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Comment by nologic01 | Hacker News Reader

This is bad news on two fronts:

* the risk driver for these ongoing smaller bank failures is (reportedly) the rise in interest rates. This concerns such a basic aspect of bank risk management one wonders how this sector could even call it self banking

* the solution seems to be to create ever larger banking behemoths (on the premise that they they can better manage risks) - as if we don't have enough examples (Lehman, Credit Suisse that this is not so). In fact this aggregation only commingles all sort of risks inside a gigantic opaque pool, makes the private-public dependency (TBTF) and all its perverse incentives even more entrenched, and ultimately creates the conditions for systemic failure

It is all so egregiously non-sensical and sub-optimal. People famously have the political systems that they deserve. In turn this perpetuates the banking systems that they deserve.

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Ironically banks are some of the least shareholder friendly businesses, they direct a lot of profits to their own bonuses during good times rather than expanding their balance sheet or returning the profits to shareholders. I wonder how much this paradigm contributes to bad outcomes as it could easily incentivize short-termism and recklessness. Poisoning the books with bad choices that won’t take effect for multiple years or a decade, or comes with individually asymmetric risk less than the business’ asymmetric risk (10% of bank failure just means 10% I retire early) seems really tempting when it means years of big bonuses.

Given that banks seem to have an uncanny ability to destroy themselves in spite of an ever increasing set of regulations trying to stop them from doing so, and the current trend indicates in the future we’ll be left with just a few blessed TBTF banks, I think we ought to consider a system where the Government or Fed provides the core functionality of “let me put $X in an account so I can use $X in the future” for free and banks compete based on value added. It’s the least-worst outcome, because otherwise people are going to turn to crypto to avoid the for-profit oligopoly subsidized by repeated debasement and access to Fed lending/liquidity tools unavailable to the public.

> I think we ought to consider a system where the Government or Fed provides the core functionality of “let me put $X in an account so I can use $X in the future” for free and banks compete based on value added

This is simple, straightforward, and disintermediatory, so I imagine everyone involved will fight to the death to prevent it happening.

There is a real trade-off there when the government has direct access to and control of citizens' bank accounts. The idea that the government would know specifically how much we spend, where we spend it, and could deny transactions sounds pretty distopian to me.

With that said, as closely tied our government and the major banks are there might not be much functional difference from power they have today.

> The idea that the government would know specifically how much we spend, where we spend it, and could deny transactions sounds pretty distopian to me.

Non American here.

They already know and/or could trivially find out. There's no more barrier to them finding out now then there would be if there was some new, nominally independent government entity involved. That is to say a very thin wall preventing what you describe.

I sometimes get the feeling we oftentimes allow for market absurdities to supposedly prevent the government from doing something that it regularly already does today, just as long as there's a 'business' somewhere in the chain.

Americans seem willing to pay more to private business and thus actually part with more of their money than they otherwise would, as long as on paper they're not giving the money to 'the government' see i.e. healthcare.

> They already know and/or could trivially find out.

100% agree here. Today the US goverment, I won't attempt to speak towards any other government, has way too much power and ability to collect inflammation in it's citizens. We've allowed the government to assume that powers but we could also take that power away. If the government owns the bank there's literally no way to do that.

Healthcare here is a whole other massively broken system. In general yes I think it's a fair generalization that we would prefer to pay extra to avoid large governments, historically at least since we've done a really poor job keeping our federal government small for the last 80 years. It makes sense given our country's history though, and personally I'd rather pay a little more to a corporation than save a few bucks at the expense of living under a much more powerful centralized authority.

Those corporations are already powerful centralized authorities! The difference is that they don't even have to pretend to be beholden to the public like the government is.

Exactly! If the government starts doing things to you there are legal recourses. If your bank decides you can’t have an account anymore, there’s not much you can do.

Because a government would never freeze the funds in your bank account.

Oh wait: that is what Canadian government did to tractor-trailer protesters a few years ago.

They frozen the funds held by private banks. So what's the value-add of banks, again?

As long as they are technically separate we have the chance to separate the two again, removing corruption and capture.

If the industries are moved into the government officially we really have given up that fight and have to accept whatever they give us. I assume it will be cake.

> I'd rather pay a little more to a corporation

It's hardly "a little more" though. We're spending almost twice as much and get almost half as little back. Objectively speaking the capitalist market has failed in this area. We have to first accept this fact before we can find any solutions. If we keep thinking "government is bad" and "private industry is good" we're only allowing further exploitation and pain; and for what? We need to be data/solution driven.

Ford twice as much I assume you're referencing healthcare specifically. Or healthcare system is horribly broken and in a terrible middle ground of government overreach and corruption while still technically being a private system. That's just about the worst example we could look at at which point twice as much doesn't sound nearly as bad for a worst case.

> Objectively speaking the capitalist market has failed in this area

Objectively speaking the non-capitalist systems have failed in this area too. The UK’s NHS is not capitalist and it is surely isn’t succeeding better than the US healthcare system.

You can find countries where “socialist” healthcare works, but you can also find capitalist healthcare that works.

> Objectively speaking the non-capitalist systems have failed in this area too. The UK’s NHS is not capitalist and it is surely isn’t succeeding better than the US healthcare system.

The NHS has been effectively privatized as much as the Conservatives could get away with. It is constantly underfunded. It is not an example of a system the government wants to make work. In fact making it not work is the goal.

Yet when a family member of mine needed a life saving operation, they got it promptly and it didn't send them into any debt, whereas in contrast there's something like 50k preventable deaths a year in the U.S. due to lack of healthcare and people of poor means actively avoid visiting the hospital, so the NHS still works better for the vast majority.

Yes, for us in the tech industry and for elective procedures it's not so great, but that also perhaps isn't what regular people need.

> 50k preventable deaths

I love that term. If you prevent death one day, only for them to die the next, is that one preventable death? What if you do that five days in a row? Death is not preventable.

Extra years of quality life, I can get on board with. Especially because it sounds more manipulable, so you are more wary about it’s meaning.

To put 50k/annum in perspective, 3.5 million people died in the USA in 2021.

It’s a difficult area to come up with numbers for: https://news.ycombinator.com/item?id=34045778

> people of poor means

Don’t poor people get some free healthcare in the US - although relatively how good that care is compared with other countries I don’t know. I thought it was the middle class that lose everything.

the banking industry has been heavily subsidized by FDIC, the Fed, and bailouts. This corporate socialization is certainly worse than either fully capitalist or fully centralized.

That is modern capitalism at its finest.

Privatize the gains, socialize the losses.

That's really not capitalism at all.

That is how capitalism works in reality.

The healthcare marketplace is hardly capitalist. It's deeply influenced by government policy and spending, as most healthcare expenditure is for the old, and it goes through Medicare.

If the US healthcare market isn't capitalist, then no country's healthcare system is.

It's rare to find a way to "no true Scotsman" as hard as communists, but you've managed it.

But to address your point: contrary to what you're implying, Medicare spending is actually lower on average relative to spending on 65+'s in other countries; in e.g. the NHS, they're 18% of the population and 40% of the spending[1]. i.e. per-person spending is much higher in retirees. Contrast this with the US where per-medicare-enrollee spending (13k) is almost the same as the average spending (12.5k), because the non-socialized (capitalist) part of the market pays so much more than in other developed countries, that it doesn't bring down the average despite the younger cohorts having many fewer health problems.

[1] https://www.theguardian.com/society/2016/feb/01/ageing-brita...

> If the US healthcare market isn't capitalist, then no country's healthcare system is.

Yes.

That said, developing countries are most likely to have one. If the government caps the number of doctors and hospitals in the country, like the US does with residencies and certificate of need laws, it's not very market-driven.

The government does not cap the number of doctors. There's no law that you can only have X doctors. What it caps is the amount of social help it's willing to subsidize. This is like complaining that the government is not "socialist" enough and therefore socialism is bad.

No, the US government caps the number of doctors because Medicare funds residency slots, and you have to get through one of those to get a license to be a doctor.

> There's no law that you can only have X doctors.

We have tons of these laws. All occupational licensing requirements are this law; that's the whole point of them.

The US government caps the number of residencies it is paying/subsidizing. Yes, you have to go through residency, but there's nothing stopping the private sector from taking on this cost (well, other than greed)

It is a subsidy program:

https://hospitalmedicaldirector.com/how-residents-are-paid/

> We have tons of these laws.

Point me to one law that says you are not allowed to have more than X doctors.

> Point me to one law that says you are not allowed to have more than X doctors.

Why can't we have doctors that other countries have agreed are qualified to be doctors?

Also, do you know how certificate of need laws work? It literally says you can't have a hospital unless the other nearby hospitals agree you can have it.

Taxi medallions are truly a "there can only be X many people doing this" system, but even if they're not written that way, these other laws are still intended to restrict the supply of healthcare.

nb my issue isn't whether the healthcare system is "socialist" or not, it's that it's bad. I don't think "just make the government pay for everything" is a solution to things costing too much though; if an ambulance ride costs $9000 the solution is to make it not cost that, not to share paying for it.

Your original argument was the government caps the number of doctors (not taxi drivers). I am not finding anything that would show this. There is a cap on the total amount the gov is subsidizing (should be increased, but that's a different topic).

If an individual is willing/able to pay for the cost of residency that the gov covers there's nothing to prevent one to do so. Of course, this is not a practical solution for most, but that's another story.

> nb my issue isn't whether the healthcare system is "socialist" or not, it's that it's bad.

Agree, no argument there

> I don't think "just make the government pay for everything" is a solution to things costing too much though

Of course not, but if the capitalistic / private market has failed, I'd rather try a more gov-focused approach (or something else) than let it fester and cause more and more pain.

> if an ambulance ride costs $9000 the solution is to make it not cost that, not to share paying for it.

Agree, but how do you do that when the "ambulance lobby" owns the politicians and media who then try to convince the population that this is "the best system in the world"? You can't find a better system when you already think you have the best one (not saying you do) or that the "other" system is worse because it starts with an "s".

I just want to point out that ”to collect inflammation in it's citizens" is an great typo!

"The West, so afraid of strong government, now has no government, only financial power."

People can trivially break a window but door locks are still effective in aggregate. Don’t underestimate trivial difficulties.

No. There is a big difference to "they already know" and/or they "could trivially find out". Even if the latter may be true, the former is not. The government does not have direct access to personal bank account ledgers.

