Half of America’s banks are already insolvent | Hacker News Reader

Half of America’s banks are already insolvent

finance.yahoo.com

69 pointsvirtualwhys79 comments

If you read the actual report they quote, it says no such thing: https://www.gsb.stanford.edu/faculty-research/working-papers...

> On the other hand, SVB had a disproportional share of uninsured funding: only 1 percent of banks had higher uninsured leverage. Combined, losses and uninsured leverage provide incentives for an SVB uninsured depositor run. We compute similar incentives for the sample of all U.S. banks. Even if only half of uninsured depositors decide to withdraw, almost 190 banks are at a potential risk of impairment to insured depositors, with potentially $300 billion of insured deposits at risk.

Having fewer investment assets than liabilities does not necessarily make a bank insolvent - but it should be very concerning how much money has been left parked in low-interest uninsured bank accounts.

>Having fewer assets than liabilities does not necessarily make a bank insolvent

Having fewer assets than liabilities is the literal definition of insolvency.

Banks debt > money+interest lent out

At the same time then maybe the bank is insolvent

However all debt typically isn't all due at the same time just like money lent out isn't paid back all at the same time.

This stuff is spread and balanced out so that ideally the bank has little liquid assets it needs, it is then able to borrow and lend out the maximum amount of money it can.

That is if it can lend money at a higher rate than it borrows it's making money. Otherwise it ain't.

I thought insolvency was when you didnt have the current assets to pay currently due liabilities? A 30 year note for $1M doesnt have to be paid right now. But it's ~$4000 per month interest does. So you can have $4k in cash assets and $1M in debt and still be solvent (for now).

I think this is why insolvency is bit opaque for banks. Literally any bank will be insolvent if everyone wants their money out at the same time. So you have to be pretty clever about how you estimate the risk of insolvency.

> Having fewer assets than liabilities does not necessarily make a bank insolvent

For that to translate into insolvency, all it takes is enough tension to accumulate in the banking sector. And the last months haven't been pretty. Truth is most banks are severely exposed and, if the wind start blowing in the wrong direction, it's going to be the end of them.

From the IRS's website: A taxpayer is insolvent when his or her total liabilities exceed his or her total assets. But if you're a bank it's a different story, because it's unclear what your assets actually are. It's possible that your liabilities are secretly also assets, that's what happens when you get a bailout. Because of that it's somewhat meaningless to call a bank insolvent. But if we want the term to have meaning for banks, and we take the simple definition that the irs has then I believe all of the banks are insolvent. None of them have enough assets to cover their liabilities.

https://www.irs.gov/newsroom/what-if-i-am-insolvent

In the case of the report, they are only counting assets as the bank's investment purchases. But banks also usually have money from investors. So in a lot of cases investors will eat the loss until such a time as the banks have cycled through their bad investments. And presumably there is a lot of upside if their newer investments are getting set at a much higher interest rate.

I still don't understand what you're thinking of as assets vs liabilities for a bank. A bank's assets are any cash it has on hand, plus any loans it issued / bonds it purchased (I think that's what you meant by investment assets?). A bank's liabilities are its deposits as well as any other money raised via bonds. It's not clear at all what you're referring to as "money from investors" as that could mean money the bank borrowed (so show up as liabilities) or it could mean money raised via sale of stock (which is not a liability, but shows up as owners equity).

It's hard to understand what the article itself is claiming - it isn't clear what they are citing, but I read it as the banks being underwater on their investments specifically. Which could be true but they still have capital reserves and equity.

And also, as the report they actually cited points out, not all capital reserves are created equal. And it's the amount of uninsured deposits that predicts their risk of a bank flight.

First thing that popped in my head was the quote “War is peace. Freedom is slavery. Ignorance is strength.”

They keep changing the definitions. First what is a recession now what is insolvent.

What are people to believe?

They are prepping us to justify more takeovers and sell offs to the big banks. A handful of big banks are what is needed to implement CBDC. It is kind of similar to how the government prefers a handful of tech companies which they can control.

Apple, Microsoft, Google, Amazon, Facebook

Goldman Sachs, JP Morgan Chase, Citibank, BofA, Wells Fargo

> the government prefers a handful of tech companies which they can control

I think you have the order wrong there

Nah, I think the one with a $6T annual budget, a money printer, and the monopoly on violence is the one in charge.

