Ask HN: Are there banks/crypto companies immune to bank run? | Hacker News Reader

Ask HN: Are there banks/crypto companies immune to bank run?

15 pointsagy50 comments

With SVB and other banks having issues now, with crypto companies with stable coins (UST for example) collapsing, I’m wondering why there is no bank/crypto company that just holds your money 1:1, so even there is a bank run they can return all the money. You need some revenue to operate a company, but you can do it by charging customers a monthly fee and keep money as is without investing it anywhere and do not provide deposit/loans services, just storing your money and providing money transfer services (wire, checks, debit cards). Is it just eventually any company would love to earn more, so they invest it in some assets thus increasing the risk or something else?

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What you're asking about is called narrow banking - as opposed to the broad banking status quo. There are at least two banks, The Narrow Bank and Custodia Bank, that want to bring this business model to customers but the Fed is not interested in authorizing them. Here are some resources:

https://www.spglobal.com/marketintelligence/en/news-insights...

https://www.chicagobooth.edu/review/safest-bank-fed-wont-san...

https://www.listennotes.com/podcasts/bankshot/ep-14-whos-afr...

https://twitter.com/LynAldenContact/status/16379101661369303...

https://www.youtube.com/watch?v=xqX_NkBUQzg

Traditional banks have almost always had "high fee, no yield" account types that you can sign up for where you pay high fees and get a guarantee of high liquidity in exchange. These account types used to be more strongly regulated (to insure this isn't just the bank advertising one thing and doing another) for banks classified as "Credit Unions" but that hasn't been the case in decades. (But for some decades it used to one of the pros specifically for Credit Unions because the high fees doubled as Credit Union dues, in turn limiting membership and overall risk of bank runs.)

Generally, advice is to not use high fee/low yield accounts because you lose money on them (monthly fees means that the more months you store your money in your account the less money you have each month, that's not everyone's preferred "1:1" storage).

Of course, you are still relying on (what little remains of) regulation and the FDIC that a bank takes your high fees and does the right thing with your money and the right prioritization in a run-like environment that they've promised to do.

No, they are more prone to runs because there is no central bank to bail anyone out

Uhm, hate to break it to you, but you can only have a run on the bank as a result of fractional banking - which is systemic in the fiat banking system due to regulations only requiring they hold 10% of customers' deposits.

You literally cannot have a bank run on USDC or BTC because they do not do fractional banking (i.e loan out the money you deposited).

Yes you can with stable coins, the money held to back USDC was held in regular banks like SVB, some of which would have gone poof if not for the Fed has not guaranteed all SVB deposits. That’s why USDC depegged before the deposit guarantee was announced

You can't give out loans really without fractional banking either. I mean you can. But not really.

You could.

Banks, bolstered nightly with USD loans from this Fed, could not.

Well, you technically can, but few individuals will be issuing mortgages to the average joe.

The majority of business capitalization isn’t a loan, but invested savings in return for equity. All of venture capital, the stock market, small business using their own funds, etc.

Mortgages are collateralized, and business loans can be secured with assets or equity. I suspect the majority of bank loans are mortgages (?). Interest rates do not need to be high without fractional banking, since loans can be secured.

Who is going to issue mortgages, if not banks?

Banks only do community and jumbo in the us. Most mortgages are owned by the federal government

The federal government originates mortgages? TIL

Apparently the Fed owns 1/3 of all mortgage bonds.

https://mishtalk.com/economics/the-fed-now-owns-nearly-one-t...

… and ~25% of the Feds entire balance sheet is mortgage securities.

They don't originate those loans.

Banks can issue mortgages without fractional banking… Investors pool capital and start a bank. The bank loans money for homes and makes a profit from interest.

I suppose, but wouldn't really need a bank for that. And you need a lot of money - more money I'd wager than investors will want to pool together.

But, I guess if your goal is less people being able to get mortgages and loans, maybe it will be a good thing!

With stable coins you can have insolvency which is worse than a bank run probably (because no government insurance). Stable coins are the worse to keep cash - higher risk than a bank account but no interest. The only logical uses for them is online gambling and money laundering.

You don’t own a USDC. Instead some random offshore company owes you a dollar.

How can a stable coin be insolvent if they have proof of reserves showing they have assets that match total deposit value?

1. Do they post daily proof of reserves?

2. Are their bank accounts locked down to strictly the blockchain activity?

Proof of reserves means everyone was safe yesterday, at best.

Same way you did with svb. A stable coin is basically a bank. They take in assets and generate tokens against them. If there is a mass withdrawal they would need to sell assets possibly at a loss to cover it. If they a duration mismatch then they eat the losses come withdrawal time. Go too fast and they depeg and boom

You can buy government bonds - very little risk involved in terms of price change, and your money is safe from a bank collapse then - that is, even if the bank fails, they just forward all your bonds to a different bank.

Also, if you're under the insurance limit, you're safe. If bank insurers fail because too many banks fail, then the currency won't be worth paper it's printed on anyway.

IIRC government bonds are the "safest" option. Because the only way you lose them is if the US government collapses; and even if you think this could happen, if the US government does collapse, you have much bigger issues and also can expect every other currency to collapse as well (including Bitcoin/crypto, because most people will simply not accept it)

How come, maybe they just stop printing new dollars when the govt collapse?

USD can exsist without govt. It can't exsist without army behind the paper , at least on paper.