"They already know" is a red herring; there is no "they". "Government" as a single entity has no brain, so the best you can do is ask about individual actors. So let's talk instead about a person: Merrick Garland.[1]

Pretend for a moment that Merrick receives a piece of memo from a subordinate that incriminates you in some form of bank fraud. Of course Merrick personally doesn't know anything about your bank account. Nobody has both the information and a brain big enough to store it. Hell, I have to check my own bank account regularly because I keep forgetting exactly how much is in there and it's my own money!

If something came across Merrick's desk and it convinced _him_ that it was worthwhile to investigate, do you really expect other than delays waiting for signed papers before he got the information he wanted? Do you really think there's a difference to Merrick whether he gets that information in 60 seconds by logging into your bank "as you" and looking at it, or whether he waits a few days and gets hand delivered a piece of paper by a bank's legal team?

[1] U.S. Attorney General and current chief law enforcement officer for the nation

Yes it matters, because there will be a court involved in this process as opposed to if the government “owned” your bank account nothing would stop it from knowing exactly what was in there at all times.

I'm sorry, but courts have lost most of their credibility in recent years. There was an HN thread recently[1] about a person arrested and extradited from one state to another without what appears to be any oversight. Pretending the courts are magic isn't actually very helpful here. If any single person in power wanted this information, they could have it. If any single person not in power wanted this information, they would have to work really hard to get it.

[1] https://news.ycombinator.com/item?id=35389566

No one is pretending anything. It's still an extra step that adds transparency even if it is not a huge barrier. But in reality, that is a lot larger barrier than just direct access 24/7.

> because there will be a court involved in this process as opposed to if the government “owned” your bank account nothing would stop it from knowing exactly what was in there at all times

There's some decentralization within the government also, if one branch wants something from another it (ideally) has to go the courts route too, it's not that every federal employee can just access any government records on a person, (at least in theory). If there's someone powerful enough taking interest in you to override that, I doubt a private bank is going to be a major obstacle.

I mean courts themselves are technically part of that system too. I am as cynical as the next person regarding government overreach, but I see little protection from a multi-national banking entity entangled with the government for decades in all sorts of ways.

If it was as 'easy' to start a bank as an ISP in the 90s, I could see it.

> "Government" as a single entity has no brain, so the best you can do is ask about individual actors.

I don't think the Fed is "government" in the 4th amendment sense that it can just get information about you without a warrant, is it?

In an unrelated law, this is the reason child abuse reports from ISPs go to a private company called NCMEC. It's so law enforcement won't have automatically have access to private data in the reports without legal process.

Anyone who has worked in data knows this difference instinctively.

There’s a massive difference between the data being theoretically available somewhere in your organization and “trivially” accessible vs actually being able to run a query (let alone the work to actually run the query).

With that said the unbanked crisis is severe and there are big societal benefits to insuring everyone has a checking and savings account. There’s no reason robust safeguards can’t be built into the law establishing the Bank of the United States (Third time is the charm!).

You don't need a federal bank to solve that problem. A simple regulation would suffice requiring private banks to service these customers in some fashion.

True, but then you would get complaints about government mandates.

part of the point is to separate the "is a place to deposit and withdraw your money" portion of banking from the "does financial speculation" portion.

That's the entire purpose of a bank. The point of a bank is that the customers think they're putting their money in a box, but it's actually loaned out to businesses.

If you don't do this, the money supply gets a lot smaller.

>Americans seem willing to pay more to private business and thus actually part with more of their money than they otherwise would, as long as on paper they're not giving the money to 'the government' see i.e. healthcare.

Americans reject public healthcare because your average American has incredibly narrow view of the world, and many people buy lies about public health care in other places.

They simply buy the lie that propagandist are paid to spread that public health care includes 'death panels' or insanely long ER waits, or that you can't pick your doctor (can you now?).

The larger problem is that the government deals with things that are sufficiently complicated that they require dedicated time to understanding them and Americans aren't willing to do that on a scale that impacts government policy.

As a Canadian, right next door, I'm continually amazed that we can have two polar takes on healthcare and both get it so wrong. In Canada it is an incredibly expensive way to pay for a universal public system in case you personally need it, at which point it's pretty poor quality, especially for new approaches or preventative, non-emergent care. Then in the States you have so many with absolutely zero safety net or primary care, at which we do a better (but still bad IMO) job of, while the well-insured or very wealthy have the most amazing health options in the world. We should both be able to come up with a solution that prevents rural mothers from dying related to childbirth AND gets someone a hip replacement in less than a year so they don't irreversibly deteriorate. Governments on both sides of the border just dig in their heels for political motivations, actual health outcomes not a consideration.

Canadian health care is relatively inexpensive though. Canadians spent $8,563 Canadian Dollars per capita on health care in 2022, which is currently equivalent to $6,320 US dollars per capita.

Americans spent $12,914 American dollars per capita in 2021 for health care costs. We pay over double per capita what Canadians pay.

Canada could increase the quality of the health care system by buying more services and paying more for services to increase quality.

https://www.cihi.ca/en/national-health-expenditure-trends-20... https://www.cms.gov/research-statistics-data-and-systems/sta...

And as the poster above you mentioned American health care is the most advanced in the world. So even if it is “double” the types of treatments available here are much better.

I’ve had friends travel here just to get treated.

> I’ve had friends travel here just to get treated.

And a million+ Americans in border states travel to Mexico for routine procedures and prescriptions [0].

I imagine the numbers would be even higher if more Americans lived within travel distance of the southern border.

[0] https://www.npr.org/2023/03/08/1161888974/medical-tourism-me...

>And as the poster above you mentioned American health care is the most advanced in the world. So even if it is “double” the types of treatments available here are much better.

Most medical services are routine treatments that are the same wherever you go.People travel for special services, but special services don't represent most of that cost difference.

"Most advanced in the world" to only 70% of Americans is a failed system.

IMO more interstate competition on services is the right way forward. We should make it cheaper for competitive providers to expand to neighboring states.

People with money are basically cutting the line. This is acceptable because generally nobody really cares about the poor- they don't vote or influence society very much. Don't have lawyers and they rarely call a senator. You will see a backlash against public healthcare because it would mean a rich man is treated according to his medical needs.

You're on the waiting list BECAUSE SOMEBODY ELSE NEEDED IT MORE. But I'm a Google developer I'm worth more to society! Who decides that? A death panel.

The stupidest thing about this argument is that WE DON'T GET INSTANT ACCESS NOW! Even with the literally twice as expensive healthcare we have, and personally having good insurance, if I call my doctor to get an appointment for something non-emergency, it takes at least a month.

I have "excellent" health care and I can't find a dentist who has happenings after my old dentist decided to stop taking my dental insurance.

This is already happening. Banks report all transactions above a very low threshold under various justifications and laws, plus the government is always going to be the front-of-the-line creditor and can trivially find out your entire net worth at will. We could at least look to cut out rent seekers on the baseline services and make banks compete on performance and value-add. As a customer and shareholder of banks I feel like I'm getting ripped off on both ends.

...and it would be easier to directly monitor the government and control the bank instead of having a level of indirection like we do now.

This level of indirection requires regulators who are always behind because of the extra layer.

"The government" already has this level of access. Not only that, but its control extends beyond the country's borders too; the government can seize, freeze or otherwise access the accounts of Americans (and non-Americans) in almost any bank across the globe. The only bank accounts that it can't do this to would be under the control of an even more repressive government (Russia, China, Iran).

Most of this information is for sale anyway.

> The idea that the government would know specifically how much we spend, where we spend it, and could deny transactions sounds pretty distopian to me.

That boat has sailed. Private enterprises collect spending information[0], associate it with your identity and sell the aggregated data to anyone willing to pay. The FBI is on the record as willing to be pay for this data. This dystopia has the "free market/small government" seal of approval.

0. Which is why every retailer badgers you into joining their rewards program based or your phone number and/or email.

If you use cash, the “government” does not know where you spend it. If you use a credit card, it’s a virtual certainty that they do already.

I’m not certain it’s being done for 100% of bills, but it would be easy to track any single bill between being withdrawn from an atm/bank and re-entering one by noting the serial number and account number as it comes and goes. Exchanges will certainly happen between withdrawals and deposits, but still your privacy is only preserved when neither of your counterparties withdraw/deposit the bill

Tell me how much harder and less reliable it is to track billions of individual serialized objects over time vs. a database transaction.

I always just assumed that somewhere in the banknotes lifecycle those serial numbers are all getting written into a database… I kind of assumed that based on examples where the government was able to trace where large amounts of cash had come from and what it got spent on when doing major crime investigations or things like DB Cooper and how confidently they proclaim that none of the cash (that wasn’t “lost” and then found by various searches or the public over the years) was ever spent. I assumed it was probably part of obligatory regulations to do with money laundering or something equivalent and thus they all had to do it.

For cash transactions, I believe anything over $600 is supposed to be reported now. The limit used to be $10k but was raised recently.

With credit cards, the government shouldn't know as they shouldn't be involved, but they almost certainly do because overreach. Congress could always pass a law to block that or an individual could sue and claim something similar to illegal search. As soon as the government is the bank there's no way to bifricate the two, the deal is done.

Government knows your credit card transactions not necessarily just due to generic overreach but also specifically "Third party doctrine". Various companies sell your near-realtime transaction data and it's generally available to data brokers and it's not clear why the government shouldn't be able to buy your data from data brokers.

> The implementation of the Internal Revenue Service's "$600 rule" is being postponed until next year

https://www.cnbc.com/amp/select/irs-600-reporting-rule-delay... (From Feb 2023)

Didn't realize that got delayed, thanks! Guess that's good for this year but doesn't help long term.

>Congress could always pass a law to block that or an individual could sue and claim something similar to illegal search.

Nah, we'd see any lawsuits over violations of such a law get blocked due to standing issues or state secrets privilege, much like the lawsuits over the illegal and unconstitutional surveillance performed by the NSA.

Whether the system would allow a new law to protect our rights is a bit of a different issue. Structurally such a law could only exist if the government doesn't already own the bank.

How about in North Dakota, which had a state-owned bank?

https://en.wikipedia.org/wiki/Bank_of_North_Dakota

At least in the US, a state-owned bank is a very different animal from a federally owned bank.

States don't have the power to control the currency itself, don't control the collection of three-letter agencies, and in general are meant to have more leeway to try new things than the federal government.

