Banking in uncertain times

The Basel accords are supposed to establish a risk-oriented way of measuring and controlling capital risk limits across asset classes. SVB and other regional banks fought heavily against being subject to this kind of oversight. I think it makes more sense to rework Basel 4 based on this failure rather than change the accounting standards.

Because at maturity, the bank gets back its money. So it is perfectly valid to say "in ten years, this $100m bond is worth $100m...and I intend to hold it for ten years, so it's worth $100m [equivalent] today". The "I intend to hold it" is the relevant part of the valuation, though.

- Enron used "creative" accounting and mark to something style procedures to create fake valuations

- They go out of business.

- Regulators say, "Hey! Now you need to mark to market always!"

- 2008 happens. Markets for things like CDOs and CDSs dry up almost overnight. At the very least most of the liquidity is gone and spreads get VERY big

- B/c of the above coupled with rules of "you need to mark to market" and "if value falls X% you have to sell", lots of selling happens in low liquidity environments and therefore prices fall more, the downward cycle begins

- Post 2008, people realize that "mark to market, always!" maybe isn't the best idea.

- I would imagine, that's why the Govt is saying "Ok, we will pretend that your assets are worth par value". They don't want to trigger the downward spiral.

It's also interesting to note that the Govt made money on many of the assets they bought in 2008 at well below par value. The implication is that those assets were undervalued when they bought them. Again, I would imagine this is a selling point of the idea "the par value is probably not that bad price to pay for these things now".

Finance is an imaginary staircase that only works until we look down and freak out. We don't document the robustness of the stairs because the stairs aren't real.

Or that the bank should be able to say "depositor X transferred $100 million to Chase, so we sent Chase a wire for $10 million and treasuries marked HTM worth $90 million" or something.

I agree with your main point.

You'd have to be careful with regulation around this, because what you might end up with is banks preferentially seeking assets for which there is not a liquid market so they can pretend they are worth more. That's... not an obvious improvement.

To some degree this makes sense, because if the maturity timelines and classification are correct the bank is only losing opportunity cost and inflation-adjusted dollars. Not actual dollars.

Meanwhile, if they need money from the fed it is offered against collateral based on mark-to-market value.

Have a read of Matt Levine:

https://archive.is/l4nLU

The “let’s do something about it” could actually be business as usual. Look at the “deposit beta” in that article: when interest rates increase, mean rates banks pay on deposits increase less. So you can have a bank with a low mark-to-market value (assume all deposits liquidate at par and securities are sold at mid-market), but that ignores the value of the enterprise itself. Or you can project forward (to a specific time or times, not necessarily to the arbitrary maturity of each security), and you may well find that you end up with enough money at every point in the future to be quite comfortable, assuming your deposits stick around and continue to earn less than market interest.

Imagine you worked at a magic trading desk where you could issue a very special bond: you borrow money right now, and you pay a floating interest rate that is set at 1/2 the federal funds rate. This is a great deal, but it comes with a catch: the bond holder can call the debt at any time, which they will do on occasion at random but will do en masse if they don’t like you. Also, people can lend you money on these terms and you have to accept the deal. How would you make money on these? How would you account for them?

I agree that HTM accounting, done carelessly, can lead to wrong conclusions.

If a bank that makes a mortgage loan has to buy an interest rate swap that zeros out the interest rate risk on that loan, then the replicating portfolio is basically ... nothing ... right?

Banks have to be long duration risk to be useful.

Many of their assets aren't really fungible either. Mortgages are the canonical example: yes they can now be turned into MBS, but your local credit union just issues and holds them). The same is true of the commercial loan to the local stationary business. As far as I know those aren't bundleable into commercial paper securities. The debtors do the same: they don't treat their loan as having any market value at all beyond what it had when issued. House prices generally don't mark to market except in places with property tax assessment.

A bank is illiquid if its holdings require time to sell at "market price". Selling things like mortgages requires time because the buyer has to perform due diligence. If i have to sell mortgages right now, I'm going to be getting an awful price for them.

OTOH, i can sell treasuries in a fraction of a second at the ask price minus epsilon. It's not a liquidity problem, its an assets < liabilities problem, (as you clearly state, I'm just frustrated by the discussion here).

What is the alternative ? To have the banks trading on a millisecond basis so that the mark to market value of assets is positive ? What about the transaction fees ?

In the olde days that was the bottom drawer where you would stuff the losing tickets at the end of the day and hope that they were in the money tomorrow.

