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Comment by eftychis | Hacker News Reader

Yes, but the problem is the 1 million is unlikely to be in cash. Here, it is in MBS issued at low interest rates and thus practically ~$500k if the security is sold right now.

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.

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The $1 million deposit creates a $1 million cash asset and a $1 million account liability.

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.

This is right, though I think we should be clear that the MBSs lost value because they are normally like bonds, and bond prices decrease when yields increase.

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.

> 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%.

What?

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.

And you think that the bank just keeps sitting on that cash until you withdraw it again, paying you interest in the meantime?

If they are sitting on excess cash, they can lower interest rates on deposits.

The point is that when banks receive deposits, in the short term, their assets/liabilities doesn’t change.

Sure, but you don't get a useful model of a bank by only looking at the short term like this.

> 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.

Correct, although if they don't do something to make money with the cash they take in as deposits, they won't have sufficient income to cover their expenses, let alone make a profit.

The effecf of the deposit is separate from the effects of decisions the bank makes after the deposit.

The deposit creates a cash asset and an equal liability for the increases account balance.

Other transactions have other effects.

It’s cash, until the bank converts it to something else. For example a loan.

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.

One way to generate interest is to simply park it at the Fed. Check out The Narrow Bank for the story of an upstart that wanted to make that their whole business model.

https://johnhcochrane.blogspot.com/2018/09/fed-nixes-narrow-...

Thank you for this! Very interesting.

You're right, the full million isn't a liability. But anyone depositing 1M isn't putting it in a non-interest bearing account. So now you are generating liability every second you sit on the cash. Which means you need to "invest" it.

No one is showing up at a bank and depositing $1M of physical cash (except maybe Mexican drug cartels).

That $1M you're depositing is presumably the liability of another bank.

Doesn't matter if it's physical cash or an electronic ledger since both the electronic ledger and the physical green pieces of paper are liabilities of the banking system, specifically for US dollars they're both liabilities of the Federal Reserve.

> specifically for US dollars they're both liabilities of the Federal Reserve.

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?

Dollars are bank notes “promises to repay”. It used to be many different bank issues notes payable in gold, now it’s one bank - the Fed, and it’s no longer gold.

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.

> 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.

> I don't see how those are liabilities of the Federal Reserve, but maybe I'm missing something?

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...

Yup, that’s quite the insight. (Although I don’t understand why you write banks are forced by law to buy.)

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