> There is a real trade-off there when the government has direct access to and control of citizens' bank accounts.

Narrow banking and central bank accounts for individuals aren’t the same thing.

In fact, most CDBC projects see a role for commercial banks as KYC, fraud prevention, user interface etc. providers. – just not money creation.

Postal banking. Available in the US between 1911 and 1967.

It was mostly killed by the FDIC, which allowed private banks access to what was its competative advantage.

There's a proposal to revive the postal banking service in Congress every year or so; but thus far none have gone anywhere.

Huh, wonder why.

Oh yeah, the bipartisan bribes.

https://www.opensecrets.org/orgs/visa-inc/summary?id=D000029...

https://www.opensecrets.org/orgs/mastercard-inc/summary?id=D...

https://www.opensecrets.org/orgs/jpmorgan-chase-co/summary?i...

https://www.opensecrets.org/orgs/bank-of-america/summary?id=...

https://www.opensecrets.org/orgs/citigroup-inc/summary?id=d0...

https://www.opensecrets.org/orgs/wells-fargo/summary?id=D000...

There's also the very one-sided action to kill the post office entirely. Even with zero bribes, republicans want public services gutted and turned into private profits.

> simple, straightforward, and disintermediatory

It requires re-working the financial system from the ground up, and commitment to that new vision, because there isn't a graceful way to ease from fractional reserve to narrow banking or public accounts at the Fed, and there isn't a simple way back to our status quo from it.

For money storage that existed in some large countries up until the end of the GFC (e.g., German Bundesbank offered some deposits to retail). I don't think that would need much retooling rather than a change in risks for banks to manage.

Edit: I think technically the deposits where with the federal finance agency, i.e., lending to the federal republic. Don't think that matters for the discussion here.

> don't think that would need much retooling rather than a change in risks for banks to manage

In a crisis, it would make the narrow/public bank the natural place to drain deposits. (Similar to our SIFIs today.) As such, narrow banking would mean the end of commercial checking. That means we need to find non-bank providers of all the asset-side services, from lending to trade finance, banks currently provide. That's the re-tooling.

It didn't work like that in 2007/8 in Germany. Deposits didn't just all go to the Bundesbank/Finanzagentur. Maybe you need different banks in the mix, e.g., more coops. For lending, some alternatives exist already, same for trade finance. I think the delta to the current state would be surprisingly small.

> didn't work like that in 2007/8 in Germany

Do you have a source on the scope of what they did?

> some alternatives exist already, same for trade finance. I think the delta to the current state would be surprisingly small

The delta is tens of trillions of dollars. By no means insurmountable. But you don't want that changeover happening unexpectedly in a crisis.

Not saying should be done right now, but I would consider not having a discussion about it an error.

German Bundesbank has a timeseries database you can drill into for banks' balance sheet and other data (easy to find).

I meant on the Bundesbank providing checking accounts. Source on that, why it was ended, et cetera.

I didn't say checking accounts, but money storage with the respective sovereign (and daily liquidity).

Was actually the German finance agency (same thing for our purposes really, as only daily risk is sovereign Germany). There were claims that lobbying by banks killed it, but it was also not very attractive in a low yield environment. Ostensibly, it was created to broaden the funding base of the Federal Republic, I think.

This was the thing: https://www.deutsche-finanzagentur.de/bundeswertpapiere/bund...

We once had postal banking in America [1]. I could see a bridge to narrow banking working if it’s restricted to natural person depositors and prohibited from paying interest or something. (And by extension, their reserves wouldn’t earn as much as their risk-taking peers.)

> money storage with the respective sovereign (and daily liquidity)

You can buy overnight bills in most countries.

[1] https://www.investopedia.com/what-is-postal-banking-5217341

> there isn't a graceful way to ease from fractional reserve to narrow banking

Wouldn't the graceful way be to... simply allow narrow banks to have fed accounts?

https://johnhcochrane.blogspot.com/2019/03/fed-vs-narrow-ban...

> Wouldn't the graceful way be to... simply allow narrow banks to have fed accounts?

No. As the Fed details, in a crisis, deposits would drain into the narrow bank. Permitting a narrow bank by itself is de-stabilising. (There are a myriad of solutions to the issues introduced. From paying a lower return on non-risk taking reserves to limiting accounts to natural persons. But the point is the systemic effects have to be thought out in advance.)

It's not that simple for The Fed or the Federal Government, as they have to take over all the tedious affairs in banking (like KYC, among many smaller tasks), so I suspect they'll be reluctant. But that doesn't mean it would be a bad thing to talk them into it.

There have been attempts to start a bank that would just do this. The FED refused to give those banks a banking license. If they would give that license, then the 'narrow bank' gets the job of KYC, customer service, and everything else. But the funds remain safe at the FED.

Problem is, this takes a lot of money out of the economy if it catches on. That likely will reduce investment, and damage the economy. So regulators dislike narrow banking.

This sounds to me pretty close to a treasury money market fund, doesn't it? Money market funds are not insured for some nominal amount, but among the most common in practice have significant repurchase agreements with The Fed and hold short-dated treasury debt, but this plus your brokerage it's pretty close to the narrow bank idea.

I suppose the Fed could try to make the circle slightly rounder here, but they may look at the hundreds of billions of dollars in such funds, which are by nature extremely "narrow" quasi-banking devices (because they only support a tiny form of maturity transformation, in asset type and term length), and decide "good enough, economic needs of this kind met"

But they could still allow for narrow banks to exist which would intermediate these “nuisances” while passing through all deposits to Fed reserves.

I fear banking would become like government run healthcare or health insurance. I’m not quite sure what it would look like, but it wouldn’t be great.

The Fed and Gov already have stuff like this (TreasuryDirect), and like some fintech are just thin UX wrappers around ugly consumer bank interfaces or even I-bonds, you could have the same with these accounts.

There is no profit motive and it’s a very technically simple offering that the Fed already supports or will soon support with FedNow: I have a table of people and balances, and I only support transactions between the two.

If a bank can’t figure out how to compete with 0% interest with no value add to attract deposits, IMO they shouldn’t exist.

The important social function that modern banks perform isn’t attracting depositors, it’s creating deposits AKA originating loans.

Regional and local banks are far more likely to originate loans to local residents, especially for unique purposes. If somebody in flyover country wants a loan to start a business, it basically has to be a cookie cutter franchise or a large existing customer for a big coastal syndicate bank to even look at it. This is one reason, although not the only one, why outfits like Dollar General are eating the downscale retail market when it used to be local general stores.

Yes, I know that, but why should I as an individual risk my deposits in a bank? Before digital payments took off it was entirely feasible for a regular person to be what we’d now call unbanked or underbanked. I’m pretty sure my grandfather was greatly underbanked well into the 90s and aughts. I’m sure many banked because they didn’t want to keep track of all their cash physically hanging around, but banks had to actually compete against “stuff it under your mattress” by passing on rates and other ways of providing value.

The advent of online banking and digital payments added enough value that there was really no reason to continue to be unbanked or underbanked for most people. But IMO banks have begun to take depositors for granted by offering poor interest rates and exposing us to more risk than necessary (certainly more than justifies checking or savings rates). With the recent spat of bank failures roughly coinciding with crypto, which also provides online banking and digital payment functionality, the Fed/banks need to recognize that there is a real risk that depositors will opt back out of traditional banking.

I think a shift off the dollar and onto crypto would be much worse (personally, but also for banking) than the Fed offering a path to digital mattress stuffing of the USD, because at least with that they can still influence monetary policy and keep people on the dollar. I also suspect, but have no data, that our shift towards structurally low rates and high asset prices over the last half century was partially influenced by banks’ relative share of the monetary supply increasing so much that too many deposits are stuck chasing yield/credit is too accessible for activities perceived as low risk: so if some deposits shift onto a Fed narrow bank, banks will at least find it easier to loan and offer interest at higher rates. But even beside that, I as an individual should not be obligated to deposit my money into a banking system that gives me poor risk:reward - and when better options exist, I might not. So the banks and Fed better figure out something better than crypto or a fireproof safe.

You mean, more efficient, with better outcomes for its customers?

This is called Digital Euro, it's coming this summer via the ECB

> banks seem to have an uncanny ability to destroy themselves in spite of an ever increasing set of regulations

That’s the opposite of what is happening. Regulation has been decreasing.

Depends heavily on your time scale.

What scale should we use?

Well if you go aback 6 years bank regulation decreased, make it 15 years and regulation has increased dramatically.

Really you could stretch that back out to 100 years and bank regulation has trended higher, so it'd seem only a very short time scale has regulation decreasing.

Something between 150 and 300 years seems reasonable.

That seems way too long to reasonably be considered relevant to modern banking in the US. At one end, it pre-dates this country, and the other still pre-dates the start of the gold standard, let alone its end.

100 years seems reasonable. That would include the gold standard change, some significant monetary changes, and the great depression. I disagree that banking regulation is too much, but I do think the Federal government has an obligation to make regulation implementation easier to implement. We also have some non-sensical banking regulations that continue to victimize sex workers for the sake of it, so I think it's a mixed bag.

By what measure has it been decreasing? I never heard of laws being removed or sunsetted just new legislation added on top of existing framework. Maybe some of it counteracts existing laws but the complexity is the problem. Or maybe number of regulators? What was the last time a regulatory agency was disbanded rather than a new one added (e.g. consumer protection bureau). Or number of employees in regulatory bodies, or budgets. Its tough to find a metric that says regulations have decreased.

I think the regulations add a false sense of security. If it's highly regulated like the financial industry people just follow the regulations and think that's enough. Investors don't care and assume correctly any mess up at the bank with be bailed out. Less regulated industries tend the have more savvy buyers because you know there won't be a backstop

The Economic Growth, Regulatory Relief, and Consumer Protection Act exempted banks with less than $250 billion in assets from most of the Dodd-Frank Act. They no longer had to have stress tests and it lowered liquidity levels. Under Dodd-Frank, the level was $50 billion.

So far all four bank failures that have made headlines recently (Silvergate, Silicon Valley, Signature and now First Republic) were all under the new threshold. I think Silvergate was under the old threshold as well, but that still leaves 3 out of 4 that could have been prevented if Dodd-Frank were left in place.

Also: "new legislation added on top of existing framework" can result in less regulation if the new legislation nullifies or repeals or (in this case) exempts some participants from current regulations.