Finance crimes are low tech and have not evolved much as they don’t need to; there’s no policing.

Have a go at it, elites scream communism and the like, and rile up the 2nd Amendment fan boys, only to throw the ones that go over the line in jail to keep up appearances.

I’ve been noting and watching this same social ebb and flow since the 80s. The kids/teens then who soaked that reality up live it still today. IMO memory is why we had a mini-Reagan in Trump grow so popular.

The reason such things you point out are allowed is they’ve always been allowed from the perspective of those benefiting from them. If the system was stable and accountable to the masses, the phony winners rich off mathematical inference but too inept to keep themselves alive would of course be subject to a terrible regime should elites be required to pull on their boot straps; a figurative identity of being coddled is all they know!

The history here is illuminating: (Jan 1 2023)

> "During the 1980s, savings rates climbed as high as 8%. Deregulation caused deposit interest rates to stay higher than financial institutions could sustainably support, which contributed to banking failures during that decade. In the 1990s, savings account rates decreased significantly, typically sitting between 4% and 5%. The 2000s kicked off with a recession, and savings rates fell to between 1% and 2%. Following the financial crisis of 2008, savings account interest rates fell to historic lows—below 0.25%."

https://www.forbes.com/advisor/banking/savings/history-of-sa...

See also: https://twitter.com/biancoresearch

"Just deserts" is a common phrase that uses it in the same way.

The reason “fractional reserves” keep creeping back in whenever you try to offer mortgages to more than just rich people is because fractional reserves are a way to invent money out of thin air, and you have to invent money out of thin air because the not-rich people buying the houses do not have the money to afford the house (but they can make that money if they focus on it for 10 or 20 or 30 years).

You often see people demand to know why banks are allowed to do fractional reserve banking. And this is the reason: it lets banks offer mortgages and credit cards to most of the public. Most people don’t have much money, but do have a lot of future earnings. Giving people access today to large chunks of their future earnings is a big social good but it fundamentally requires money to be invented from thin air, and that invented money is then gradually filled in with real money over time as the earnings come in.

So somebody somewhere has to be inventing trillions of dollars. This is risky. The capitalist way is to have private entities who profit when they manage their risk well, since that provides the strongest incentives for competency. And the democratic-capitalist way is to heavily regulate those private entities, eating some portion of their profit to provide some extra value to the public.

> But… they aren’t real yet? [...] So I don’t understand this point.

If people withdraw their deposits, the bank will have to deliver the money somehow...by selling the assets that have lost money. So the point is that although, if nobody withdraws, the losses are survivable, if enough people withdraw, the losses are not survivable. As soon as depositors realise this situation, they will withdraw their money. So that's the problem.

Barring something extremely abnormal happening, aren't low-yield bonds seeing real losses already due to inflation?

Like it doesn't have to be the spot price we're talking about, aren't many of them toxic already and others expected to track there?

Yes, banks do "create" money. No, it is not out of thin air. It absolutely does come from deposits.

An example of how banks "create" money, is person A has $100. A deposits it. The bank lends that $100 to B. Now B has $100, but A also still thinks they have $100, even though they just have a number on a piece of paper.

They system goes from acting as if $100 exists, to acting as if $200 exists, but really there is only $100, and an IOU for $100.

That is what bank money "creation" is. It is not from thin air.

People get confused because "money", as in fiat currency, is also a Government IOU. But the above principle is true for gold, bitcoin, or any asset, and they wouldn't get mixed up the same way thinking banks create gold out of thin air.

It is a starkly different thing than how the Government creates money.

And nor does the balance sheet become inexplicably unbalanced. It issues bills, a liability, which will cancel out as an asset unless it sells them, or takes a value from it's balance sheet capital, or gets interbank funding (which still balances, because that's another bank's asset).

You're not wrong a bank can fund it's lending, indeed there's that often cited BoE paper all about it, but that funding doesn't come from thin air.

If you keep creating money out of thin air — which as per my admittedly naive understanding is equivalent to just printing money without giving back anything in return — wouldn't it ultimately lead to a collapse or a hyper inflation? Like it did in Venezuela a few years ago (???).

Why is the US seemingly immune to this kind of thing?

https://www.federalreserve.gov/monetarypolicy/reservereq.htm

https://positivemoney.org/how-money-%20works/how-banks-%20cr...

Ironically, US’s down fall may be its own failure to believe itself.