Tech companies don't control the government, the government has much more power than them.

Also, within the government there are groups, though they're a minority, that are against big tech.

But yes, the State gets private information [0] and influences content moderation [1] from tech companies, and on the other side big tech spends millions each year lobbying the federal government [2].

[0] - https://www.cloudwards.net/prism-snowden-and-government-surv...

[1] - https://en.wikipedia.org/wiki/Twitter_Files ( nos. 6-10 )

[2] - https://www.politico.com/newsletters/morning-tech/2022/01/24...

At least a CBDC would allow central banks to print money without also creating debt – because really the debt driven economy is the reason we keep ending up in these crises.

Yes and no, CBDCs can still lead to debt driven economies. If they 'print'/'mint'/'whatever' only X 'coins' they never give them away. They 'lend' them and the chain of lending means that, in aggregate, X+Y coins are due to be repaid (Y being total debt obligations).

If gov/fed then don't print Y additional coins it leads to a crunch. Not only has the borrower to pay back the capital with interest (obviously) but that additional money has to exist for them to be able to do so.

When money supply is tightened, there's just less money in existence. In theory the value of the money should go up (I guess that's why people expect inflation to then go down).

But it doesn't change the fact that if you're on the hook to pay back money when the 'physical' or 'virtual' supply doesn't exist you are pretty screwed.

Isn’t it the other way around in the US? Big companies have a big influence over the government.

The article is typical alarmist clickbait but there is some truth in there.

Anyone with half a brain already saw there would be a crisis when the fed reduced rates to zero and started passing out stimulus checks to both people and corporates. Inflation was obvious but I didn't know the fed would do a 180 and started raising rate like Michael Jackson raising zombies. They obviously made a choice and it seems inflation was a big enough threat to slow the entire economy to a crawl.

The responses to an event will always be lagging in the economy. Inflation took a few months to become a serious problem since Covid, the rate increases will likewise take a while to break stuff. Seeing how 2 giant banks already collapsed in the initial wave, it may indicate worse things are coming. I hope the fed realizes this and stop pumping the brakes.

> inflation was a big enough threat to slow the entire economy to a crawl.

Naw, central banks saw wages starting to go up and that was their cue to act. But interest rates increases aren’t as effective of a tool against wages vs. commonly leveraged assets.

If the central bankers acted when house prices started going to the stratosphere starting right in Jan 2020, rate increases would have been far more effective and wouldn’t have been as dramatic.

Note that the inflection was before the pandemic was in full swing.

They stood too long at the sidelines and lost control of the situation.

https://fred.stlouisfed.org/series/CSUSHPINSA

True. They waited too long. They cited "Covid Recovery" as the reason for all the stimulus in 2020 iirc but I wonder if it was only economic reasons that were responsible. It was election year after all.

This is a 100% fed driven problem. You have very low interest rates and you flood the economy with a lot of cash. The banks get higher deposits and they need to manage all this cash, what do you do? Long term “safe bonds” at low interest rates get destroyed when interest rates go up, so does the risky stock market and real estate (residential and commercial). Where do you park the money? Hold cash? You can lend it out, but again we’re talking about an all time low interest rate environment flush with cash, where the only demand for credit is from risky lenders. There was way more money with the banks than there was a need for credit. How else could the banks have mitigated the risk?

I’m definitely not making excuses for poor decision making by some of these banks, but still. Even if you want to play it safe and do things by the regulation, how do you do it?

The problem is that the Fed is trying to fight inflation while also trying to keep the banks from having to recognize the losses in their HTM portfolios. In a sane world, Congress would raise taxes and cut federal spending to suck money out of the economy to fight inflation, thereby easing the need for the Fed to keep raising interest rates. Unfortunately, we don't live in a sane world.

All you need is a triggering event now to cause a run on the banks, and we're going to get to relive the Savings & Loan crisis all over again.

After this is all said and done, the Fed needs to really have its hands tied. No more ZIRP for a decade.