> I think we ought to consider a system where the Government or Fed provides the core functionality...

I have been told that the Chinese government own the big Chinese banks. Is this a good or bad thing? (Or am I mistaken?)

You are mostly correct. The largest retail banks in China are SOEs, so called State Owned Enterprises. However while these banks are the backbone of the retail banking sector the rural banks and investment banks are increasingly more relevant when doing business in China because the state owned banks are very risk adverse and operate with gigantic capital reserves. It's an interesting system because it basically insulates the retail banking sector from any and all shenanigans however has led to explosion of risk in the private sector. China has been trying to pare back this risk and leverage of the financial sector for over 10 years but every time they start some global crisis starts and they have to stop.

To be fair, they don't really want to. Lots of interest groups against it. Heaven is high and the emperor is far away, as they say.

The multi trillion dollar real estate bubble in China was state funded…

State enabled would be a better way of looking at it. The state (well more correctly the provinces) have been incentivised to perpetuate this real estate bubble because they derive a ton of their funding through the sale of land.

Actually -funding- the developers is an entirely different matter however. They are partially funded through pre-purchases of off-the-plan apartments, this is then leveraged mostly through bonds, primarily sold to said private banking sector but largely to off-shore buyers seeking high yield corporate paper.

The SOEs and large Chinese banks like ICBC, BOC, HSBC and insurance/finance provides like Ping An have largely kept their distance for the last decade - in part because of that risk adversity and very large safety capital requirements that prevent them from owning such high risk debt. China -did- learn their lessons from 2008, unfortunately they have fallen victim to other ways of generating extreme financial leverage.

Right now the de-leveraging is still happening, the Three Red Lines stipulations have been relaxed somewhat in the last few months to try ease up pressure on the real-estate market during global downturn but are still limiting debt expansion in the sector.

I would say they have successfully staved off a crash/collapse but I would expect the real-estate market in China to enter a long period of stagnation at this point.

I don’t want the government to get into lending because there is a lot of opportunity for corruption or really destructive populist policies. I think regular banks should do that, that’s what they’re supposed to be for, they take your deposit and lend it out so you get a nice little return.

What I’m proposing is less like a full service bank and more like a lockbox or mattress where you can stuff dollars for later. You wouldn’t get interest (or if you did it would be tiny) in this system, because the money would not be lent or otherwise put to work like it is in normal banking

As a depositor, you might be better off.

As an investor, I presume you’d be better off with the current situation, even when there are occasional hair cuts.

When you consider the % of people globally, or even country by country, most just need a safe place to keep their money to participate in institutions. Most don't have enough money to place bets on the stock market.

When most folks(US and China) don't have spare cash to bet with, safe retail banking is incredibly important. In the US, tons of service workers take their paycheck with cashapp because so many retail offerings for low earners are notorious sharks with punishing overdraft fees and account minimums.

If people in a society are required to participate in an institution, there should be options for people that are not profit motivated. Anything profit motivated will also be motivated by increased profit which in turn will cannibalize their userbase when rate of profit declines, which almost always sends many people into the woodchipper until it is corrected. This should not be the default.

Banks and natural disaster insurance companies have super fat risk tail.

In the worst case everyone comes asking for their money right now, and we know this is impossible to be satisfied.

> Ironically banks are some of the least shareholder friendly businesses, they direct a lot of profits to their own bonuses during good times rather than expanding their balance sheet or returning the profits to shareholders.

From what I can see, private equity firms are actually even worse. It’s curious that no major shareholder has sued any of those for breach of fiduciary duty.

It’s extremely hard to do shareholder lawsuits around fiduciary duty because of the business judgment rule. Companies can basically do anything as long as it could theoretically make shareholders richer.

It’s kind of dumb tbh

> […] I think we ought to consider a system where the Government or Fed provides the core functionality of “let me put $X in an account so I can use $X in the future” for free […]

The Odd Lots podcast recently had an episode "Is It Time For Public Checking Accounts at the Fed?":

> When Silicon Valley Bank failed, the government stepped in and guaranteed that all accounts — even those well above the FDIC threshold for deposit insurance — would be made whole. So now people are wondering whether all accounts at every bank are implicitly guaranteed, regardless of their size. But if they are, then what is the point of private, for-profit retail banking? On this episode of the podcast, we speak with Saule Omarova, a professor at Cornell Law School. She had been nominated by President Biden to head the Office of the Comptroller of the Currency, but was forced to withdraw due to fierce opposition from the banking lobby. That opposition was based, in part, on her endorsement of public checking accounts at the Federal Reserve. But what was a seemingly "out there" view a year ago, is now firmly within the Overton Window of political possibilities. On this episode, we discuss the SVB disaster, what it means for banking, and the case for a public option.

* https://www.podchaser.com/podcasts/odd-lots-40661/episodes/i...

* https://www.youtube.com/watch?v=3Zkzpz9aK3I

* Also on Apple Podcasts, etc.

Transcript:

* https://www.bloomberg.com/news/articles/2023-03-23/transcrip...

* https://archive.is/9yROE

Don't credit unions already provide this service?

https://www.history.com/topics/us-government-and-politics/ba...

> expanding their balance sheet

I keep seeing this jargon, and I have to admit I don't know what it means?

A balance sheet is one of the four main financial statements that businesses have to produce. It describes how much stuff you've got (assets) and how much money you owe others (liabilities).

To expand your balance sheet means to load up on assets. In the parent comment's specific example, it means that the bank could simply hold onto the money it makes, rather than paying that money out as bonuses to the executives or dividends to the shareholders. This would give the bank a better cash cushion to weather a storm (e.g. interest rates rising unexpectedly, account holders pulling out their deposits, etc.)

Thanks!

So "expanding their balance sheet" here translates to "keeping the money"

In this case, it's very close, yes.

It's worth noting that you can also expand your balance sheet by buying any assets: spending the money on real estate, government bonds, or even using the money to buy your own company stock would also expand the balance sheet, as long as the company retains ownership of those assets.

But for people familiar with basic business terminology, it communicates something else, too.

In business, there's a core belief that money at rest is money wasted. You generally want to use your money to buy something rather than letting it pile up. Saying that you're using the money to "expand your balance sheet" implies that we shouldn't think of that money as merely idle, undeployed capital - in fact, it's being used for a very specific purpose: to make the business healthier. Companies with healthier balance sheets are better prepared to handle unexpected scenarios, and their stock is more attractive to investors.

A closer layman's translation might be, "keeping the profits, to make the business healthier."

Thanks.

I've actually silently been wondering about this phrase for years!

There's too much money in the finance industry, creating very strong incentives for the players to resort to shady tactics. A strong government can enforce regulations, but given the current political situation in the US that's not very likely.

This is pretty much the main reason BitCoin and many other coins were created - remove the corruption and the unfair advantage some actors in the finance industry enjoy. Why do you think that people resorting to crypto is a bad scenario?

The US government providing basic bank accounts is never going to pass in Congress - the republicans are going to be against it based on their small government ideas and many democrats are depending on the money from sponsors in the finance industry. The Fed is owned by the banks anyway.

Crypto is a mess of scammers and criminals. There’s occasionally actual uses, like nfts. But we only need to check the nft marketplace to see how that actual use cases has died. Pushing ordinary people into crypto with no recourse for their funds is asinine. Modern societies are built around the fact that goods and services are exchanged for money that will clawed back if the deliverables are unacceptable. Crypto makes it impossible for unilateral or third party refunds.

Sure, there are problems with crypto. But the stuff you mentioned has nothing to do with using say BitCoin as virtual gold - as a long term store of value, instead of say a savings account.

When’s the last time you lost a billion dollars of gold by accidentally tossing it in the trash? The ux of crypto is horrific.

I would not personally put my savings in BitCoin. The price is far too volatile [1] and storage of BitCoin revolves around problematic centralized wallets or keeping your wallet offline which is similarly problematic for lay people. You might be able to create a fund that amortizes risk across various coins to get what our existing popular savings funds are, but you'd need some anchor coins that are mostly stable to do that.

1: https://www.coindesk.com/price/bitcoin/

You can't store value in something whose only purpose is to store value.

Insofar as you can save an asset, it's because you're defecting in a game where other people are actively using it to provide the future value you want to claim later. If everyone only ever saved Bitcoin, then who's going to buy it when you want to sell it later? Someone else who wants to store it forever?

The reason saving currency in a bank works for the economy is because they're loaning out the back to productive businesses and then giving you some of the interest. This doesn't work if you keep it under your bed/in a crypto wallet.

(Maybe you could solve it by paying people more to take risk, but I don't think interest is that attractive to people?)

If bitcoin is only a long term store of value it really needs to be paired with a separate currency for daily transactions. What should we consider using as a checking account if bitcoin is mainly savings?

How about composing a digital currency stack in layers, similar to the OSI model for networking?

Bitcoin already has second layers: the Lightning Network, Stacks, and bridges to other blockchain systems.

Those second layers seen to lose the benefits behind bitcoin if I'm not mistaken. Most layer solutions act more like PayPal than anything else, with a trusted mediator taking offish transactions in their own system.

No more immutable ledger, traceability, fungibility, or censorship protections.

You are not mistaken but interacting directly with traditional on-chain transactions is there if you want, possibly a little slower and/or more expensive.

I see traditional (haha, talking about crypto having traditions already) on-chain transactions for high value, low volume movements of coins. And Lightning (and BitPay, etc) solutions for low value, high volume.

You are also mistaken.

Please explain how the Lightning Network loses most of the benefits of Bitcoin.

You are mistaken.

The Lightning Network literally consists of Bitcoin transactions.

There are custodial solutions that serve each layer, but that’s orthogonal to the network itself.

Unless it's changed drastically over the last couple years, the lightning network attempts to effectively buffer transactions outside the ledger. Transactions are "deposited" into the network and passed around similar to marked bills. The bitcoin block chain is only involved when a transaction is initially moved to the lightning network and when one of more transactions chained into that are written back to the ledger when moved back out of the network.

This design has nothing to do with bitcoin other than the input and output formats. You depends solely on the lightning network itself and have given up all benefits from using a public ledger-based system. There is literally no way a layer two solution can offer faster transactions than bitcoin block times without requiring off-ledger transactions that aren't protected by the consensus protocol.