To add, the vast amount of money that's circulating is created by banks. As I keep harping, refer to this article by BoE for details.

https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/m...

If the banks listen and take the beating, invest more equity and re-adjust their banking practices to handle interest rate risk, nothing exciting happens.

If the banks don't heed the klaxon call, they will likely get wiped to zero and cease to be owners of banks anymore(because the FDIC will take the bank over and say enough). Depositors/customers of the banks will probably be just fine though. The FDIC will either find a new set of owners or dissolve it and move customers to new banks that did take the beating.

I imagine some idiots will try and call the bluff, get wiped to zero and hopefully learn something in the process, if only to not be a bank owner anymore.

In 2023 the situation isn't necessarily worse, but it is certainly different. Asset prices seem relatively well-understood, in that their declines are a straightforward function of interest rates as opposed to an uncertain function of credit losses. Bank leverage is less than in 2008 as a result of regulation.

If the situation in 2008 was "some banks are _super_ insolvent, and it's hard to tell which ones", in 2023 it seems to be "some banks are mildly insolvent, and it's fairly clear which ones". A mildly insolvent bank can probably stay afloat as long as it continues to have access to capital, which the Fed is giving them. But if people start withdrawing their deposits from one of the mildly insolvent banks, it will become increasingly difficult for that bank to dig out of even a small solvency hole, so there's still some uncertainty as to whether the Fed lifeline is enough to save them.

they can be an issue if, say, all your depositors decide to make huge withdrawals and the bank's immediate cash needs balloon, or if they have specific payments they need to make in the near term which would force those "available for sale" securities to be actually sold

none of this is an inevitable risk. there are ways to hedge against rising rates. the current rate hikes, although historic in their pace, have also long been anticipated by the market and telegraphed by the Fed. that bank administrators failed to plan accordingly is honestly baffling

The truth is roughly that both sides are right, and the sum of their claims is much weirder than either subset.

The actual instrument in question is a little tough to get your head around. The first part is the basic bond mechanism: you give the government a thousand bucks, and ten years later they give you back that thousand dollars (guaranteed: they can print money so they will never default, only risk is they have to print so much money to pay you back that the economy explodes, and everyone has bigger problems at that point). Why would you do this? You wouldn’t, there is no upside, you only get back what you put in and it’ll be worth a little less because of inflation by then as well. Nobody does it, so right now what we have is not a real financial instrument.

So let’s make a first attempt at offering some upside: if you let them hold a thousand bucks for ten years, they’ll give you 10 bucks twice a year. Now you’ll take it - unless you think you can make more than 20 dollars out of your 1000 dollars each year by putting it somewhere else. What controls how much you can make on your 1000 dollars elsewhere? A lot of factors that all ultimately rest on the interest rate. Okay, so the government can’t just offer a flat 10 bucks twice a month, they have to offer something competitive with the current interest rate. But there’s the kicker: the current interest rate. Once you buy the bond, that amount is fixed, even if the interest rate later changes.

If the interest rates go up after you buy a bond, next years bonds will be offering higher per-year payments, so your bonds are inferior by comparison (they pay the same at the end, but less on the way, and they’ve already paid out some of the payments to you) and thus are worth a lot less. This is important because aside from holding them you can also sell them to someone else for any price you agree on, and whoever buys them from you gets the rest of the yearly payments and the final payout instead of you. They’re a hard thing to sell if interest rates have gone up, because you’re offering 20 bucks a year for five years while the government is offering 50 bucks a year for 10 years.

So: the money you get back eventually is worth less than when you handed it over because of inflation, but you’re getting small payments all along the way based on the interest rate at the time of the agreement. You care about interest and about inflation.

We have to stop for a moment and talk about interest rates and inflation. It is generally accepted that an increase in interest rates will cause a decrease in inflation a few years later. Confusingly, people will also say that interest rates move in the same direction as inflation but with a lag. It’s not that confusing though:

an increase in inflation at time t=0…

…will cause an increase in interest rates at time t=1…

…which will cause a decrease in inflation at time t=2…

(…which will cause a decrease in interest rates at time t=3…)

(…which will cause an increase in inflation at time t=4, and we’re back to step 1)

And so the cycle goes.

So in effect, you’re betting on this tension between interest and inflation resolving in your favor. In practice I believe the effect of inflation is smaller than the interest payments, so it’s also generally believed you always have a way out of the bet: just hold for the full ten years and the interest payments over that time will more than cover the inflation loss.