Why is this at all surprising? Banks buy fixed-interest-rate debt/bonds with deposits. Then the fed raises rates by a huge amount quickly, resulting in FMV of that debt dropping significantly, so lots of banks are insolvent if you were to mark-to-market their loans / treasuries.

Question is why are banks issuing 25 year fixed mortgages at rates that nobody would buy a 25 year CD at? Do banks even sell 25 year CDs?

Worldwide, the USA is odd, read the PDF at: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1683472

It discusses it a bit.

I'm no economist, but here's my (probably crazy) idea to fix this.

A lot of the problem is supposedly that, seeking higher earnings, banks bought long-term bonds with slightly higher annual yields. Then as interest rates went up, the value of these existing long-term bonds dropped (because who wants to buy an old bond with a low interest rate when a brand new bond has a higher one?).

This is OK as long as nobody withdraws their money. The bank could simply proceed with the original plan: pay its depositors the same rate it has been, wait for bonds to mature and sell them for their full face value. It's only when people pull money out that they have to sell bonds before their maturity.

So, the government could (here's the crazy part) just let banks and everyone else redeem bonds early. You've got a 3 years left on bond for $10K paying out 1% interest, and you can't wait the 3 years to get your $10K? Fine, we will let you cash out before the 3 years is up.

Yes, it would cost the government a huge pile of money to do this, but the government borrowed that money at (what are now) insanely low rates, and it locked in those low rates. They're getting a super sweet deal on those bonds. Giving that up is not an outrageous ask.

Basically, this would kind of act like an infusion of money for the banks, but only in the sense that the rate they borrow at is more in line with the rate they lend at, i.e. a more typical, natural state of affairs.

This would probably need to be done gradually, like tell everybody you can cash in your bonds 3 months early if you want. If that's not enough, change it to 6 months, and so on.

This would effectively lead to the government refinancing all creditors to a higher interest rate. The government doesn’t have the money lying around.

The only way the government could do such a thing is to either massively increase the deficit or raise taxes. We are probably reaching the end of experimental finance policy being able to bail a business out.

I wish i could block sites like yahoo, since they're so heavily advertising driven.

You can use an ad blocker and just block the ads. I don't see any ads on that page with uBlock Origin on Chrome.

Or use adblockers to block the entire site as well, if that's what they want.

I prefer this over a site with no visible advertising.

So in 2008, home owners were underwater (houses worth less than the mortgage balance), which meant the bank's mortgage holding were worth less due to an unrealized higher risk of default. Today, the banks loans are underwater due to the low interest rates on the terms of those loans. Fed to the rescue again? All they have to do is lower interest rates to make the bank loans worth more, or they can buy or promise to buy the bank loans at face value if needed. Does that sound right?

Underwater homeowners that didn’t sell eventually came out ahead

As I understand these banks, like those homeowners, are underwater if they need to sell today

But the treasuries held to maturity will still return the same value

Written by this guy https://www.facebook.com/leaveeuofficial/photos/a.8058551128...

So does this mean I should be holding cash?

Cash is quickly losing value. IMO, hold useful assets.

Fix things that need to be repaired.

Slowly acquire items you want while they are readily available and relatively inexpensive.

Above all, be in good health, physically, mentally, emotionally.

So like:

* tools

* cars

* gold

* generators

* gas

* etc

If we're mentioning gas, we might as well mention of valuable "assets":

* food (canned, livestock, garden, etc.)

* firearms

* ammo

* etc.

Stockpiling unleaded gasoline in or near your home is a poor idea. It's more likely to suffer exothermic depreciation than to successfully hedge against anything in particular. Unleaded will generally last less than a year without stabilizers anyway.

Diesel is a little better, but still not really the best choice.

right, gas goes bad and then is a pain in the ass to get rid of.

i still have a few gallons i need to dispose of from march 2020... ugh

Wait until the car has half a tank, throw it in there. At worst, the car will not run as well as you might be used to. Common case: you won't notice the difference. Your car will be far more tolerant of old gas than your mower or weed trimmer.

> Diesel is a little better, but still not really the best choice.

In an apocalyptic situation, a diesel car might be the best choice. As long as there is some kind of heavy oil (animal, plant, or mineral), you can basically run the car.

Skip the gas, buy cigarettes and booze.