The protocol consists of passing signed multisig transactions back and forth through a network of payment channels. Every single one is a first class bitcoin transaction than can be redeemed by broadcasting to the base layer, enforced by consensus.

You have misunderstood since the beginning, because this is how it’s worked since the initial spec was proposed in 2015, years before it was actually implemented.

Here’s a book you may find informative: https://github.com/lnbook/lnbook

Right, so we are describing the same thing here. Transactions in the lightning network happen off chain and don't provoke any of the benefits of bitcoin's public ledger.

It's impressive that you could say I was completely wrong then proceed to describe the same system in slightly different wording.

When you say LN transactions “don’t provoke any of the benefits of bitcoin’s public ledger” what does that even mean? What benefits do you perceive are being lost?

Your initial description seems accurate, but then you erroneously claim this has nothing to do with bitcoin.

I don't view LN as having anything to do with bitcoin because it all happened off chain. The benefit of the consensus protocol is lost entirely since consensus is only reached once LN transaction chains are sent back to the bitcoin network and eventually make it into the blockchain. LN transactions rely on am entirely different network of transactions, validators, and (de)centralization tactics.

What are the benefits you see in LN that are worth the tradeoffs of abandoning bicoin's main chain consensus protocol?

The main chain is not abandoned, it’s used as a settlement layer.

If I hand you a paper bitcoin wallet worth a certain amount of satoshis, that’s still bitcoin. You rightly shouldn’t accept it because I know the private key and could rugpull those funds from your control. If there were cryptographic assurance to prevent that rugpull, owning that key becomes as valuable as the underlying asset.

Your flawed explanation is like saying the dollars spent on a Visa card aren’t using US currency because the transaction isn’t immediately settled in the eyes of central banks.

Edit: To be clear, there’s no credit involved in the LN transaction. I only used the analogy as a layman’s example. All LN transactions are fully collateralized and can be settled to the base layer at any time by either participant.

Upon re-reading this I think I identified the gap in your mental model: There’s no such thing as “LN transaction chains.”

Every LN transaction is literally a bitcoin transaction. Usually these are not broadcast to peers for settlement on the base layer, but the latest transaction always can be broadcast, just like any other Bitcoin transaction.

I don’t follow other L2s closely, so maybe this differs from Ethereum and its derivatives. But the Bitcoin Lightning Network is 100% Bitcoin.

Ah yes. Solving broken systems with little legitimate use by building ever more complicated solutions.

> There’s occasionally actual uses, like nfts

Surely you're being sarcastic.

What legitimate use reached general appeal more than nfts?

Drug dealing, sanction evasion, money laundering, murder for hire, and csam are not legitimate uses.

What’s left besides hodlers?

Legal drugs that payment providers think are icky are legitimate uses. Nootropics for instance.

Also the only one I've ever seen; adult sites and sex work don't take crypto.

> remove the corruption and the unfair advantage some actors in the finance industry enjoy

only to put themselves in the very same seat, but without any actual regulatory oversight.

How is it the same seat? The creation of new coins is ruled by algorithms, not by well connected people.

> ruled by algorithms, not by well connected people.

the earlier coiners gets a lot more. Just like today's financial institutions have gotten there by just being around early enough to have captured a lot more.

All i see in bitcoin (and etherium) are just people who wish they were those old bankers.

Anyone can create a new coin and rugpull it. This is not an improvement.

And those algorithms are largely driven by well connected people.

You could also argue that the main reason bitcoin was adopted by those who bought it was to get in on the ground floor and have the unfair advantage themselves.

Bitcoin hasn't solved corruption or unfair advantage, it just moves it out of the hands of the few politicians and bank executives in charge to the few running a handful of mining pools.

There are still people pulling the strings that can, and have, changed the rules along the way. Even the magic number of how many bitcoins will ever be produced can be changed, that limit is no more real than the gold standard that was killed with the stroke of a pen.

I can envision some future well polished crypto ecosystem being good for banking, but even if it were just Bitcoin (I prefer monero but it wouldn’t work for other reasons), it has some properties that could make collapses or crises spectacularly bad. Fundamentally it’s not that different from wildcat banking which we moved on from because it led to lots of fraud and collapses. Anyway, for just Bitcoin:

Bitcoin isn’t ideal for payments still and, speaking personally, I don’t want to ever be in the situation where I have tens of thousands of dollars that could permanently evaporate just because I forgot a code. So in practice I think most people would want custodians to facilitate payments or larger deposits. And it’s still possible for those custodians to make a purely technical fuck up and permanently lose funds in a way that is unrecoverable and irreversible but not possible in the current banking system.

Any coin with a fixed supply will be very deflationary which will make lending very difficult. Ever since we made it really hard to build new buildings and decided most early stage businesses are too risky for banks, it kinda seems like this isn’t as bad as it sounds. But, people are gonna want to do it sometimes and it will be hard. And you can’t rely on a basal protocol for a real world lending system because most real world loans can’t be fully/overcollateralized like with crypto (there is only a market for this because of tax avoidance that AFAIU is not even tested in court) and there is a real risk someone will not be able to pay it back, you need an oldschool system for stopping fraud and handling bankruptcies up to and including a guy with a gun taking away your toys.

If we’re gonna have custodians and a market for loans, I got bad news for you, some custodians will combine the two and pass on those benefits to consumers. If done with CD-like instruments this won’t change things much, until some bank gets this genius idea: if a lender and lendee make most of their payments within the same bank, you don’t actually need to debit the lender the full loan because most of that money will stay within the bank. And if lender-custodians all partner up they can fully debit all such loans. And then because lenders don’t get their accounts locked up, whether or not their balance is loaned and for how much can be completely abstracted and presented as a shared flat yield across all lenders at the bank… (this is a simplified version of modern banking)

Maybe it won’t be exactly like that, but I guarantee you, something banking-like will happen. And eventually a bank will fail because of bad risk management or a bank run. With crypto, it actually is feasible to do a huge bank run of all your money even if it’s millions of dollars, so it’ll be quick and sharp. Anybody who isn’t fast enough loses everything with no Fed to help them, we hit an extremely severe and instant deflationary depression where credit is completely unavailable, and there is no Fed to pass centralized monetary policy measures to fix it.

Instead of speedrunning digital Black Friday, I’d rather the Fed just let any individual meeting whatever reserve/audit/whatever requirements use any special facility available to member banks (or remove a facility if it cannot be offered as such). So rather than replace the system due to an unfair advantage, let everybody play by the same rules. If a bank can’t compete with that, they’re not a viable business. As a consumer I can better manage my risk within what is (to me) a very similar system. Ultimately, I want the Fed to be able to buy treasuries (print money) and raise/lower rates to control inflation because I’ve tried to learn as much as I can about banking history, economics, and crypto and this still seems like the most solid way to control inflation and prevent depressions.

This is called a T-note? And it is issued by the government?

TBTF = To Big To Fail

> This concerns such a basic aspect of bank risk management one wonders how this sector could even call it self banking

I feel like message boards like reddit/HackerNews are notorious for over-simplifying any topic. It's "reductionist".

"How could these paid professionals consider themselves qualified?! As somebody not in that field without any insider knowledge or specific details into why hard decisions with tradeoffs were made, I know better, it's taught in economics 101!"

notorious for over-simplifying any topic

My last employer we managed money for community banks. I actually created the system that generated interest rate shock reports that showed the impact to a portfolio of fixed income assets for interest rate shocks of -300 to +300 basis points.

Nobody thought interest rates would go +300 bp in such a short amount of time, especially in the short end of the yield curve.

Banks essentially have 2 portfolios. Their loan portfolio is where they take the risk and it goes up and down with the traditional business cycle. Their fixed income portfolio is supposed to be almost no risk.

They were whipsawed by the fed that lowered interest rates so quickly that it forced banks to buy longer-duration securities to just find any kind of yield within the regulatory constraints they were allowed to buy. Then the fed raised interest rates even more quickly causing staggering losses in the "almost no risk" fixed income portfolios of banks.

Expect a lot more banks to be taken over even with the emergency backstops the fed has put into place. Look what the Fed did:

https://www.federalreserve.gov/monetarypolicy/bst_recenttren...

In 2008 the Fed flooded the economy with $2 trillion. In 2020 the Fed jumped up and flooded the economy with an additional $7 trillion. In September 2022 they started taking that money back (which incidentally led to tech company layoffs). As of March 2023 they removed about $600 billion. Then they suddenly put over half of that right back into the economy when SVB failed.

It's impossible to predict or even appropriately react to what the Federal Reserve is doing.

It maybe impossible to predict what the Fed would do but it is certainly possible to avoid a lot of the damage by duration matching of assets and liabilities. e.g. Do not take short term deposits in checking that are callable at any time and invest them in 10 year maturity instruments. No issues at all taking proceeds from 5 year CDs and putting them into 5 year maturity bonds.

avoid a lot of the damage by duration matching of assets and liabilities

Respectfully, you have misunderstood the situation.

This has almost nothing to do with duration matching assets and liabilities. That's how it works on the loan portfolio side of a bank. This has to do with how bonds work.

If you buy $10MM of a bond with a 3% coupon and rates for the same duration bond go to 5% then you have a significant capital loss. Depending on how you classified the investment under FASB 115 rules (HTM, AFS, Trading) you can telegraph to the market that your capital situation is dire which can then cause a run on the bank as we've seen multiple times in the last several weeks.

Well, as somebody who is currently coding a calculation service that will handle a 500 billions portfolio, I can tell you this: the specs require the data to be interpolated + extrapolated left and right. And they use that to estimate risks and take huge decisions. And when they don't have enough data to interpolate from, they create a synthetic instrument from other instruments that have enough data, and use that to estimate risks and take decisions.

The only thing that makes the whole jenga tower stable is the fact it's all interdependent. E.G: to diminish your exposure, you take a swap with some other entity, and if everybody do that enough, the risk is averaged on the entire economy.

So from the inside, it's worse than it looks from the outside.

And mind you, the client I do that for is one of the most serious in the business. They are extremely risk adverse, and they have been acting nothing but honestly, at least at the level I can observe.

They are so by-the-book we have once found an error in $FAMOUS_DATA_PROVIDER calculations, because we thought we made a mistake, and we looked for it until we realized the data we compared ourselves to was wrong.

So if they manage half a trillion by using excel FORECAST.LINEAR and Matlab interp, imagine what is done by JP Morgan.