Except you can’t just hold on to the bet, because you’re a bank, and that thousand dollars you gave to the government is not your thousand dollars - it is some customer’s deposit, and they might want it back. So you better plan to have another thousand dollars somewhere else that you can give that customer, because the only way you can turn this bond back into money before the 10 years is up is selling it. And as mentioned before, if interest rates have recently gone up, your bond is not going to sell for anywhere close to breaking even.

That’s what that unrealized loss figure of 600 billion is: if you sold them for market value today, how much would you lose? As pointed out in the article, because interest rates were extremely low when these bonds were made, their yearly payout is very low. Because interest rates have risen rapidly, new bonds have much higher yearly payouts. And because interest rates have risen recently, we’re still in the lag period before inflation falls, so the final payout is also worth less (once again, I believe the effect of inflation differential is smaller here, and the price is I think mostly driven by the interest rate differential).

Concretely, right now, you could probably sell those bonds for no more than 75 cents on the dollar, and likely closer to 65 cents. If the Fed keeps raising interest rates like they’re doing now until the end of the current Presidential term (where someone else will get to tell the Fed what to do), we might get below 50 cents on the dollar, or even lower.

Banks bought 2 trillion dollars of an asset and right now that asset is only worth 1.4 trillion. That is, objectively, a huge loss. Point to the busters.

…But if we just hold the asset long enough, it is worth about 2 trillion again. Point to the holders, and this is why we call them “unrealized” losses.

…But if we can’t hold the asset (because, say, everyone withdraws at the same time), we have to sell at the current market rate, and those losses are forced to be realized. Point once more to the busters.

…But if we can rely on the FDIC or the government or other banks to step in and cover our withdrawals, we aren’t forced to sell - we can hold until the value returns, and pay back the FDIC or the government or the other banks then. Point once more to the holders.

And so it goes, back and forth between the busters and the holders. Who is right? In aggregate it’s both and neither, but at specific times for specific banks it could very visibly be one or the other. No wonder it’s so confusing!

There’s a lot more of these back and forths at every level that further complicate things. The government is jacking up interest rates so they’re causing the pressure… but banks know this dynamic exists and didn’t prepare for it so they made themselves vulnerable to this pressure… but the government regulations make these investments much more attractive to banks (very roughly: regulations say you only have to put up 0-20% of the value of these investments as collateral, for other investments it could be 100% or even 400% collateral) so the government pushed the banks in this direction… and so this cycle goes, too.

The fundamental dynamic is these bonds were an easy investment that turned into a giant Sword of Damocles over your head that’s growing by the day. In ten years you can step out from under the Sword, but any day now your depositors might panic and drop it on you, but if they do drop it the government might catch it before it kills you.

Thus, finally, some insight into the title of the post: very uncertain times indeed.

Without a fractional reserve system, the liquidity that drives all economic activity grinds to a halt as everyone fights over the few remaining real dollars rather than managing their deployed capital.

Banks basically act to multiply the amount of money in the world today by creating promises about the future that act as a bridge that moves money from the future into the present. That money then flows into restaurants, dog walkers, software engineers, etc... Inflation is kept in check b/c the promises force the money to be paid back to the bank via monthly loan repayments.

Banks that only hold short term reserves or cash equivalents like Brex don't act as this multiplier. Going forward it's likely small banks will move towards this model as only the big banks that are too big to fail (b/c they are necessary as multipliers) can afford to take on the risk of longer term investments or creating loans.

But that doesn't really provide that much interest to depositors, in this age of loose money supply.

So there are more exotic functions that "investment" banks fiddle with. Ie trading on the stock market (regulated betting) buying companies, and trading on futures and other pure bets.

The problem is that banks are bigger, and have more depositors. So when one pops, other go because they are all doing the same shady shit to make profit.

In the UK there are still a few building societies that offer traditional, boring, consumer banking and mortgages. But they are now large national behemoths.

But to your point, Brex is a payment manager/facilitator. Its not really offering banking, its more a service to manage expenditure. This might seem like pedantry, but its different enough to make the point.

It’s a necessary condition of the discounted cash flow asset pricing model.

https://en.wikipedia.org/wiki/Discounted_cash_flow?wprov=sft...

The opposite occurs when interest rates go up, people can no longer borrow enough to pay asking prices, demand falls and prices fall to meet demand.

There are obviously other factors involved but the basic relationship holds.