MMFs and GOVT

Why GOVT instead of SHV?

No, it means you should not invest in banks, and instead buy short-term bonds of better companies or treasuries.

Long-term bonds are more risky right now get the short-term ones.

Why would long term bonds be more risky now?

The same reason why banks are underwater -- rising interest rates will cause long term bonds to drop in value (because you can buy debt at a higher return/interest rate, so fixed interest rate bonds have to drop in price to compensate).

That doesn't matter if you hold them to term.

Yes, it does matter because it means you made less money that you would have with other bonds of equal risk.

That's exactly why their value goes down: They make you less money. Their value goes down exactly as much as the difference in how much money you could have made on other bonds. (i.e. you can take the loss now, in lower value, or take the loss at the end by earning less.)

>They make you less money.

No, they make you precisely as much money as they were ever going to, with the rates fixed at issue. That some other investment strategy turns out after the fact to have been a better option doesn't change that.

Tell me, would you also say this in reverse? Let's say your treasury is worth more - are you going to ask the current (higher) value, or just sell it for what you originally were going to make?

In what situation are you suggesting that the US treasury is going to offer you extra money?

In addition to what the others have already said in this thread -

- the real return is lower (and can even be negative) if high inflation occurs during the period, and

- if you do hold onto them no matter what, your money is locked into a long term asset for below market returns

You can always tell yourself "it's fine", and perhaps it's really fine (for you, or whoever can afford to hold onto low interest bond for 10 years without doing anything with the money). I'm just saying there's a risk here. The fact that half of the banks in US are underwater due to this risk is quite on-topic too.

If you change your investment strategy every time someone posts an alarming article you probably aren't going to do very well as an investor.

Sadly it means that you'll need more active strategies to seek alpha.

For example I've been chasing the AI bubble just to squeeze out 1% gains. If I had just left funds in Vanguard I would be down.

Should have bought a CD paying 5%.

What are you talking about? Interest rates for savings/cd accounts for USD is like 4% now....

Yeah, the banks are basically falling all over themselves to sell CDs, since this is how a bank can borrow with a longer time horizon. CDs exist to hedge the kind of risk that has been causing these failures.

> If I had just left funds in Vanguard I would be down.

My vanguard lazy portfolio is at +2.2% over the last year, and +5% since ~2016. Cash is bringing in 4% or better for decent savings accounts, and a CD ladder would be better still.

I’m not claiming this will continue to be true, but chasing AI to get 1% sounds like something to reevaluate.

What the hell are you doing. Im 5% up right now in the past 5 years and 2% up in the last year and I dont pay attention to it at all.

You might want to try stop attempting to be smart.

That doesn't mean a lot without context, in some countries gov't bonds yield 16% now but their real inflation is 50%+.

The context is 1% gains claimed by GGP by chasing AI fads. There are easier ways to get ~4-5% these days. Not saying it's a "good" return though.

There’s still a housing crisis. Why don’t you buy some land and build some housing? That would be a productive and stable use of capital.

Being a landlord is a full-time job, and very risky.

Just building housing for sale is also a full-time job, and not exactly easy to do. You can't just give a pile of cash to a general contractor and expect a perfect, turn-key house as a result.

There's a reason that companies specialize in the things you suggest here. Of course, you could just invest in those companies, but that's no different than investing in any stock.

If you are holding onto more than $250,000 in a checking account, you probably should be doing something better with your money anyway.

Funny this came out right before the rates are to be raised tomorrow.

These bank CEOs had to know Interest Rates were going to raise, I knew it would happen eventually. So they should have started slowly selling their low rate assets years ago. Instead the got hooked on Free Money from the Fed.

Wall Street has been selling low performing assets for a while. I heard stocks are priced to the presumed Interest Rate Markets. So to the banks: stupid is as stupid does.

> So they should have started slowly selling their low rate assets years ago.

How could they have known years ago? Up until last year there was no indication rates were going to shoot up like they did.

10 Bad situation happens.

20 Regulation is setup to mitigate/eliminate the bad situation.

30 Regulation to prevent the bad situation is removed.

40 GOTO 10

Seriously, all of this was predictable.

