Where does the money come from? I mean that non-sarcastically, confess I've not figured out the way the banking system in the large works.
edit : thanks all for coherent clear responses.
edit : thanks all for coherent clear responses.
> A. The FDIC's deposit insurance fund consists of premiums already paid by insured banks and interest earnings on its investment portfolio of U.S. Treasury securities. No federal or state tax revenues are involved.
Source: https://www.fdic.gov/consumers/banking/facts/#:~:text=what%2...
In other words, IOUs to itself, like the social security “fund”
So the FDIC’s responsibility is to do something with what remains. Selling it all to another bank was one option that may not be panning it out; failing that, they’ll fund depositors, creditors, and investors as individual blocks of assets are wound down.
Insured depositors are sure to get all of their insured funds and the FDIC would have provided their own funding for that if they needed to. Uninsured balances and uninsured depositors will have high priority for what remains, which should be substantial.
These advanced dividends may come from liquid capital at the bank or from some other source of funds the FDIC has access to, and will be based on what the FDIC is already confident they can recover from the assets.
And yet: https://dfpi.ca.gov/wp-content/uploads/sites/337/2023/03/DFP...
I don't even doubt you can sell the assets and come out of it with 90% of deposits, but the wording is off.
From "1999 Repeal of Glass-Steagall was the worst deregulation enacted in US history" (2022) https://news.ycombinator.com/item?id=30206570 :
> Yeah what was the deal with that dotcom correction in the early 2000s? Did banks invest differently after GLBA said that they can gamble against peoples' savings deposits (because they created a 'sociallist' $100b credit line, called it FDIC, and things like that don't happen anymore)
> Decline of the Glass-Steagall Act: https://en.wikipedia.org/wiki/Decline_of_the_Glass%E2%80%93S...
> Dot-com bubble: https://en.wikipedia.org/wiki/Dot-com_bubble
Right. The problem is that SVB's books reported that the assets were worth more than they were actually worth.
If they weren’t forced to sell, they could collect coupons and make the exact amount of money they claim to have.
It’s not a matter of “actual” vs “paper”. Their books were correct until the run happened.
Yes… so if you hold it, that is exactly what it is worth. The issue is that they are forced to sell. We’re literally talking in circles.
If you are forced to sell on most assets, you are going to take a hit on your books, that doesn’t suddenly mean that the asset was valued incorrectly.
They didn't become insolvent because of the bank run. The bank run exposed the fact that they were already insolvent.
They are worth one 2033 dollar or 0.7 2023 dollar. 2033 dollar and 2023 dollar should be considered two different currencies. The bonds are pegged to 2033 dollars but customers want 2023 dollars, and when dominated in 2023 dollars the bonds are devaluing like shit.
A bank run is a bank run, it doesn’t matter what you hold if all your customers demand their money back at once.
That is an accounting practice; it has no bearing on the actual value of the asset. The same is true with calculating cost of goods sold; you can actually choose to use LIFO or FIFO costing to alter the accounting value of your inventory for tax purposes and such. Look up "LIFO liquidation" to see an example of what I mean.
Using generally accepted accounting principles, you have some room to conceal extra value or loss on your balance sheet. But the cash flows don't lie.
Insinuating that all assets must be liquid enough for all deposits to be withdrawn simultaneously basically requires that the bank only hold cash, which makes the entire concept of a bank fall apart.
We may use fiat instead of gold now but that doesn't mean a bank can float itself by hoping no one opens the box and breaks their superposition.
A bank is expected to be able to float itself as long as a sufficiently low number of customers demand their money at any given time, a bank run will collapse a bank no matter what monetary standard you’re on.
Incorrect. The opposite is true, in fact. Todays interest rate is irrelevant with regards to future cash flows for the bond.
Bonds are fixed income, your coupons are set and you get paid what you get paid. The coupons are fixed and when the bond matures, you are paid face value.
The only difference that is due to todays interest rates is that your low interest bonds have to fall in value to meet the market clearing interest rate if you are to sell them.
Correct.
>Bonds are fixed income, your coupons are set and you get paid what you get paid. The coupons are fixed and when the bond matures, you are paid face value.
Correct.
>The only difference that is due to todays interest rates is that your low interest bonds have to fall in value
Incorrect. They fall in price compared to the purchase price, not in value. The value was low even if they had held to maturity.
If you were forced to sell a bond before maturity, and you decided to repurchase that same bond, you could regain all of those future cash flows that were supposedly worth more according to the prior book value. Now if you repurchased that same bond, what price would you be willing to pay for it? That's right, you would be willing to pay no more than the current market price, because that is what it's actually worth, given those future cash flows that you so value so much.
Why would you only want to pay market price? Because those future cash flows aren't very much compared with the yield of other bonds. You're not going to pay the same price for a 2% yield and a 5% yield, because one is clearly better. The 2% yield has less value; it had less value before you sold it, it would've had less value had you held it to maturity. The bond's value is worth roughly the market price, whether you sell it or not. Its current value has exactly nothing to do with what you paid for it.
In a firesale the market price isn't full price, because the market needs time to react to price signals. More time than you give it during a firesale.
If you don't have time to let buyers figure out what a fair price would be, you gotta sell for much less than full price to convince those buyers to buy.
The issue is that the bonds can’t be sold now for anything like npv, because nearly risk-feee government issued bonds pay 3-4x what these bonds will.
That makes them… discounted
The actual value of the bond went down, because the expected value of the payout is less, even though the actual amount of dollars returned at maturity is the same.
Which is why the market price for it went down.