America will soon see a wave of bank mergers?
economist.com
economist.com
Who would you rather lend a mortgage to?
- Group A, consisting of people who prudently pay debts early
- Group B, consisting of people who pay debts on their due date, and sometimes after
Let's say you lend $100B to each group A and group B. Historical data might show that in aggregate, group A has a default rate of 1% and group B 5% (there's 5% chance that a person from group B defaults on the loan).
Because of defaults (risk), you expect to lose $1B of principal on group A and $5B principal on group B. To break even, you need to charge group A interest that would at least offset their $1B loss, and charge group B interest to offset their $5B loss, hence group B's higher interest rate. One group is not automatically more profitable than the other.
Group B might incur more costs such as late fees, but this only works against their ability to make future payments.
If it sounds ridiculous… imagine that every month, all the mutual funds you are invested in shut down and gave you your money back (with interest), and you had to choose from a whole new set. Some of you probably do this anyways, but most people prefer to make the choice once and then just let it grow.
I imagine that late fees increase the cost of repayments while debt interest increases the number of payments thus not hindering the ability to make future payments.
Once you have established credit you will then be offer 0 APR credit cards for 12 to 48 months. With a zero APR credit card that has a balance say of 10,000 your monthly minimum payment is 1% of that so $100. $20,000 $200 a month ... once the APR promo ends transfer it to another card with zero APR.
Closing credits has hurt my credit so i keep them open and locked, as well establish email alerts on all of them for different scenarios to monitor them.
My credit today is good, but not perfect. I have trouble getting any new credit card. All for the same stated reason - too much available unused credit.
I'm sure my score would dive if I closed a bunch, just pointing out that having a bunch isn't always a good thing.
I can also see my credit scores as much as I want and ensure that I am using no more then 30% of my total accumulated credit limit. For example say I have 10 credit cards equally $100,000 combined then as long as don't have credit debt higher then $30,000 my credit remains good to very good to excellent. Your score will be negatively affected if your debt went to 31K and higher.
Another good thing is both apps alert me immediately when theres a change to my credit.
I pay about $50 a month for both, expensive yet well worth it especially if your looking to buy a house(s) and you overall really care about your financial health/score for present day or the future.
How many know they can rack up $10,000 in credit card debt and only pay $100 a month with a zero APR card? Im not sure many know this especially those in their 20s and maybe early 30s.
So whose your lender.. love to get a 2 percent interest rate on my next house. Moving into one soon and its much higher then that.
Fixed that for you. The big banks have one thing going for them, they're big. That means they will have a wide network and a large service organization, but most feel no need to meaningfully compete for your business. You're going to use them because they're big. You're not going to get meaningful interest on your deposits at a big bank, because they don't need your deposits; bankrate shows me rates up to 4.75%, with banks I've heard of at 4.3%, Ally at 3.75%, my credit union at 2.5% (at least it's moving up, although the pace of increases is a lot slower than the decreases were :/), and Chase is at the national average of big banks: 0.02%. Certainly, 0.02% was understandable in the zero-rate environment, but I'm pretty sure it's been Chase's interest rate for the last 30 years (no data, just a hunch). Mortgage rates float in and out of competitiveness, especially if you jump through the hoops for a relationship discount; that's a good business where volume means profit at origination, and it's easy to sell the loans if they want to (that's part of why their underwriting is so cookie cutter; gotta make it easy to resell).
If you're in the SF Bay Area, you should really check out the local credit unions; some of them are pretty decent. Co-op/shared branch banking takes care of most of the access issues, but you might want to be aware that after hours telephone service is directed to a shared branch call center. My credit union holds and services the mortgages they originate, which means you don't have to deal with the servicing changed dance, and also they're able to do limited paperwork rate adjustments for a reasonable fee; much simpler than a refinance.
Your credit wasn't near-perfect. You hadn't defaulted, but that's far from proving that you can manage your credit/money and make payments on time. A hobo who lived in the woods would also have never missed a payment.
The myth of US-style 'credit score' requiring a history of card use does persist here though, and I've known several people who have had to close one or more credit cards in order to get their mortgage approved.
I can relate, as I came in US from Europe. I arrived, opened a bank account in a big bank, I could only get a debit card, because I had not credit history. After few months I could get a credit card, but with a $500.00 limit! I needed a car, so I bought one cash.
When came the time to buy a home, I was asked to open more credit cards (one was not sufficient) and come back in a year or so later, to see how my score would improve.
Doing the same thing but this time with interest proves nothing the others don't. Borrowing history makes sense for businesses or people who with complicated cash-flows. But if you're stably gainfully employed the only things that matter is how you manage your external financial risks (which banks don't check for) and your ability to not over spend (which banks also don't check for).
Combine this with the your typical mortgage is overcollateralized means the magnitude of the loan is essentially meaningless outside of "is the monthly payment something you can afford."
