This isn't an over simplification it's just wrong. The bank does have more assets (the 1 million in cash) that balances the liability (the 1 million they owe to their customer).
Banks have a serious problem in their hands as they have to figure out a way to keep buying assets that they have to buy by law, while the Fed is going to keep increasing the interest rates via selling their MBS portfolio at a rate that makes "yesterday's treasury or MBS" the loser.
If action is not taken we haven't heard the end of this.
The value being in MBS now is a result of a separate transaction (well, a lot of them, probably) where (in aggregate) the bank takes a bunch of money from its cash assets and trades them for an (initially) equal value in MBS assets.
It becomes a problem when the MBS assets lose value, and the bank needs cash to cover withdrawals.
MBSs tend to remind people of '08 when MBSs lost value because too many had a bunch of garbage loans which defaulted, causing MBSs' face values to decrease. In this case, the fact that they were MBSs is mostly a coincidence. If SVB had invested in Treasuries, they'd be in the same world of hurt that they're in today.
Not necessarily, if they were investing/laddering in short term Treasury Bills (< 52 weeks) instead of longer dated bonds things might have panned out differently.
”97% of these MBS were 10+ year duration, with a weighted average yield of 1.56%.”
Treasury Bills from 6 months ago had yields of 3.37%.
No, it's cash.
If I deposit $1m in cash at the bank, the bank suddenly has an extra $1m liability and an extra $1m cash asset.
The point is that when banks receive deposits, in the short term, their assets/liabilities doesn’t change.
> The point is that when banks receive deposits, in the short term, their assets/liabilities doesn’t change.
They do change: Cash is a (risk-free, modulo safe storage) asset, the deposit is a liability. This has consequences for all kinds of metrics vital to the running of a bank.
The deposit creates a cash asset and an equal liability for the increases account balance.
Other transactions have other effects.
Yes, it is initially cash. But if the bank wants to make any money, it needs to convert that cash into some other vehicle for generating interest.
https://johnhcochrane.blogspot.com/2018/09/fed-nixes-narrow-...
That $1M you're depositing is presumably the liability of another bank.
To my sibling: Missing is the fact that US dollars are bank notes issued by the Federal Reserve. Issuing a note creates a liability.
https://www.federalreserve.gov/monetarypolicy/bst_frliabilit...
I don't think that's right. There are banks outside the US that hold US dollars that the Federal Reserve has no jurisdiction over. They create more currency through fractional reserve lending for their local currency as well as any dollar denominated loans they make. I don't see how those are liabilities of the Federal Reserve, but maybe I'm missing something?
It doesnt matter if the US dollars is held outside the US. The dollar represents a promise by the fed to pay, and thus is a liability to the fed.
Of course the fed has the power to create and destroy dollars.
So to banks outside the US. That's how fractional reserve banking works. If I go to the UK and deposit $1m USD, and they loan out $900k of that to you, that UK based bank has created $900k.