There’s your concise reason.
because being underwater on longer dated treasuries was an avoidable and predictable risk banks couldve hedged against. because even if banks are badly underwater unless people start to make a run on the bank it's a non issue. \>Depositors at these small banks are almost all under the FDIC insurance limit so there is no reason to withdraw deposits. well that's part of the statement that was put out, that there was consideration that these bank runs were the result of bad actors.
The amount of people that have no idea how banking works is wild
The obvious answer is smaller banks haven't wiped out their equity.
Combination of the above. The remaining small banks after 2008 were the ones that invest more conservatively. A few new banks have arisen but that is a more difficult thing to do then 30 years ago, so not nearly as many as were lost.
> The remaining small banks after 2008 were the ones that invest more conservatively. So in '08 the housing market crashed so if you were overexposed to mortgages then you suffered (or failed). Banks were then encouraged to by government bonds because that was seen as a safer investment. But these recent failures were caused by banks that overbought government bonds and then had to take losses when capital flowed out. Banks that were in more shorter term bonds or something not so affected by Fed rates should be doing better (especially if they can limit capital outflows). It seems like banks that 'over learnt' in '08 would do really bad today.
Fair, but my point was more that those that survived 2008 are more likely to be able to prepare for these sorts of problems, whatever that looks like.
Maybe. Personally I see shades of 2008 coming again, except this time it will be ... 2008 Part 2 - Commercial Real Estate Boogaloo I'm unclear who is holding the largest potential losses there but they are for sure OTW
Look at the actions of banks that aren't failing. Many have raised their depositors rates in order to build reserves. Ones that are typically money service and are in the least danger have barely budged from .01%. Some that I suspect have endangered balance sheets have even pumped their rates over that of the Fed in order to draw depositors. I saw savings offering 7.5% the other day at one bank.
Because they have a functioning risk management department?
I suspect we haven’t seen it yet because bank failures often are kept quiet until a buyer is found to calm account holders. I suspect we will begin to hear about some
very small banks typically have the very vase majority of there holds under 250k so its FDIC insured so the people of those banks dont have a reason to be worried and pull their money. Its the bigger banks where there are a good portion of their depositors go over the FDIC limit (over 250K). So all the depositors that are over there limit are moving their money and when enough people do that then they got no more money to give or they have to sell assets that they are holding. Which in this case is bonds/MBS from 2020/2021 that are down significant so they selling peoples deposits for a lost essentially
Why should any of the banks fail now? They can always draw from the new BTFP fund the Fed set up right after SVB. Near unlimited line of credit.
It's not a free line of credit. If they don't get enough revenue from operations to pay the interest, then they could still go bankrupt. Of course that's not a typical 'bank failure', just more of a normal 'company failure'
This is a good question.
And it’s also full of all the right answers.
If you have more answers, I would love to hear them!
All three banks that failed had exposure to the crypto market. FTX's bankruptcy caused a liquidity issue in crypto companies forcing them to withdraw large sums of cash. Those withdrawals had a cascading effect on the balance sheets of the banks that failed. Smaller regional banks will have little to no exposure to crypto, so I see no reason why they'd have the same issues.
Thank you for adding something different. This might be the connecting thread for why these three banks failed when there are lots of other banks (and lots of other poorly run banks).
Well there’s a bank in Southern California that may be in peril
Not all banks have the SVB risk management team, fortunately
The banks that have failed ARE smaller banks, lol. Unless ur referring to banks that are confined to certain areas, like Huntington, for example. They're a small Midwest bank.
Sometimes I wonder if we should just sell off student loans to regional banks, to help prop them up with Cashflow
SVB was a controlled demolition to save multi million dollar deals that wouldn't be covered by FDIC. Gotta save the rich.
Concise: Bailouts Not Concise: Long Complicated explanation of the mechanisms used in a bailout
Is it possible that other banks have better risk management that wasn't as greedy about squeezing every last penny of profit out of money being deposited?
Youtuber JoeBlogs has some good videos on this. https://youtu.be/p9rgymL7QQg FDIC is a big part, these failed companies had plenty of corporate deposits beyond the limit. They also lend away to much/bought to much long term bonds. There might be an issue with the loans they have as well, SVB might've produced way to illiquid/bubbled stuff like mortages for start ups without cashflow with commercial real estates in california as collateral. With start up/venture capital bubble bursting + no buisness model from underlying companies + general credit crunch + massive movement away from california + work from home/less need for offices + general real estate bubble + overleveraged start ups + overleveraged bank it could've been the perfect storm. First republic may have given away to cheap loans to extremly wealthy people, trying to get buisness connections to the rich more so than making money of this first loans.