Credit score is a moralizing system that hates the poor, so it's unsurprisingly embedded itself into American culture by three corporations that will never be held accountable (see: Equifax leak).
It's as American as the bald eagle. I'll stop now, my cynicism is showing. I just don't see a way to get to a place where we don't have the current trifecta of credit scoring corporations running our lives without a giant pile of money to start a competing credit bureau that makes and underwrites loans based on different computation of a person's score. Because a credit score was initially for rating people on their ability to pay back borrowed money. It's just been perverted since its inception into what we have now.
I agree. And slowly credit scores are starting to take rent into account.
> There's no difference at all for someone who works a dayjob.
But there is a difference. If you put your living expenses on a $500/mo credit card, you can have a $120k job and be eating ramen, living in a flophouse and spending the rest on drugfs or supporting people who cannot work. You cannot afford to service a mortgage. If you commonly service larger debts, then they don't have to worry about hidden things sapping all your funds.
Now they want to borrow $5k all of a sudden. Do you give it to them, just based on the above history?
So, if I have been making $100K for 6 years at the same company, with no credit card (I only used debit in Europe because there was very little incentive for me to use credit card that I pay at the end of the month), even though I have never had a debt before, they would be willing to give me loan. While in US, with no credit card before, they could not.
loan/credit application is mostly based on your income (you can maybe borrow up to 4.5-5x your gross income for a mortgage), how certain your income is, for example whether you have a temporary or permanent contract, and if there are no red flags in the last few years.
It also sounds to me that the difference between how we live here and the American system (I feel most people have loans for stuff in the 1–10k €/$ range in the US?) is a couple of months of living a bit more frugal, and the result is a lifetime of profit because you avoid all this interest everywhere.
Here it is common (and recommended by the government and banks) to have a 5k buffer. It could be my bubble but most people I know maintain that buffer. It pays for a new washing machine or even a new (crappy) car if needed.
Is it my view of the US based on Netflix that everyone has loans for the smallest of thing (like TVs) or is it really true?
There is much more access to credit in the US, most Americans use that credit a moderate amount to smooth cash flow for bumpy purchasing.
It is certainly the case that there are outliers who overuse credit, and many people who abhor credit like it sounds like you do.
One of the biggest differences between US borrowing and the rest of the world is that bankruptcy is very very easy to access, has very little stigma, and clears out most debts.
This makes the perceived costs of carrying a large debt load quite different.
These two are not the same thing.
Like - you wanna spend 30K on a car and you have it in cash? take loan
you'll lose a some $$, but you'll be building your history.
The issue is with very large banks. They have rigid underwriting deparments and poor CS, so if you approach them as a first-time buyer who isn't already leveraged to the hilt, they will make it a long and painful process. Mortgage agents are a prime target for AI replacements, because all they do is relay information between you and the underwriting departments that make the real decisions.
Other people have pointed out that when you take a loan for something you can afford, you can use the money you would have spent on other things in the meantime. (As long as you're confident that you'll keep making enough money to make your payments for the life of the loan.)
I'm not sure they're all that available or popular (they're highly dependent on your landlord having the correct paperwork and such) but the place I rented an apartment last year had this available and it did get reported
Personally I've never owned a credit card, I always pay with a debit card or cash. 20 years ago I refused to participate in the credit scoring system and still stand by it.
Curious how the parent commenter had great credit with no seasoned lines of credit. It's one of the biggest factors in the score.
Months before seeking a mortgage loan, learn the score's equation and appease it.
It's a kind of arbitrage. If you're losing money overall, you're doing it wrong.
If we assume 8% returns and you only put 50% in the stock market and your loan costs 2% interest then your total benefit is only 4%. Putting all of it might get you 6% but you are now taking a significant amount of risk.
* you think you can make more money by investing your 30k and letting it grow and compound
* you are very prudent with your cash on hand and would rather have immediate access to liquid cash than save a little bit on interest which you pay down over the course of <term>
Some of the dynamics here are a bit different when market returns are not looking great/steady and money isn't cheap anymore.
Mortgages especially. Mortgage interest is tax deductible and makes it easier for high tax bracket individuals to outperform their loan by investing.
Since 2017, not really, due to tax law changes. Cap of $10k but that includes state taxes paid also.
Why exactly is this the conclusion, as opposed to suggesting the big banks need better evaluation of borrowers (whether thats with better metrics or humans in the loop)?
All the problems being brought up seem like they could happen to banks of any sizes...
First, centralization and consolidation increase the risk of fraud and corruption, and malign influence with regards to antitrust.
Second, almost no new banks are being chartered. What do you think typically happens when you go from Many -> Few (single digits) -> 1.
If something happens because they play the bailout game, the only real option is for nationalization.
Third, their sector mandate is to loan money to businesses that can use that money to turn a profit and feed the economy. They've stopped doing that outside a few corrupt friends(entities).