Your second argument is that it would be trivial to stop and reverse inflation if it were true, but even if it were true it would not be so easy. The way we measure inflation is based on the prices paid for goods and services of consumer goods. If the only change from an interest rate hike were on asset prices, then this doesn't directly impact prices of consumer goods.

As trivial as it sounds it is exactly the premise with which fed operates. Their mandate is price stability (~2% inflation) with low unemployment rate. And interest rate is a key lever they have. So yes they are going to keep rising rates until they see inflation come down to around 2%. They harp on this at every FOMC meeting[1]. They believe raising rates to around 4.75% will bring down inflation to 2%.

Will be interesting to see how it plays out.

[1] https://www.federalreserve.gov/newsevents/pressreleases/mone...

Of course there are instruments like interest rate derivatives where you can make money when rates rise, but he's talking about ordinary assets like bonds and equities.

The reason all prices do indeed embed an interest rate is that all future cash flows need to be valued somehow, and those values go down as interest rates go up. So your equity that (somehow) is guaranteed to pay 10c next year is worth less if interest rates go up, just like if it were a bond.

How could you conclude that an interest rate hikes wouldn't reduce all asset prices?

Well, that is the strategy of the Fed. Raise interest rates when we experience too much inflation.

So for individual people, this affects... maybe 5%. It certainly affects small companies, but those are entities that we, as a society, expect to have good financial advisors. (It turns out that many of them do not.)

Every bank and credit union I've ever dealt with has prominently placed the FDIC or NCUA insurance terms on their paperwork, website and physical doors. When you sign up for an account with a brokerage/bank, they are always explicit about what accounts, if any, are protected savings and which are unprotected investment accounts.

If you're an owner and you need over 250k to be liquid on daily to weekly timescales, but hiring a three people to manage manage your bank accounts sounds unaffordable, you should find a 3rd party that can do that "cash sweep" thing for you.

Beyond 3 years it makes sense to spread it among Index fund, gold ETF etc., depending on your need, risk appetite etc., But then we are venturing into "investment" and not "safe keeping".

https://www.treasurydirect.gov/marketable-securities/treasur...

On your own account, once you reach $250k in cash (not pensions or home equity etc) you're basically in the financial 1% and you're sort of expected to be either sophisticated or speak to a "wealth management" firm.

As a business it's more complicated in the intermediate zone before you can hire a Treasury Officer to deal with this, which is basically patio11's argument.

Just don’t exceed the insured amount in a single bank, and if you do need to have more than $250k in cash… either open a second account at a different bank or donate it.

So if you have $1M parked in one account then you're at risk. $250K parked in 4 accounts caries zero risk.

If I don't trust that the bank can give me the money, it doesn't matter if it's in a CD or checking account, I'm going to pull it out (screw the gains) and the liquidity problem still exists. The extra months/year of interest don't stop a bank run.

This is why I think this can really only be solved by government and regulation. Government regulation on the quality of investments to make sure that they're really worth X% long term. If there is a bank run, government needs to step in with the government liquidity, and say "customer gets their money, we get your assets". Of course, brokering an auction for these amongst other banks is the preferred approach.

There should be a fairly free market around what leverage banks are willing to take on as long as the investments that back it are regulated and solid. If a company wants to expose their shareholders to risk by keeping high levels of leverage, that's their problem, but you can't punish depositors for the mistakes of the bank. Not saying we shouldn't have any regulations in this space, but as long as mistakes impact shareholders and not depositors or taxpayers, I think everyone is happy.

> The regulators’ response to SVB — guaranteeing all depositors, but also the Fed’s Bank Term Funding Program to finance other banks’ bond portfolios at par[7] — increases the value of other banks’ optionality, which encourages them to take more risk, because their deposits are safer. (I suppose this is the real moral hazard concern.) And so there should be more regulatory and supervisory changes to tamp down the other banks’ risks.

> [...]

> [T]he post-SVB actions have made bank deposits a lot safer, which is a nice windfall for the shareholders of every other regional bank that has a lot of losses on held-to-maturity securities. And so in exchange for that windfall the regulators should regulate those banks much more strictly, which will make them actually safer (and reduce the government’s exposure to their risks), but will also reduce their profitability.

This makes zero difference to the bank. The bank doesn't get saved by the FDIC limit, as you know. What happens after the bank fails - whether the depositors are made whole or not - is immaterial to the people who owned the bank, who now see their asset (the bank) worth $0.