There were multiple cases in history when governments failed, I think their currencies never survived this. Hyperinflation in such situations tends to devalue money so much that it's not worth the paper it's printed on.

If you hold them to duration government bonds are fine. If you buy them, then interest rates go up, then you need to sell them ... well, SVB did that and now we're here talking about how NOT to do that.

That’s why your buy low duration. Payroll doesn’t just suddenly happen you can plan for these things

It pains me that even on hacker news (a more sophisticated discussion destination than most) most people who are replying didn't read the body of the message and just saw "are there banks/crypto cos immune to bank run" and just blurted out their usual response "no central bank to bail anyone out" or "banks earn money by investing / crypto has no FDIC".

OP is explicitly asking what if banks (tradfi) or crypto cos held assets 1:1 and charged fees as operations rather than invest funds. The question isn't so much around tradfi vs crypto but inclusive of both, that can a bank business sustain this way or not.

I don't have answers but I have a feeling a bank/crypto bank like this would attract far fewer regular customers to be able to sustain running it, like a couple of replies said.

"It pains me that even on hacker news (a more sophisticated discussion destination than most)"

Sophisticated is a weird way to spell pompous.

Do manufacturers of rat poison keep their factories free of peanuts, might be an analogous question.

The point being running to crypto because you are scared of a bank run is probably not going to be in your risk profile

I think the term for this is "full-reserve banking" or "100% reserve banking".

The Wikipedia page only talks about governments that have occasionally flirted with the idea, and economists who have debated its merits as a regulatory policy. I haven't found any bank that claims to be doing it.

https://en.wikipedia.org/wiki/Full-reserve_banking

You might be thinking about this the wrong way. It's not that banks are tempted to invest, it's that this is the whole business model, and it's even part of how most governments stimulate (or throttle) economic activity. Ultimately banks get a charter to multiply money, at a rate that the government thinks is good for everyone.

You don't need a bank for this. What you describe is a broker. You can open an account with InteractiveBrokers and buy government bonds. You buy the maturity that fits your cash flow. Problem solved.

Imagine if there was one. In the scenario where there was a bank run on anybody, this hypothetical bank would be more reliable than the government itself and would end up storing all the money available and bankrupts literally everybody else.

Such an outcome is undesirable, so this type of bank isn't allowed.

If you meant a bank that is guarenteed to recover money up to a certain amount, standard FDIC protections have you covered.

Banks earn money by investing and making loans.

As a result, they don't have enough readily available cash to fully reimburse every depositor. This is called "fractional reserve" banking.

The backstop in the USA in case of a bank run is FDIC insurance --- as applied in the case of SVB.

The FDIC also applies rules and regulations to member banks designed to limit and mitigate the reasonably possible effects of a bank run.

Crypto has none of this.

I just made this account and this is the first topic I seen. It's an interesting theory. I think that cryptocurrency is the future of all governments currency and I like the idea. I'm a business grad and my gf is a investment baker specializing in cryptocurrency. My question is if I could do this would you be willing to put your money in a account at my bank? This is basically what you pay a investment banker to do. I just wonder if people would want to use this service. I personally like the idea and probably would use it. Cryptocurrency has been on a huge bounce back and will continue to rise.

My question is if I could do this would you be willing to put your money in a account at my bank?

This investment banker stuff seems like a huge waste of time and effort.

In fact, so does working for money when anyone can just make the stuff out of electrons. This is the promise of cryptocurrency. I hear it is on a huge bounce back and will continue to rise --- expect BTC is currently down about 4.5% from yesterday.

You may be interested in the SPOT cryptocurrency, it's design claims to be 'an inflation-resistant store of value that features responsible protocol design choices. It is a freely redeemable, on-chain, stable asset that can safely wind down to zero users under stress without interventional bailouts'

spot.cash

Bank runs are rare while monthly subscriptions show up in your balance sheet every month. People prefer to take a minor risk instead of constantly losing money. If they don't trust the banks, they would just keep their savings under the floorboards or in assets like houses or gold.

Check out The Narrow Bank and what happened to them.

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

Most people are well under the insurance limit and would rather bank for free than pay fees.

This. The fees to cover the bank branches, the online banking system, atm usage etc. would have to be huge.

Why? Many banks are now fully digital and don't have branches.

Also, if nothing else, crypto has shown that storing money performing transfers is not that expensive.

I'd argue that most people simply don't know what is going on and think that their money is being stored in a bank vault.

True. I suppose if we combine both groups, that covers the vast majority of people.

tbf, this group have a better handle on how things work than the people who live in existential fear of bank runs because they're oblivious to the fact that a solvent bank can always borrow enough money to fulfil withdrawal requests (with FDIC kicking in only when the bank is insolvent)

Remains to be seen IMO - esp. in the age of social media.

Social media has nothing to do with the fact a solvent bank can borrow enough to offset its entire loan portfolio

I just started this account and this was the first topic I read. I like the idea implied. This is basically what you're paying a investment banker to do. I'm a business major and my gf is a investment banker. My question is would you use this service if I provided it? Currently it would be an impossible feat to get such a thing Fdic insured but I believe believe cryptocurrency is the future currency of the world's and since the Fdx scandal has bounced back nicely and is on a steady rise

Money market funds

BTC has been pumping hard since SVB, just sayin'

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