What you often don't hear about is what happens when they are the only game in town, they know your business is stressed, and they refuse to loan to you on arbitrary grounds (behind closed doors) knowing they can buy it up in bankruptcy for pennies on the dollar for a larger profit.
Like what Amazon did to the baby diaper companies.
https://arstechnica.com/tech-policy/2020/07/emails-detail-am...
It's nice to believe throwing more greedy people at a problem will fix it, and hey, sometimes it works.
and for those of you who refuse to talk to people when spending multiple hundreds of thousands or even millions of dollars, well... this is what you get to deal with.
the first step to not being a mark is understanding what you don't know, and working with people who do. you may still get marked to a certain degree, but at least you'll end up with a 2.x% interest rate like i did and no messages from the computer saying "you're too poor to buy this product, so run along now little man" when it clearly isn't true.
Especially if you have an unusual situation, brokers and personal bankers will know how to handle it.
I had 0 credit history in Canada (literally a completely blank printout), but wanted to buy a house now that I'm a PR. A personal banker was able to work with a copy of my US credit report (Canadian banks don't/can't pull this on their own), and proof of assets in the states. The first item on my Canadian credit report was cosigning a mortgage at prime rates.
Are there other reasons that small banks have seemed to thrive in the United States but no where else?
That is 3.6 microbanks per person
The US has 9 microbanks per person, but based on the prediction of 1000 banks would be similar to Australia.
[1] https://www.ausbanking.org.au/insight/banking-by-numbers
SMITH: So states looked for ways to support and protect local banks.
SQUIRE: A lot of states passed what were called branch banking laws, which made it illegal to operate a bank out of more than one building. It's hard to imagine it now. And so every little town in America had its own local bank.
https://www.npr.org/2023/04/30/1172957377/small-banks-are-de...
AFAIK we are also an outlier, but Germany has quite a few banks:
> As of December 2022, there were 1,389 credit institutions in [Germany]
-- https://www.statista.com/statistics/350502/eurozone-germany-...
edit:
US (FDIC insured only) 1 bank per 78,680 people, Germany 1 bank per 60,670 people (afaik every bank is essentially FDIC insured here), rough numbers from 2020-2023 wikipedia and statista.
There are another 737 Volksbanken & Raiffeisenbanken [1], which I think you would call credit unions in the US, and are owned by their members.
Both Sparkassen and Volksbanken have a complicated associated with bigger banks and service providers like asset managers (Landesbanken, DZ-Bank, LBS, Deutsche Leasing, Union Investment, etc.). It is just, that the number inflates, because of their upside-down ownership structure. The branches own the parents.
[0]: https://www.dsgv.de/sparkassen-finanzgruppe/organisation/ver...
It’s something even most Americans don’t even understand anymore, let alone foreigners or immigrants; that the USA is technically by design 50 countries, in an economic and organizational block for limited purposes.
The core, supreme law of the land, the Constitution is explicit that anything not explicitly delegated to the Federal government is the right of the state and the people. The vast majority of what the federal government claims rights over is not mentioned at all, let alone explicitly delegates to the federal government. Included in that, banks and regulation of banks.
Unfortunately, the founders of America were not positively explicit enough about the sovereignty of the states, probably because they had no understanding of the consolidating forces that would be introduced through things like automobiles, planes, roads, electricity, telecommunications, and computers and the internet.
The small banks thrived and why America’s banking sector was so “fragmented”, was by design, in hopes of preventing the very consolidation of power and control that the founders were so concerned about and threatens everything now. American banks were community scale, community oriented, community based, and had community accountability; all factors that restrain psychopathic tendencies of banks and bankers.
If these forces of evil that are trying to consolidate everything are not able to be stopped, by all measures things will only get worse for all of humanity from here. Just as banking has become stale and uniform and conformist without any real diversity, so will those pressures continue destroying real diversity in the world by trying to force everyone and everything into templated, repeatable objects for global uniformity.
There has been no time in human history where consolidation of power was a good thing. Monolithic things fail spectacularly. I would argue that the degree of global consolidation of power lusted after by globalists even represents an existential threat to humanity, if not all life on this planet. It creates a single point of failure and also snuffs out what makes us human, actual, real diversity of people doing different things in different places and environments, under the guise of fraudulent diversity and diversification.
I won't get into debates about the Interstate Commerce Clause or anything like that. It's more fundamental. We're not the same country we were just out of the Articles of Confederation. If you lined up the 39 people who signed the document, or the 56 people who signed the Declaration of Independence and told them that after 250-odd years we were trying to live exactly to the standard they set without any progress or changes, they would consider the experiment failed.
What you are stating isn't that black and white. The US constitution is only worth as much as governments and judges are willing to enforce. And where it isn't very explicit, that's mostly a very political thing. In the case of banks means that a lot of power has actually been granted to federal authorities over time. All without changing a line of text in the constitution. There's been a bit of a cycle of de-regulation followed by crisis induced new regulations happening of course historically. And you might argue things are currently leaning towards more regulation rather than less given the apparent failure of the sector to self regulate and sort things out themselves.