I think this comment is missing a key bit of context in that regionals/smaller banks were exempted from some of the regulations of Dodd-Frank.

https://www.npr.org/sections/thetwo-way/2018/05/22/613390275...

So it's not that we assume bigger banks can better manage risk, we are simply, currently regulating them to manage risk better.

Isn't the answer then to require small banks to conform to the same rules as big banks? Instead of allowing them to fail and be acquired by big banks?

Well that's precisely what we were doing until 2018 when lobbyists and the Trump Administration carved out exceptions for banks with less than (or equal to) $250 Billion in assets (see link above). So a more pertinent question from my perspective is: "Who's brilliant idea was this anyway? /s"

But if "the answer" you are referring to is to prevent consolidation in banking, then I think it's not quite as cut-and-dry. Regulation, especially risk-management regulations, can act as barriers to entry and create an environment that favors larger/established institutions leading to market consolidation. As an over simplification by a layman, it could look something like:

    - Higher regulation constrains profitability and raises fixed costs of running a bank (compliance burden).
    - This means that the amount of assets under control by a bank has to be higher in order for the bank to be profitable.
    - This higher floor reduces the likelihood new banks start (since the asset requirements to be profitable are higher).
    - Existing banks, in an effort to increase profits, acquire and merge with other banks.

These final two trends (less banks starting, more MnA's) are what could drive market consolidation. In a lot of ways Airlines are an example of this in a different industry.

I am definitely _not_ suggesting small banks should be exempted from Dodd-Frank like they were. I actually found the 2018 deregulation disturbing and disappointing. I am only trying to illustrate that even if 2018 hadn't happened, I don't know for sure if there would be more competition in the banking industry. (Only that the banks we do have would be less risky)

That would still result in tbtf banks since smaller banks will find it harder to comply with onerous regulations. I'm talking about community banks and the like, which don't really do the fancy investment banking stuff.

Well I agree with your two asterisks. The thing that gives rise to it is that people who are deciding on what to do about the rising rates are all incentivized the same way: write new loans or lose your job. Each bank has its own set of customers, strengths in marketing, and so on. The loan officers then choose the best of that pool. If that means firms that are at greater risk to rising rates, they still pick the better credits out of the ones they are presented with. It's basically a mugs game.

Gathering everything in a big bad bucket is indeed just hiding it until the next crisis. Gotta wonder what size of crisis this will eventually cause, not sure if I want to be around when it happens.

But:

> People famously have the political systems that they deserve.

I'm not sure most people through history or right now really have had much say in what political system they live under.

I struggle to understand why there is no "deposit banks" category which would include heavy regulation, with full reserves required.

There is certainly a significant number of people who just want to keep their money safe. They would happily pay 50 or 100 USD per month for an actual bank service where your money is just stored and not lend out to someone else.

I think you're describing "narrow banking". It doesn't exist in the US because the government doesn't allow it. As I understand it, they don't allow it because it would be obviously better for deposits individually, but would slow down the economy as a whole by driving up the price of loans, since all of the deposit money would suddenly be unavailable for lending.

Specifically, the Federal Reserve doesn’t allow it. They are explicitly stoking fractional reserve banking by preventing narrow banking, leading to this performative art (deposits backing fractional reserve lending, FDIC oversight, etc).

“Can we have narrow banking?” “No!” “Okay, how about not taking actions that cause massive consolidation in the banking industry and systemic issues?” “Also no.”

Spot on about cheap deposits funding lending and bank ops.

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

Before digital payments or online banking, it was common for an average Joe to keep much of what would otherwise go into a checking account in physical cash. In modern amounts maybe $5k at the high end or $500-2k on average. It didn’t seem to prevent the system from functioning; I certainly can’t seem to draw a direct conclusion between shifting to a cashless economy and the living standards of an average personal directly improving as a result of lower cost of capital, unless they had assets that would benefit from easy/low-rate credit access like a house.

If the Fed keeps trying to fix failed banks through indirect money printing (covering uninsured deposits by overpaying for treasuries/MBS) they could lose control of inflation and be unable to further raise rates. That seems like a worse outcome for the average person than a slightly higher cost of capital from banks having to compete with narrow banking. And the Fed should hope for narrow banking at that point because it would be the easiest to manage compared to the other options like physical cash, crypto, and other currencies.

Yeah, the amounts they're worried about are a few orders of magnitude larger than that. I don't think that's a compelling counter-example.

> If the Fed keeps trying to fix failed banks through indirect money printing (covering uninsured deposits by overpaying for treasuries/MBS)

Is this happening? The uninsured deposits are being covered by the FDIC insurance fund, which is funded by the banks. None of it is coming from the fed.

Isn't this called a "narrow bank"? Maybe I'm mixing terms but I've heard the idea.

Yep, same concept. Wish I had a link to the article handy, but there was actually a bank (TNB if I'm not mistaken) trying to do exactly this that got blocked by regulators.

They gave very little explanation for why the application took dramatically longer than normal before eventually being rejected. I believe the reason effectively boiled down to "we don't like your business model"

> There is certainly a significant number of people who just want to keep their money safe. They would happily pay 50 or 100 USD per month for an actual bank service where your money is just stored and not lend out to someone else.

Realistically, who would these people be?

$50-$100/mo is quite a substantial amount for just a banking fee, so it would have to be people rich enough that it's not a showstopper. But people that rich have no problem moving their money to investment accounts where they can do much better on return, so they wouldn't be customers of this.

The vast majority of society doesn't have 250k+ on their bank account. Hell for most this is barely news as long as the US government keeps their FDIC insurance promise.

America is no Argentina or Lebanon.

Custodia Bank is trying to do this in Wyoming.

The Fed is trying to stop them at all costs.

People cannot wait for the aristocracy to surrender power to them. Throughout history there is exactly one way to make some say in the political system.

So the big problem was the Fed increasing rates quite dramatically, signaling this, and the banks not properly having a t-bill ladder (ie, buying a mix of short&long term securities instead of just long-term treasuries)?

Adding lots of high-value accounts & making lots of loans is one thing, but diversifying the investment appropriately should be mission #1 for funds.

More centralization would mean more government interventions and bailouts. That means socializing the losses.

If the excrements hit the atmospheric propulsion devices, governments can always re-institute a gold standard, but that just moves the pain from the haves to the have-nots.

Big banks are better risk hedged! In this case because the government requires them to be as a result of post-2008 laws. SVB lobbied successfully to get the burden for complying with those regulations not to apply to small under 250-billion dollar banks when coincidentally they were just under that number a few years ago.

> SVB lobbied successfully to get the burden for complying with those regulations not to apply to small under 250-billion dollar banks when coincidentally they were just under that number a few years ago

To be clear, the rules they lobbied out of wouldn’t have forced them to hedge. They would have drawn attention to the problem much earlier.

Our industry is the same. Example: "Individual authentication systems are often insecure, so lets pool all our permission management under the umbrella of two or three huge companies that manage all authentication for everything in the entire world via mechanisms like OIDC."

We apparently like to trade noticeably frequent (but still fairly infrequent) small failures for rare catastrophic failures. The key here is that these rare catastrophic failures are rare enough that we can pretend they won't happen. Enough time goes by between incidents that we have time to forget and claim ignorance.

Eventually humanity will pool all risk in one basket so big that when it breaks we will go extinct. The end.

Gigantism has many "features" going for it:

Like you say, it pushes risks to the tail (lower probability). Low probability - high impact events are easily mis-priced and thus this becomes a rent extraction channel.

Removing competition by acquisitions means the market can be distorted more easily. Another source of non-earned profit.

But there are also subtler benefits:

Gigantism creates de-facto regulatory capture (how could a lowly government bureaucrat go against the "giant"?). Such leverage versus rule-makers can be tweaked to optimize... wait for it, further risk-less profit.

Finally, "giants" can offer excess compensation and prestige to attract key talented individuals, essentially a scorched earth strategy to suppress any other actors.

All-in-all a horrible pattern that doesn't really offer any benefit (besides to the few insiders in the top of the pyramid). Delivering innovative products or services requires a certain scale but that is typically an order of magnitude smaller than observed sectoral concentrations.

Why is it happening if it is so toxic? Well, society is stupid. More stupid in fact than many (if not most) of its individuals.

The hope is that there is a sufficient number of independently evolving societies so that low-IQ societies imbibing on toxic stuff go extinct (not physically, as a cultural pattern).

The banks know that all they need to do is become too big to fail. I.e. if I owe a thousand dollars it's my problem, if I owe a billion dollars it's the other guy's problem.

If you owe a billion dollars, it's everyone's problem.

A billion dollars is an absorbable loss by a lot of entities. Even winding it down, Meta is reported to have lost $4 billion in VR this quarter, Blue Origins is deficit funded by Bezos to the tune of 1 billion a quarter.

This almost leads to the conclusion that large corporations should be owned by the state.

Or that they shouldn’t exist.

To make sure large corporations don't exist, we would need a strong government that is not controlled by large corporations, which almost sounds like ________

> the risk driver for these ongoing smaller bank failures is (reportedly) the rise in interest rates.

Ultimately it's poor risk management. If you take depositor funds and buy 10-30 year bonds with them then you're exposed to a run on the bank and rising interest rates will devalue your bonds. The bank instead could've rolled 30-90 day Fed funds instead but they didn't. Why? Lower yield.

Put another way: the bank took a risk with depositor funds and they get wiped out because of it while depositors are fine.

> the solution seems to be to create ever larger banking behemoths

Yes and no. At the heart of this is fractional reserve banking, which has been wildly successful. Like any kind of risk-spreading business (including insurance) bigger is generally better because variance is less and everything becomes more predictable.

I understand (and agree with) concerns about consolidation creating an oligopoly.

Ultimately though, what backstops the entire financial system is the government. This was true before and it's true now. The Federal Reserve is even called the lender of last resort.

And where is the accountability? The facts seem to point to poor management, but in the case of SVB all the leaders there were all over linkedin acting like they were the victim, not the perpetrators.

> People famously have the political systems that they deserve.

Partisans invalidate people that care about the ways both sides are the same.

We know which ways the parties are different, it is perfectly fine to be more frustrated in the ways they're the same.

> People famously have the political systems that they deserve.