See Glass-Steagall Act loosening in 1999, followed by the GFC of 2008.

See removal of stress tests for all banks except six, in 2018, followed by 2023 bank collapses.

Stress tests never modeled for interest rates rising, but keep banging the regulations drum.

See https://www.federalreserve.gov/supervisionreg/dfa-stress-tes...

Funny that you cite the Federal Reserve, because they literally say the exact opposite of what you're saying.

"The Board’s tailoring approach in response to the Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA) and a shift in the stance of supervisory policy impeded effective supervision by reducing standards, increasing complexity, and promoting a less assertive supervisory approach."

https://www.federalreserve.gov/newsevents/pressreleases/bcre...

https://www.reuters.com/business/finance/us-fed-points-finge...

I cited the stress tests that you were referring to. Do you have anything to say about the fact that the stress tests did not model reality? Did you read tables 2.A and 3.A in the stress tests document? If you're so eager to bring up the stress tests, why do you shirk any attempt to understand what the stress tests modeled?

Also, I do not care who the Fed points the finger at, especially considering their stress tests failed to predict the future in which interest rates rose as dramatically as they have over the last year and a half. Incidentally, interest rates are one of the only things the Fed has control over, so you might take some time to ponder the total absuridity that their stress tests failed to model for something they ended up doing in the real world.

Why bother? You admitted have your conclusion and violently react to anything that contradicts your faith based reality. (“ I do not care who the Fed points the finger at”)

The absurdity of referring to the stress tests and then refusing to understand what's in them is on you.

You call it a "violent" reaction and talk about my "faith based" reality. Yet I'm the one who just read the stress tests and linked them here. I'm living in I-read-the-actual-stress-tests reality. You're not. So whose reality is faith based? And if there was anything violent about my reaction, it's to your arrogant, "Funny that you..." comment. Watch your tone.

Anyone with critical thinking skills who reads this exchange: seriously, go read the stress tests, look at the interest rates, and compare them to what interest rates currently are. The only reasonable conclusion is that the stress tests would not have prepared these banks in any meaningful way for what ended up happening.

Of course, none of this even means that regulations are bad, or that Trump-era rollback of regulations was good. It just means the existing regulations were inadequate anyway. And acting like the stress tests would have prevented anything is a disingenuous or ignorant position. In your case, it's ignorance.

From the article:

>One of the 10 most vulnerable banks is a globally systemic entity with assets of over $1 trillion. Three others are large banks. “It is not just a problem for banks under $250bn that didn’t have to pass stress tests,” he said.

>The full shock of monetary tightening by the Fed has yet to hit. A great edifice of debt faces a refinancing cliff-edge over the next six quarters.

The Republicans initiated this with the ridiculous "Stimulus Checks". Trump actually had a good piece of advice: Cut the payroll tax instead... but you know, Orange man bad, rawr. Stimulus Checks ended up pretty much doing nothing and the incredible inefficiency/overhead in which they operate pretty much had the inevitable outcome: stupid amounts of inflation.

And it could have stopped there, but once the Democrats rose to power, and despite the pandemic largely being over AND the economy escaping just fine, they wanted to make sure their names got on a few stimulus checks too; being infuriated by Trump's ego and having his name on all over the checks.

Furthermore, a Democrat controlled house and senate being granted absolute blanks checks spending money on absolutely stupid stuff, but buying out/repaying important donors (For instance, Comcast, who can now collect $50/month per subscriber on reservations) and an inflation "reduction" act that was a self-titled joke.

While I think this article is alarmist, we do continue to drive ourselves off a cliff. The latest piece of stupidity echos 2008 where "credit scores are unfair" (categorically impossible, but ok) and good borrowers are now being forced to subsidize poor behavior... all of this being done in the most sketchy of channels via PMI.

Honestly, it's too risky for either party to be completely to have a majority. They're both self-serving muppets trying to extract as much value from the taxpayer while stabbing them in the back. Their only loyalty is to their net worth while the rest of us are _literally_ forced to support it or face jail time.

Fiat bros gonna cry about how valuable police state ponzi tokens are because they're backed by the best death threats by the biggest nuclear weapons.

Are they wrong? Seems like a really solid way to back a ponzi token right?

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