But, IIRC, you can set up a bank absent checking services, wires, FDIC protection, etc. and operate entirely within one state. Good luck attracting customers.
The sovereignty of the states drastically changed after the civil war and the reconstruction amendments.
And a few will be so large that they can make insane bets, betting on risky and novel new investment vehicles that will (maybe initially) pay off handsomely before ultimately failing dramatically. This will make "too big to fail" look quaint by comparison and the banks will end up owning everything.
1974: ~14,000 banks
2008: ~7,000 banks
2023: ~4,000 banks
This has been a steady decline since 1974 (not 2008) in the US.
https://banks.data.fdic.gov/explore/historical?displayFields...
As a comparison, Canada only has 34 banks.
https://en.m.wikipedia.org/wiki/List_of_banks_and_credit_uni....
EDIT:
In case anyone is curious, these are the credit union numbers.
1981: ~7,000 credit unions
2010: ~7,000 credit unions
2023: ~5,000 credit unions
https://www.fdic.gov/about/history/timeline/1900-1919.html https://www.bis.org/publ/work137.pdf
It's interesting that in the US, even small banking service provides are banks. But in Canada, small ones tend to be provincially regulated entities such as credit unions. It's not that small entities don't exist. They just belong to a different list.
Democrats can't do it, because Republicans will never cooperate with a Democratic Party president.
Republicans can't do it, because they will continue to nominate a culture warrior whose only job is to fight wokeness, so they aren't even interested in it.
This thing will keep escalating, relatively slowly, until it finally crosses the line and even the Republicans will figure out that maybe they ought to have some accountability.
My guess it will take minimum of two generations.
[0]: https://www.theguardian.com/commentisfree/2012/dec/29/fbi-co...
That’s not to say that there aren’t issues with race in America but they pale in comparison to the socioeconomic ones. A nation obsessed over race and culture has little time to confront other issues.
It wouldn't have done any good. Those that benefitted would have started flipping houses anyway.
- Number of banks in the US: 4,844 (69,500 people / bank)
- Number of banks in the UK: 365 (184,000 people / bank)
- Number of banks in Australia: 95 (272,000 people / bank)
- Number of banks in Japan: 199 (628,000 people / bank)
Let's cool it with the doomsday talk. Every major economy (except maybe China, but they're weird so not counting them) has 2.5x+ the number of people per bank than the US. The US is the weird one.
If you want to look at this from a "return to fundamentals" perspective: the US is only a few hundred years old, and was built on some of the most virgin, rich, plentiful, resourceful land on the entire planet. That fueled 300 years of economic development the likes of which the world has never seen; and the nice thing about growth is that it really helps cover-up bets that were far too risky for any reasonable risk-taker.
We're not going to see big banks take on increasingly higher risk over the next decade. In fact, we'll see the opposite. Fewer banks, more regulation, and less risk taking, as the US begins to regress more to the worldwide economic growth rate.
https://banks.data.fdic.gov/explore/historical?displayFields...
Doesn't that mean unless they are specialised banks, that they necessarily must lose?
Maybe an economist can correct or confirm my instinct here?
Only if you play fair. If you can be bailed out it's no longer zero sum.
(it seems an insane state of things to me, with incredible overhead and inefficiency but again, I'm an outsider. I've lived in USA for a while in late 90s and state of banking from consumer perspective in USA seemed a decade behind Canada and Europe, but that was a long long time ago)
There are two ways to have a functioning society. One is to have very few very powerful people, and only choose the right leaders. The other is to have very many people with very little power. That's less efficient, but it's also much less risky.
We currently run on the first. It's not going well. I'm not aware of a time when we ran on the second. In my mind that's the only way.
What’s the right number of banks per capita?
Canada secretly bailed out their banks to the tune of $114 billion CAD in 2008. If you compare Canada's secret bank bailout to the US equivalent on a per capita basis it looks even worse. [0]
The reason we didn't hear about it at the time is that the big 5 Canadian Banks have so much power over the government and the media that they were better able to control the narrative.
Concentrating power in the hands of a few banks is a bad idea.
[0] https://www.cbc.ca/news/business/banks-got-114b-from-governm...
Use a local credit union instead of a bank.
They'd need the tacit permission of the other industries their owners are invested in.
And, they'd need tremendous amounts of capital. Plus a history of grand collusion and unethical behavior. And leverage against anyone that might call them out.
So... I've got nothing. I will say that failing to investigate this possibility seems naive; as would expecting a genuine investigation.
its an easy cycle - find a bank you want for nothing, feed bad press through the usual outlets, watch it fall, then watch depositors get spooked, then buy it for nothing
First Republic is probably just one of many banks intended to be undermined, trashed, and then sold for nothing
and remember all the times First Republic's CEO came out and defended his business as it was collapsing? me neither...makes you wonder...