This sentiment is widely expressed, but it seems absurd and offensive to me. Citizens of countries such as Finland, Switzerland and Singapore enjoy much superior quality of government to what we have in the US. Does that mean Americans are ethically or intellectually inferior to Finns, Swiss, and Singaporeans? The government of Pakistan is not very good: does that mean Pakistanis are less ethical or intelligent?

I've always thought the implication of the saying is that in aggregate they are.

I don't think that necessarily translates to the median individual.

Unless you believe in overlords or secret societies the quality of government is more or less a direct result of the ethical constitution of a society - at least for a sovereign nation.

The difficulty is that it is a collective phenomenon - as you can establish fairly easily by picking somebody from society X and embedding them in society Y.

Ofcourse there is no collective without individuals, so ultimately it is aspects of individually adopted ethical codes and behaviors that it is responsible for a poor collective organization.

A standalone computer that operates reasonably but is connected to other computers via a broken API's will lead to overall broken network operations.

There is also something we might call a society's "intellectual constitution", the collective ability to execute required changes, devise institutions and tools etc. But this is subordinated to the ethical dimension (where there is a will there is always a way).

in US its not people who have government they deserve. It is Corporations have the government they pay/lobby for.

only in the US there are voters and political donors/lobbyist.

Other developed countries only have voters decide on election outcome & policy.

Yes, concentrating all the power and all the risk in a few giant banks that also tend to do risky investments as well seems like a terrible idea for both customers and stability.

Canada has a system like this, although it is very well regulated and hasn’t so far blown up. What it does do though is give very little competition or choice to the consumer. The Canadian bank oligopoly is only slightly less horrible than the Canadian telecom oligopoly. Both are as anti free market competition as you get. It looks like the U.S. banking system is headed the same way.

Is that what made it so easy for Trudeau to freeze banks accounts of protrsters at the trucker rallies?

No that was the Emergencies Act.

https://www.cbc.ca/news/politics/emergencies-act-explainer-1...

That and the nearly unchecked power of the Canadian executive branch. I think without the oligopoly of banks it would have been too difficult to pull off on short notice. The Canadian prime minister may not rule over much compared to the U.S. President, but he is the king if he has a majority government. The courts are there, as in the U.S. to uphold the constitution, but they’re slow. You can get away with a lot before they catch up.

This was a last minute effort to avoid the bank to become bankrupt and the FDIC stepping in and using their reserves and paying out to the depositors.

I agree with you that the solution could have been just the FDIC assuming control of the bank which would have put pressure on the FDIC's reserves but, large banks generally have been buying out smaller banks to become larger and this has been going on for decades. What could have been going on behind the scenes is that large banks were being pressured to buy it out similar to 2008.

JPMorgan is actually prohibited from buying other banks in general due to their size. The FDIC gave them an exemption in the process of soliciting bids for First Republic over the weekend and maybe last week.

Having anything deposited over the secured amount is giving another private entity an unsecured laon, just like pre-paying for unrecieved goods

> In fact this aggregation only commingles all sort of risks inside a gigantic opaque pool, makes the private-public dependency (TBTF) and all its perverse incentives even more entrenched, and ultimately creates the conditions for systemic failure

This is the real issue. Bigger institutions aggregate risk.

I agree we should not have gotten here, but given the situation we are in, I'm not sure there was a better outcome possible. Let FR fail to teach uninsured investors a lesson? That has some moral appeal but not sure it would be a better long term outcome.

I'm pretty sure the companies and people who held their money in First Republic would survive losing the money they had with them (in most cases it's only a part of their assets). I'm also quite sure the owners of the First Republic stock could afford losing the value of those stocks.

It might have been a little tough for some of them, but most would just shrug it off. I do not understand why government and other banks are so anxious about a bank or two failing? Is it because all other banks are also rotten and leveraged?

It's never the direct effects.

It would likely cause people and companies with uninsured money in other banks to pull their funds out, quite possibly leading to cascading failures even for banks that are perfectly smart and healthy today.

The simple fact is that no bank can survive a run. Not a single one. Because that's how the business works.

IMO the best offramp from the systemic problem is to announce a schedule to phase out any protection for uninsured deposits. Say, 100% insurance for the next 6 months, declining by 1% per month after that, phased out completely in 8ish years.

Slow enough to avoid panic and dramatic swings while allowing the industry to create new products and address the market need.

Yes, and there needs to be some kind of restriction on how much one can expect to be allowed to withdraw in a certain amount of time. If too many want to pull out, there should be an automatic stop and everybody should know about this. The bank should maybe even be required to pay out a little extra interest as compensation.

Better this kind of limited draw out than having to rescue banks left and right and having huge amounts of regulation which can never fully stop these kind of events.

> I'm pretty sure the companies and people who held their money in First Republic would survive losing the money they had with them

Depositors shouldn't have to do due-dilligence on their bank. It might be something worth doing if you're going to park a large amount of money in the bank about the $250k insurance cap, but otherwise it shouldn't be necessary.

The investors should be doing this. And if they get wiped out, too bad.

There are also ways to spread money over $250k so it stays insured. What we have here is essentially making the $250k cap meaningless for these "too big to fail" banks. The problem is nobody really knows if their bank is considered a "systemic risk" or not. Nor should they have to care.

Sure, but the ones with less than $250k will still get their money even if the bank goes down.

The thing is I wonder if there really is a bank "too big to fail". The rich people who have their money in that bank will not go hungry if the money is gone. Most companies will not go bankrupt if the cash they have in the bank is gone. They might have a rough time, but the company could issue new shares or lend from another bank or sell a building they own and rent it back of whatever, but all the clients of a bank will not disappear just because their bank and some of their cash in that bank does disappear.

In my opinion it's worse with all the hoolabaloo when things like this happens and central banks and governments start to talk it's "too big to fail" and they want to rescue banks, lower interest rates, print money etc like in 2008 and the stock market tanks 50%. Just because some loud rich people at banks would lose their money. Most companies in the world would do just fine without JP Morgan and Goldman Sachs.

How do you think your bank would fare if everyone who has uninsured money in it pulled it all out tomorrow?

The proven with the "let the people who made poor decisions lie in the bed they made" is that it creates a panic where they lght our beds on fire. Maybe we "deserve" it too, but that doesn't seem like great public policy.

I never suggested that the depositors should lose their money.

They should have known about the 250k limit and not exceeded it in the first place, but I didn't say they should lose their money.

I said the cap is irrelevant. Everyone with SVB got all their money back. Even if you had $20 million in the account at SVB, you got it back. When, technically, you are only supposed to get back $250k.

So the rule is applied arbitrarily, depending on what is or is not a "systemic risk".

If a rural bank fails and people have more than 250k in their accounts, they will lose it.

If SVB or First Republic fails, they won't.

This case is a little different in that JP Morgan bought the whole thing. Which is just leading to further consolidation in the really TBTF banks.

Short term actions are constrained by realities on the ground. Long term actions are only constrained by ideology, vested interests and disregard for collective welfare.

Investors did lose their money. Depositors did not.

One aspect is that these behemoths have more stringent regulations than the likes of svb

The solution could also be to require banks to be more cautious, which was actually the case before 2018. But the US political system rolled back precautions that were put in place in the aftermath of the 2008 crisis.

"Larger banking behemoths" is NOT the solution - it's the result of deregulation and gutting of oversight - also referred to by libertarians here as "small government".

These banks should have been aggressively audited and diversification should have been enforced, as it used to be. We just keep going in this "deregulate-collapse-regulate" cycle.

Split large diversified banks into small banks with correlated asset portfolios and you will get MORE banking collapses, not less.

They took a 40% hit to deposits. What do you want them to do? It’s not survivable. This is just how our banking system works.

Peter Schiff tried to run a full reserve bank and was shut down by the regulators. So it is just how the banking system works, but it is by fighting the free market all the way through.

I don't like to recommend podcasts, but in of his podcast [0] he had a really interesting walkthrough of his perspective on the regulators working to shut down his bank. For me it was the most powerful advertisement for cryptocurrency I've heard to date. An opinion that would probably annoy Schiff.

Even if you don't believe in any particular bank, in a 0 interest rate environment a full reserve bank would have been competitive. If you don't get money anyway, avoiding the inevitable crash when rates rose would have been a nice selling point.

[0] https://schiffradio.com/ Ep. 887

Matt Levine has explained the Fed's disdain for narrow banking. Fed payments are a subsidy for regular banks, and regular banks are effectively public/private partnerships that make loans, enforce regulations, and generally satisfy the goals of the government. A narrow bank would capture the entire subsidy and not satisfy any of the other goals.

I tried to find an explanation for why the Feds didn't want a narrow bank.

This article has some speculations, but nothing definitive: https://www.chicagobooth.edu/review/safest-bank-fed-wont-san...

It doesn't quite make sense why the Feds don't want narrow banks, except that they might compete with traditional banks (and those banks' deep reaches into the Fed's policy decision makers are forcing out potential competition before they take root).

Fed wants the public savings to fund private sector loans, not public sector spending, which they already do with presaving taxes.

> Peter Schiff tried to run a full reserve bank and was shut down by the regulators

I've heard this before and I very much doubt that is the full story. Does anyone have the _regulators_ side of this argument?

Well, I wouldn't say it was shut down per-say and more of it was never allowed to start. They never got a banking license.

IIUC, the regulator's argument is that people are incredibly interested at putting their money in a narrow bank (aka Pass-Through Investment Entities) such that few people would want to store money not at a PTIE and it would screw over liquidity in the financial market.

https://www.bloomberg.com/opinion/articles/2019-03-08/the-fe...

https://www.federalregister.gov/documents/2019/03/12/2019-04...

> They took a 40% hit to deposits. What do you want them to do? It’s not survivable. This is just how our banking system works.

You're making it sound like people taking out their money out were those in the wrong, causing the failure of the bank.

That's not what happened. People taking their money out were in the right.

The root cause is bankers at FRB miscalculating risk. And they are those who were wrong.

I mean, banks are allowed to curtail the egress of funds through rules limiting the velocity of funds. I see this in some of the recent high-interest yield offerings.

Of course, then the super-rich and their millions might stay away. But perhaps that's the most stable course after you have too many "over the FDIC limit" account balances.

> This is just how our banking system works.

That's just how business works. Many businesses would have a hard time surviving losing 40% of their business in a short period of time.