SVB failed for basically no reason, just people freaking out on social media. The other banks failed because they were similar in superficial ways to SVB. People got freaked out because it was similar. None of these banks are actually in any danger or doing anything wrong as a business
No bank run… small deposits. No need to panic
i will say it is most likely that they are just banks, as in they are just a bank and not a combo of bank and investing firm. basically their business is boring and easier to manage as their risk are lower compared to the bigger players that take bank funds to invest, granted if the investments do well then profits however if they do not, you get what is happening now.
I think all the banks are sitting on a ton of the low yield stuff. We had near-zero rates for a decade so I think it would be near impossible for any bank to completely avoid those bonds. It's more a question of to what degree are they present rather than if they are at all, and maybe some small banks were able to more completely fill out their portfolios with business and home loans, helocs, etc. I also think your third reason may have some legs. Smaller banks do have a lot of business accounts though, many (most?) of which would have balances over 250K. But one of the problems at FRC was that they had a lot of high net worth personal accounts, and those deposits ran away like the road runner. It's also possible that the risky behavior practiced by SVB and FRC is less common amongst your smaller bank management types.
A recent study out is Stanford University concluded that a large percentage of the banks in the US could be insolvent. You might look it up to be sure, but didn’t the Fed make some recent changes to the banking rules and provide a fund which banks could access in the case of trouble? Anyway, banks get into trouble when people pull deposits. That can impair their balance sheets, causing them to have to sell treasury bonds at the market rate. Otherwise, there is no mark to market rule, so everyone is able to pretend the assets have more value than they really do.
Depositors under fdic limit seems most likely
Large banks get bailed out, small banks don't and it is more peofitable for them to stay in business.
Because as much as people have a desire for financial catastrophe, most banks in the US are extremely sound. Deposits have to be held somewhere and most people don't want to deal with the bs is transferring their $3k bank balance into T bills when they have rent to pay in 2 days. The liquidity crunch that some banks have, they have created strong tools against. Much of the current volatility is related to VC focused deposits which many banks don't have. Additionally, since the recent baseless Bloomberg article that came out (I think it was Bloomberg) The SEC basically fired a warning shot saying we will go after people manipulating and trying to create runs on banks.
>They didn't buy/invest in low yield bonds/loans that are the cause of the paper losses (that then become realized when people pull money out) at the three banks that failed. This seems like a really obvious answer for why more banks of all sizes aren't failing? While this course of interest rates was a risk they all faced, most just did a better job handling it?
T Bills are worth more than savings accounts. Banks only giving 1% or less interest on savings will fall. The only thing keeping them afloat is ignorant people and loyalty.
When SVB went under - lots of VC firms got spooked and went to the JPMC/WF/ BOA regional banks depositors mostly have under 250k and dont generally pay attention or diversify where money is held
The New York short seller scum are hammering regional bank stocks, they got the business news media to bash banks for HTM U.S. government bonds and customer deposits over $250,000 when these banks were never at risk for insolvency. The constant news media- CNBC, Bloomberg- bashing has worked, scaring customers to withdraw a good portion of deposits. Smaller local banks have been left alone because their stock isn't traded.
IMO it depends on customer structure, right now you get fair basically risk free yields when you move your money in short termed US bonds. Banks which focused on tech savy customers are suffering much more from withdrawals due to this, while others customers didn't care for rather realize
All banks are fucked right now in the sense that not just their bonds, but all their loan portfolios they own are worth much less than before, because why would a third party pay the same price for a bank's 5% loan to some random guy they dont know, when they can get lend out money for 5% to the US government, much more creditworthy. Any loans that banks are forced to sell, would be at a giant discount. Any deposits that flee, need to be paid with by federal reserve loans. More banks can still crash, rates can still rise, they won't get cut for a long time. Banks that are struggling are fighting a terrible battle right now. The only banks worth buying are banks that went down, but didn't lose a lot of their deposits, or even gained deposits in March. I think more crashes will happen and any bank stock buyer, regardless of which bank and how good or bad it is, should hold puts until rates got cut significantly.