The whole being able to trigger aggregate indebtedness violations through synthetic shares (options), seems like a systemic risk that no ones paying attention to.
Also, its hard to say we still have a fractional reserve system when required deposits have been set at 0% since the pandemic. There's no fraction, its 0 unless you change the definition (i.e. Basel III which uses capitalization as deposits).
That would have prevented these runs, which counterintuitively means fewer FDIC payouts, not more. Then couple that with stricter rules to prevent risky gambles funded by deposits.
We don't: The average person does not have $250k sitting in a checking or savings account at a single bank.
SVB collapsed because they have highly correlated (due to being startups under effective, if not actual, corporate control of a few VCs), jumpy depositors. This is something regulatory rules have not incorporated into their risk frameworks (at least not sufficiently to allow for a margin of safety in times of raising interest rates).
No one should wake up one day and find out most of their life savings or inheritance is gone because of banking shenanigans. This is not like a hurricane or catastrophic expensive surgery. This is entirely preventable and fixable by the government.
Gov’t sells low yield bonds to banks during pandemic => gov’t jacks up interest rates to fight inflation => value of bonds previously sold to banks plummet => bank marks bond values to market and is now technically insolvent causing a bank run => grandma loses majority of her life savings => government refuses to reimburse depositors above FDIC limit even though it created the problem to begin with.
That is not a chain of events I am ok with. Bank management and equity holders should get wiped out but not depositors.
Thus far, only bank investors have been impacted, and that seems likely to continue.
I'm not sure we can even get a vote on the floor that would have detrimental effects on the former class. The legislation is preordained.
You are proposing that bank management and equity holders get wiped out, not the general public checking account-holder; how would that even be possible, since they write the rules, pull the strings, lobby, etc. magnitudes more than you? They are the rulebook. They do so to such an extent that the entire system is predicated on everybody agreeing to do the same thing lest the system collapse.
Nationalize it. We've already established that the shareholders are getting zilch, so there's no argument where we're "destroying value."
From a consumer/operations level, pulling the bank under the state umbrella instantly dissipates any need for a run. They're backed by the full financial might of the government, so you don't have to worry that the ATM will be taped over and you can't get your $35.19 out of the account.
From a contagion perspective, the state backstop and elimination of investor-centric motivations allows for stabilization and avoids fire sales. If the institution was asset-sound but not liquid, as people claimed for SVB, the state could afford to cut margins and pull funds from other sources while they waited for the maturity-mismatch problems to unwind as they mature.
From a social perspective, suddenly you have a new toy in your box of social engineering tricks. The branches that used to cater to crypto-bros can reopen offering basic checking for the unbanked, small-business loans, and mortgages in historically red-lined areas.
A conceptual equivalent might be the story of Conrail: in 1976, the Federal government took over a handful of basket-case Northeastern railroads; without investor meddling, they were able to take the long game-- rehabilitate and rationalize the system, eventually re-privatizing it in 1987. I'd argue banks are less difficult than railroads in that regard-- you're not as tied to physical place and literally rusting assets.
If you told the banks that you will protect their business regardless of what corrupt, stupid or greedy behavior's they practice... what do you think they'll do?
this is so very screwed up.
That's not what the FED is doing though. They are protecting the depositors not the business. The equity holders are getting completely wiped out and most of the employees at First Republic Bank are probably going to lose their jobs so the business is definitely getting screwed.
I agree that in both of the above cases, First Republic shareholders and staffing suffer. But the latter introduces the conspiratorial angle and the unjust-ness.
> The banks and their stock is free to go to zero,
Sure, but what about the dividends and bonuses already paid out from the times it worked out in the risky banks' favor? You're suggesting a government/central bank subsidized casino.
Anything where a large amount of its assets aren't marked to market should be seen as a risk. For things like VC, this isn't such a big deal because it's the nature of the game. For banks, it leaves a lot of room for shenanigans,
GPT-4 answered quite well, but Google is a good supplement. This comment thread appears to be software engineers saying things about stuff they don't understand.
1. There is not a bank in existence in the US that could survive a bank run where 25% or more of the deposits leave. Not even JP Morgan Chase; and
2. There's a lot of evidence to suggest that the bank run on SVB was created by the direct actions of relatively few people, most notably Peter Thiel; and
3. The FDIC usually solves such bank runs by seizing the bank and selling the bank for parts. The banks all actually have more assets than depositor funds. So far at least, all depositor funds have been protected through assets and the FDIC (side note: the FDIC is funded by banks and receives no appropriations from Congress). It's expected that these asset sales are at a significant discount (eg CSFB acquiring UBS for a song although that's Switzerland not hte US obviously).