A 40% withdrawal in a short time isn't survivable. Can't really fix that in a bank that does bank things. But the underlying situation that made depositors nervous could be addressed by regulation. Some ideas, not necessarily good or thought out, would include: mark assets to market, so the present value is reported accurately, but also report on expected future values at some intervals; an on the record increase of deposit insurance maximums would also help confidence, although there's lots of details there.

WHY did they take the hit? Because the word was out these banks were putting all of their eggs in one bond basket at the time of increasing interest rates. I am a just a simple country 401K investor, and even I knew not to do that.

Your 401k is presumably mostly invested in shares. Banks aren't allowed to structure their investments like that (it's considered too risky). In general they have limited options for investment which are generally bad in times of increasing interest rates with the remaining ones being bad during recessions, not to mention the impact of the current collapse in commercial real estate demand. As far as I can tell there's no way for the government and the Fed to pursue the policies they have been without blowing up the banking system as a consequence.

those people fled because they were told to by the financial press

this really feels like a setup to let a big bank buy a little bank for nothing

if we are really talking about people fleeing banks in "trouble", they would all close tomorrow...and don't tell me about stress-tests, those don't incorporate things like a broad collapse in commercial RE (which ALL the banks will be hit by)

> those people fled because they were told to by the financial press

…reporting First Republic’s balance sheet losses and falling stock and bond prices.

> feels like a setup to let a big bank buy a little bank for nothing

It’s not. That JPMorgan wound up buying it means literally nobody else submitted a valid bid, because the OCC and FDIC would have much preferred to not waive rules in making this happen. (Remember, too, the $30bn the big guys deposited with First Republic in March [1].)

[1] https://www.cnbc.com/2023/03/16/group-of-financial-instituti...

Real estate (commercial and otherwise) is included in the stress tests,

https://www.federalreserve.gov/publications/2023-Stress-Test...

I think financial regulators are a bit too soft-touched, but they aren't so incompetent that they would neglect real estate, of all things, in stress test scenarios in this post GFC world.

> * the risk driver for these ongoing smaller bank failures is (reportedly) the rise in interest rates.

It's a failure to diversify investments and adequately respond to a changing interest rate environment.

> * the solution seems to be to create ever larger banking behemoths (on the premise that they they can better manage risks)

Regulation alone can fix it. Just place further controls on how banks can invest their funds (ie. recommended allocation percentages per instrument and risk type), require stringent reporting, and perform stress tests to verify compliance.

The scary thing now is that banks with depreciated assets know they're in this zombie state. They just haven't been pushed over yet.

It'd be easy to find out which banks these are.

Might make for a questionably ethical opportunity to short banking stocks...

Why would it be questionably ethical to short the stock of a company that your analysis shows is significantly overvalued?

That seems entirely ethical to me.

And it's not a risk-free investment either. They might be able to stumble along, long enough for interest rates to turn around, and come out ok on the other side.

My tinfoil hat view of this is that it's part of a creeping state takeover of banking in everything but name.

1. assume the liabilities of the banking system (complete in 2008)

2. induce consolidation of the industry into a few megabanks with the "systemically important" designation making small banks dangerous (in progress)

3. use the government protection as leverage to make these few remaining banks obey government priorities without ever having to pass a law. e.g. effective censorship of entities the government doesn't like by cutting off from the banking system entirely (the goal)

Dunno how you can see the problem of massive corporate consolidation and yet miss the entire mark so badly.

The regulatory toothlessness of the government means that the businesses can de facto write their own laws.

Same thing is happening in healthcare with the takeover there by a few religiously affiliated corporations, which will affect everyone's choices about their own healthcare.

We've been screaming about how the government is horrible since Reagan in the 1980s and we're on the cusp of really bearing the fruits of that decades long shift of power to completely unaccountable corporations.

But yeah, its the government which is still obviously the problem.

This is dumb because step (3) is already the state of the world. Banks are essentially extensions of the government. It's a public-private partnership. Yes, the government absolutely wants to cut off some entities from the banking system (terrorists, criminal cartels, etc). This is "censorship" only in some extremely naive and reductive sense.

Not all entities the government sanctions through extralegal pressure campaigns are actually illegal (see https://en.m.wikipedia.org/wiki/Operation_Choke_Point)

Now perhaps you don’t care if a gun dealer can’t get a bank account but every 4 years there’s a presidential election and maybe the next person wants to cut off abortion clinics from the banking system.

Again, to the extent this is a concern, that is already the state of the world. You don’t need a conspiracy theory where it is the last step.

When there are thousands of banks, it's a near certainty that at least one will decide to bank the unpopular but perfectly legal industry, and say "come at me bro, we'll win in court" to the government. With 4 megabanks, not so much.

Step 3 doesn't make sense. All banks have government protections (eg FDIC). The government already has KYC and AML laws that apply to all banks. Consolidation doesn't make the banks more susceptible to government influence. Big banks can afford to outspend the government on lawyers pushing back, it's small banks that just agree to do what the government says.

The idea that you can outspend someone on lawyers and beat them in court is nonsense that only works on the scale of <$1 million. And, yes, of course the government can make banks crack down on people who are breaking the law, but I'm talking about people who aren't.

Money is an excellent proxy for legal muscle. the argument was that bigger banks are more susceptible to informal extra legal influence, but expensive lawyers make enforcing your rights easier to do. See also SEC enforcements and IRS actions, both of which are harsher on smaller actors. Heck, look at the Disney vs DeSantis history.

The only way you can beat someone in a lawsuit with money alone (jurisdictions where you can bribe judges excepted), is by preventing the case from ever getting in front of a judge. It costs a certain amount of money to take a case to trial, and that can be a lot depending on the complexity of the case. But that's a lot to an individual, not to a corporation. Once you can spend that much, you actually have to go in front of a judge and win on merit.

The reason that IRS and SEC enforcement actions are harsher on small actors is because they break the law in much more obvious and stupid ways. e.g. not declaring taxable income and writing off obviously personal expenses. Large companies do not do this because the IRS splits penalties with whistleblowers, and any major company hiding income this way would be snitched out in a millisecond by their employees looking for the multi million dollar payout. Large companies do things that exploit loopholes and gray areas in the law, and the IRS is much more inclined to settle when their is a chance they may lose in court if they take it all the way.

There are other ways of using money to beat someone instead of delaying the trial. For instance, by making the cost of participating in the trial more than the cost of capitulating. See, for example, SLAPP suits.

But my point, which I keep making and you keep missing is that the incredible legal muscle of big banks means they don't have to worry about giving in on gray areas because they can effectively fight back. Whereas smaller companies will find it a lot simpler to give in to government pressure on the edge cases.

> use the government protection as leverage to make these few remaining banks obey government priorities without ever having to pass a law

Ala fascism. Government control of private business without government actually owning those businesses.

You sure it’s not the other way around? As far as I can tell what’s actually happening is business has taken over government.

It's effectively the same. Monarchy isn't a king ruling over lords, it's a king balancing the interests of the lords so that they continue to grant him his kingship. A king who fails to balance this properly can easily lose his head. Monarchies are just disguised oligarchies, and e.g. Fascist Germany was no different - Hitler had to balance the interests of the various groups against each other enough so as not to lose his head, which in the end completely failed at the toll of millions dead.

A government "controlling" megacorps also need to balance these megacorps & other mega-influencers so that no one group becomes too powerful and too dissatisfied enough to overturn the current ruling system. Megacorps like Google obviously have plenty of tools at their disposal even in a democracy with "fair & free & secure elections" via shadow-banning, increasing prices/costs, curtailing suggestions, labeling disinformation, decreasing visibility, etc., to attempt to sway public opinion sufficiently to cause a desirable election outcome. This is before even attempting to actually sway elections via election rigging, ballot stuffing, etc., or bypass elections entirely through some sort of pseudo-paramilitary action (e.g. coup).

Of course, the more blatant these actions become, the more the interests of the other important influences can come into play (e.g. if Google ever did attempt a paramilitary coup, they would need heavy support elsewhere to ensure the military or the States didn't stop it), whereas Google shadow-banning certain political views can go largely ignored if it's not perceived by the public to matter much.

More like the other way around

Bigger banks are more regulated. SIVB wasn't subject to the same regulations.

The difference was that the larger behemoths were required by law to manage risk better. They were subject to a stricter ongoing regulatory regime. The medium banks convinced the corrupt Trump administration and a bunch of corrupt law makers to pass a law that subjects them to a much lighter regulatory regime.

Their reasoning was that if a bank with "only" 250 billion of deposits fails it will not have a systemic effect on the economy. That reasoning was really dumb and now that a couple of medium banks failed the stupidity of that reasoning is obvious for everyone to see. Of course wiping out 250 billion dollars of deposits will cause a bank panic and will have an overall negative effect on the economy, and the fed is working hard to make sure this does not happen.

But generally speaking smaller banks are not by nature riskier. They only got riskier because they passed themselves this law that allowed them to get riskier. And now they will get a reputation for being riskier, and since in banking reputation is everything, they will become riskier.

WSJ opinion pages have been publishing a lot of great things on this front trying to show possible reasons for these failures:

* https://www.wsj.com/articles/deposit-insurance-encourages-ba... - argues the FDIC and Fed encourages poor investment of money by banks.

* https://www.wsj.com/articles/the-silicon-valley-bank-bailout... - attacks the decision makers in the Fed and Treasury.

* https://www.wsj.com/articles/president-biden-bank-failures-s... - argues the government is lying when it says it won't tax Americans to bail out these banks.

* https://www.wsj.com/articles/barney-frank-signature-bank-fai... - highlights Bernie Frank (of Dodd Frank) interviews saying the Fed has it in for crypto.

* https://www.wsj.com/articles/a-proven-way-to-avoid-moral-haz... - the FDIC should not fully pay our deposits beyond the limits. (Written by a former FDIC chairman)

* https://www.wsj.com/articles/the-fdic-should-act-like-a-real... the FDIC should act like a normal insurance company and base cost to insur based on risk. (Former currency comptroller and FDIC member)

* https://www.wsj.com/articles/federal-reserve-michael-barr-se... and https://www.wsj.com/articles/the-fed-absolves-itself-silicon... say the Fed is deflecting blame from itself. The article basically blams the Fed for being asleep at the wheel.

Everything goes according to this book https://en.m.wikipedia.org/wiki/Imperialism,_the_Highest_Sta...

the book says there is no technological progress because the bad capitalists are living off their rents, or something like this. However we have seen some technological progress since 1916... (and the planned economies used to be stagnant)

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