If you want to make a moral hazard argument with respect to the FDIC, you'd have to make it with respect to the actions of depositors.

Also, WRT the $250k limit, that's the minimum they will guarantee. They have always tried, and in recent decades always succeeded, in making depositors whole one way or another, usually without spending much (if anything) from their insurance fund. The $250k is the worst case scenario.

Because they don’t want the stock to go to 0?

I think most businesses and investors would not want that.

We’ve seen bank stocks drop, it is in those banks interest to show they’re not taking chances like SBV.

As to why it doesn't introduce more risk, it very well could. So far they have either slowed down a train wreck or prevented one. Bank issues in the last week have seemed more tied to depositors getting spooked and withdrawing or transferring money, the real question is whether other banks are so full of unrealized losses that the shift from a market depositing $5T in newly printed money to an economy spending more than it earns will break the banks.

The second is a third or fourth order bailout of banks. By moving the goal posts on depositors responsibilities to “none if you are a powerful lobby”, risky banks no longer have the second most important limit on their riskiness (depositors managing their own risk and due diligence). That leaves only the equity holders to do the diligence.

I think the reason people aren’t calling it a bailout is that it puts all the pressure on equity. Which maybe what we as a society wants but it’s certainly a big change to the existing regime.

The desperation of that action speaks volumes about what they faced (and we don't know). Having no limits for FDIC will stem panic in the short term at the cost of (practically guaranteed) mid and long term hazard that this decision will directly engender.

That's not the correct analysis. It was a liquidity crunch, not a "hole" in the sense of a debt. In some sense the bank always had the assets, just not in a form they could pay out as a withdrawal. So when everyone wanted out at once they ran out of cash and got seized by the FDIC.

That's not to say there won't be any losses at all. There likely will as the successor bank liquifies holdings and makes whole the folks who want out. And yes: those losses are (as reported currently) not going to be borne by depositors at all. Currently the idea is that they'll be rolled into fees on other banks, which is part of the FDIC insurance regime. So we all collectively pay for it, just not via taxes per se.

However, the FDIC limit is REALLY low in today's terms. $250k limit was set in 2010. The money stock has been printed 143% more since 2010. To me that is about $607k in today's dollars.

This is why the FDIC was formed: to stop rumors causing bank runs. Since the average person knows their deposits are insured, your money isn't going anywhere, so theirs no need to do a bank run.

What failed here is that a group of uninsured depositors did an old fashion bank run. That's why the FDIC announced early that everything was covered: to very clearly telegraph that the bank run was unnecessary, and you shouldn't be doing them.

Now, in the case of the Big 4 being run on, they are too big to fail so the Fed would just extend them unlimited funds (probably).

https://dfpi.ca.gov/wp-content/uploads/sites/337/2023/03/DFP...

This is objectively false, unless by "multiple years" he means 2 years. The data is out in the public[1] so why not do some basic research before putting out claims like that? Basic mistakes like this makes me question rest of the article and the author's grip on the subject.

https://www.fdic.gov/bank/historical/bank/

(largely because the mechanics of holding $60bn in treasuries would attract some questions about KYC which stablecoins are unable to answer)

Stablecoins are just fractional reserve banking but with a thin veneer of tech, and a massive narrative to differentiate them from standard fiat currency.

You're far better off just buying commodities directly, at least where your value is located is much more transparent.

Stablecoins are basically "trust me bro its worth this much, and will never drop, just don't trade too much and make me defend the peg."

Fundamentally, Tether and banks have the same problem: does everyone believe that that bank still has enough money to pay you your deposits? If not, then bank run. Does everyone believe that Tether has enough money to back each coin with $1? If not, then run on Tether. Banks are regulated, so there's supposed to be a bunch of people keeping track of the bank's reserves to see if they have enough money to back deposits. Tether "solves" the problem by not telling anyone what their reserves are, so nobody can figure out if Tether truly has the money to back each coin at $1 or not.

[0] https://archive.is/l4nLU

Stablecoins are closer in this direction than banks but only if they actually maintain 1:1 reserves. One advantage is that b/c they are protocols there is less need to seek returns to make payroll, rent, and profit. Another is more transparency.

But also... at this point such a stablecoin is basically a CBDC...

That sounds like the financial equivalent of a perpetual motion machine.

If an institution has no choice but to buy short term treasuries, why wouldn’t sellers increase the price that institution has to pay?

SVB blew up because it was a bad stablecoin.