So perhaps we should be asking if these bank runs are being deliberately created to profit from the collapse of smaller banks. In an ideal world, if true, people would end up in prison.
> the FDIC is funded by banks and receives no appropriations from Congress
So banks going down can certainly cause other banks money, too.
That being said, the "significant discount" is usually because, when you acquire the assets, you also acquire the bank's liabilities, and AIUI roughly speaking you're paying the difference between what you gain and what you lose in the process. More specifically, the FDIC helped fund JP Morgan's acquisition of First Republic because, if JP Morgan simply acquired the assets & liabilities directly, they would not be enough liquidity for it to be safe.
I.e. acquiring a smaller bank has some advantages but also some downsides, and it also destroys trust in the system which hurts the big banks too...so it's not really something that's exclusively beneficial and definitely not worth trying to trigger intentionally.
this is a sick and twisted collapse of multiple economies. It has only one direction. down.
its not too late to stop it, but nobody will, because the cost to those in power will be too great.
Bailing out depositors isn't going to increase inflation - you're just giving people the same amount of money they already have. The big problem with it is that it prevents the natural process of wealth destruction from occurring, so it may just drag out inflation for longer.
That’s not how it works. The original funds do not evaporate out of thin air. They transferred to the opposite side of the trades that the banks are making, meaning customers’ funds are melting into the pockets of hedge funds, etc.
So, in effect, it is the opposite of what you’re stating. The money is not replaced; it is duplicated, thus causing inflation.
The original problem behind these regional bank failures is that there is not enough diversity in those having extra cash in accounts and so when a FED rate change comes along that is big enough, those excess funds seek higher rates of interest thus leaving said bank with a problem of legacy assets tied to the old FED rate. We see the same pattern with Apple getting $! Billion in new savings account, yes that is Billion with a b due to their interest rate offering.
In short words a product problem with on one side products tied to the old FED rate and not being nimble enough to offer a product for the excess cash customers have that offers the higher interest rate. Or in short a virtual replay of the S&L crisis in the 1980s without all the corruption behind it.
And one should note that MMA products were suppose to fix this issue.
Don't know where I read this but it changed my view of economics and capitalism.
Theyre just skimming middle man between the government and end consumer.
Sure, the government would know your bank balance and spendings, but that could be worked around
If youre in trouble with the irs or the law, the government will have all the insight they request.
Sounds crazy? We the people had to bail them out and never get anything of their profits.
Too big to fail? As in systemic risk?
Well, only the state should be too big to fail.
And if they fail, the fdic needs to cover, also tax payer funded.
Any input is appreciated. I know the interest rate should be set by banks and not the politicians, but yeah, is that really it?
Addendum, this post has triggered an interesting discussion, it appears I am not alone with my thoughts.
So far, I do not see any ovewhelmingly convincing argument on why the banks shouldnt be run by the government. It doesnt have to be senate, it can be something relatively neutral like the irs.
If the government kept all of my banking records, they wouldn't be able to legally access them. Currently, they can just use taxpayer money to purchase these records from the corporations who gather them.
The US government is wholesale spying on the entirety of electronic communications and working with social media sites to make some voices less prominent. Private business should be able to tell the government to pound sand when banking data is requested without a warrant or subpoena. Banks are not able to do that. Banks exist as long as they are in the good graces of regulators.
Laws prohibiting the sale of personal information (location, purchases, banking) closes the loophole.
The solution is less government, not more.
All the commenters here that think the federal government should directly provide their banking services are going to be in for a rude awakening if it ever actually happens.
It is already hard enough for the GNU Taler Team to get their technology adopted. When you see comments on HN you get the impression that it is very unpopular hence it won't be implemented and the expectation is that any CBDC won't be privacy friendly.
The better question would be, why would anyone use violence to force his opinion on other people.
That's not quite true. Take a look a the various narrow banks which have been founded and people want to use their services, but the government won't approve them to operate.
That's a weird view.
We could also just, you know, vote away banks. I'm not sure why a centralized bank would result in violence.
At some point some people have to spend off their money.
You're thinking of the "federal reserve" as "the government." This is a tempting but extremely flawed point of view.
> If youre in trouble with the irs or the law, the government will have all the insight they request.
These institutions make mistakes. They're also not immune to corruption or politics themselves. Government agents have qualified immunity. Do you really want to bank with someone you essentially cannot sue?
> I know the interest rate should be set by banks and not the politicians, but yeah, is that really it?
Rates should be set by the _market_. Which would be easier if currency were backed by anything other than _fiat_. You are in a tarpit, going further down is not the secret way out.
> neutral like the irs
What makes you think the IRS is "neutral?" Or presuming that's true, given this new responsibility, how are they capable of maintaining it?
Finally.. wouldn't something simpler, like just reimplementing Glass Steagall be the better idea? Let's make "consumer banks" and "investment banks" different and separately regulated again.
The FDIC is funded by the banks. It's backed by the US government in case it fails.
Just one entity without any other consumer options?
What happens if the government makes a ton of bad loans that never get paid?
It's a government trust. The only use of banks is to realistically evaluate loans, but priced-in bailouts take away all of the risk, and with it all of the signal. People get loans because they're insiders who have relationships with bankers, or because they're objectively overpaying for them.
If banks will always be bailed out, the proper amount of interest that should be paid on a loan is 0%.
I do not think the government would be good at doing this at all. Assessing risk is very hard, and the competition is necessary for it to benefit consumers. Politicians could pass extremely harmful or stupid policies for populist purposes.
That said, because banks have an oligopoly on “give me a place to digitally hold money” and in practice more money than they could ever really productively lend (why do you think interest rates have been trending down so low historically?), they’re not doing a great job at either side.
That’s why I think the government should implement only narrow banking where they don’t lend, just manage the table of accounts and amounts, and let banks compete against that for deposits. You would still move money to a bank for yield, provided it’s good enough, and banks would still be able to lend and stimulate the economy. Yes they’d have less capital and be able to lend less, which may require structurally higher rates (which may actually be a good thing in the long run- a lot of lending and low rates are just going towards bidding up fixed assets like land or leveraged stocks, and not actual economic activity) but that would balance out with higher yields on deposits.
I'm not sure what the best solution is here, but making the big banks even bigger is not it. This is just going to make the banking system more concentrated and no concentrated market is good for anyone. Least of all because the past decade+ has set the precedent that the banks will be bailed out... If they're big enough
It would be perfectly possible for a business to provide zero risk demand deposits—-but the business would have to charge customers for its custodial operations rather than making money by writing loans.
Of course because we live in times where no one can tell the people that what they want is impossible and ridiculous, we instead have a house of cards with various parts of the government (including parts we pretend aren’t the government) eating the risks.
> It would be perfectly possible for a business to provide zero risk demand deposits—-but the business would have to charge customers for its custodial operations rather than making money by writing loans
That was true when we lived with 0% interest rates. Now, there’s no reason why a narrow bank couldn’t take deposits, stick them in with the fed providing 4% interest, and keep 25% of that for itself to cover its costs, passing 3% onto the customer.
Except they wont get a banking license issued if they state thats what they intend to do, because the system depends on people depositing money with banks that make risky loans, so that the risk is spread across lots of people.
The problem with this business model is that this 4% interest either (A) requires a certain hold period or (B) allows on-demand withdrawal.
(A) is exactly the model used today. It did not stop the collapse SVB and FRC. Assets that require a certain hold, such as Treasuries held by SVB and mortgages held by FRC, fluctuate in price. If those assets drop in price (as recently) and bank's customers withdraw money, the bank is in a pickle.
(B) moves banking into one real bank -- the government. This can be done (e.g. in the Soviet Union), but comes with a lot of limitations and challenges. It is also not something you can morph the current system into; this is a "break, then rebuild" path and is very painful. I would personally move money away if I see a whiff of this in the air. My 2c.
What happens to the value of 4% bonds if interest rates go to 6%? What about if people want their money back before the bond duration is up, so you have to sell the 4% bonds in a 6% environment?
Banks have always been able to fail, then you lose the deposits. What people are now asking for is unlimited insurance, which encourages risk takings amongst banks
Where is this risk free return coming from? You are just saying in more words that the government should give the people what they want.
Edit: sorry, you said the Fed, which MMMFs don't put money in. But they buy short-term Treasurys at comparable or better yields, which is ultimately what you want, modulo the risk of US government default, which is minimal.
If retail banks switched en mass to backing deposits 1-to-1 with Fed reserves then the Fed would quickly take strong action to disincentivise this strongly contractionary effect.
They have plenty of legal tools to do this (e.g. IORB rate). They don’t need to resort to not giving out licenses.
The Fed pays interest on those reserves to keep them from being lent. A narrow bank wouldn’t be able to lend its reserves. As such, it makes no sense for the Fed to pay interest on them.
Given that many people bank at gigantic banks that pay 0.00001% interest...I don't think that's true.
"I don't want the interest. It's your vault. I should be paying YOU rent!"
They used to. So.. what changed?
Under such a regime all banks will put customer funds at the Fed, which will be the sole entity to allocate credit, with banks as mere customer service frontends. It will use that power to allocate credit to advance nakedly political goals, with much less attention paid to minutae like risk, ability to repay, and other pesky economic concerns the free market would elevate. We’re already forgiving student loans; watch the People’s Ledger forgive mortgages!!
And when that bank fails it will just fall back on moneyprinting.
Yes, I can imagine such a huge bank to cause deep troubles in financial markets and real economy and this impacting the livelihood of people all around the globe.
But saying that "western world" will essentially end when it didn't in face of world wars, grave epidemics and plagues, etc seems definitely too dramatic.
Already had one in 2008. Thankfully, our currency’s value is notional and the fed can print more until such time as the bank run ends.
It's value is not notional. If you make more currency then all currency in circulation now has less value. "Quantitative Easing" is simply a way of taxing you after the fact.
Worse still if bonds are involved. Now it's a way of taxing your children before they're even born.
…see, the one big bank cannot fail.
Remember that? Apparently, no one remembers. Or it was simply more political / leadership theatre of tell the proles one thing while doing the opposite. Perhaps both.
People complain about "the democracy" and they often falsely name names. It easy to blame a symptom when you don't understand the problem. And yet those same people are silent about the banks, power, cronie capitalism, etc.
Many are in denial. Others are able to control the narrative. In either case you can't solve root problems when you're not even willing to address them.
Europe doesn't have 5000 banks they all merged decades ago.
More concentrated.
More highly regulated.
Closer to being absorbed by the state.
I'm not saying that's necessarily going to happen someday. But that is the direction it is (and has been) moving.
I'm not a tin foil hat person, but corporations growing larger than nation states just doesn't seem remotely far fetched. Which corporation will be first to sit at the UN table?
Or the opposite.
Was SVB too big to fail? Signature? Apparently!
TBTF is now a popular concept more than a legal one. We need explicit universal deposit insurance along with the rules that make that guarantee tenable. I also think experiments in narrow banking, e.g. permitting each state to charter a narrow bank open to its residents and guaranteed against losses (e.g. due to fraud) by its own treasury to access a special type of reserve account, need to commence.
Are there any regulations that could provide economic incentives to small businesses and make it increasingly difficult for large companies to grow larger? Wealth going in one direction is not a very stable system.
But regulators stopped enforcing those regulations in the 1980s because of "efficiency" and each administration after Reagan doubled down. Luckily some politicians are starting to see the error of their ways and listening to thinkers like Matt Stoller:
It should really be: You can only do A, B, and C and in the ways we tell you.
Stop letting banks write the regulations?
The government and those who work for them are not your friends. The power you give them can and will be abused and will never be returned to the people without great difficulty and probably bloodshed.
Welcome to reality where "competition" and "free market" are just buzz words meant to fool the naive populace.
Eliminate the Fed.
Banks eliminate inherent risk by being backstopped by the fed. A simple example of how this works is FDIC insurance. If a bank had all of its depositors holding $250k or less, it could essentially lend out all of that money with very little risk of getting sued by their depositors.
Do incumbents in such a system leverage their status, leading to new kinds of abuses? Arguably yes. That said, SVB was a member bank of the Federal Reserve and it didn't help their shareholders when the market decided that they were over-exposed.
Looking at your assertion from the opposite direction, if you don't trust the Federal Reserve, why would you trust a smaller bank to do a better job? Sure, it's in their long-term interest to self-regulate and operate prudently, but history is full of people acting irrationally because of greed, myopia, confirmation bias etc. The fed at least exhibits moderate transparency of structure and operation - risk is distributed across a set of reserve banks, and the membership and balance sheets of the regional reserve banks are open to scrutiny.
Ally bank has been paying reasonable yields on deposits, being a digital bank with lower operating costs.
The bank model works, it’s the “too big to fail” model that is broke.
The one upside of TBTF banks is you forfeit any deposit earnings to get “insurance” on the full amount.
The trick is in modelling and mitigating risk, of which there are many:
1. Duration risk. With demand deposits, banks borrow short and lend long. Demand deposits come and go daily, but the banks use them to make mortgages and other loans. Some stay on the books, others sell and either make more loans or hold other assets. The risk is that depositors may all ask for their money back, but you cant recall the loans you made.
2. Interest rate risk. Interlinked with duration, rate risk is the risk that the rates you loan at now are less favorable than rates later. A loan earning 1 percent is less valuable than one earning 2 percent. The strength of this relationship is tied to duration; losing out on 1 percent for 1 year is less bad than losing out for the next 30 years. The rule of thumb is that for every 1 percent rate hike your asset loses 1 percent of its value times the years until it matures -- so that 1 percent underperformer with a 30 year duration loses 30 percent of its value!
3. Default risk. Loans may go into default, and then instead of getting your money back in 10 years you get less, maybe even nothing. You try to price that into your underwriting, but the error term here might be called "underwriting risk" -- the risk that your risk estimate is wrong.
Theres more ive likely forgotten as a layman, but I'm sure you get the idea.
There's nothing wrong with being a low risk lender. Thats not the central problem with the banking system in the US. Its that bigger banks take riskier and riskier bets with money that they really shouldn't be, and when bad times hit they often don't have proper risk management in place to cover it, or its unpredictably catastrophic.
It used to be that these activities were separated, limiting risk to the average person significantly as a result. Simply forcing that separation again would be more than enough to get some stability back into the banking system.