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Comment by 0zemp2c | Hacker News Reader

yes, and now they are "attacking" PacWest, whose stock is plummeting like First Republic

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...

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Am I wrong in thinking that all banks should have no exposure to the stock market period?

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).

What exposure to the stock market are you talking about?

Any bank with a ticker on a market. Technically no security on the market is safe from this mechanism. Banks are particularly vulnerable.

With a properly timed news drop, shorting, and forcing the market maker to exit delta-hedging (due to volatility) you end up having them create synthetic shares that in addition to the loaned shorted shares push the price downwards (because there will always be more shares since they were created via the contracts and are not constrained by short limits/availability and float). The market maker may even participate to offset losses.

Once the capitalization rate falls below a certain threshold you get aggregate indebtedness violations. At which point any loans they might have had create a liquidity event (i.e. frozen), which must be paid back and price levels returned to normal within 30 days (Basel 3), or 2 months (Nasdaq).

It creates a spiral which can't be recovered from, they will bleed deposits, and then the regulator will seize them, and sell their assets to one of the survivor banks for pennies on the dollar (with guarantees). Another form of bailout.

This is what largely happened with FRC, and now its starting to a lesser degree (a/o last night) other regional banks.

What "capitalization rate" (?) that banks use includes the publicly traded share price in its calculation?

Two mechanisms,

* Basel 3 counts capitalization as capital reserves instead of the normal deposit reserves we expect in fractional banking, this was adopted just recently (which is why the Fed site shows 0% deposit requirements).

If your reserves dip under the requirements you have 1-2 months to correct (from what I've read, although I'm not an expert and its very legalese, and dense so don't take that as advice). Basel is very opaque compared to Federal Reserve reporting in my opinion.

* Aggregate Indebtedness violations have to do with the SEC and market's net capital rules. In the case of SBLOCs or Securities backed loans, sudden drops in capitalization from price action can trigger illiquidity as any existing revolving credit can be frozen, and interest on utilization can balloon in addition to any further ballooning that might occur as a result of rating downgrades (S&P/Moodies).

Either are directly impacted by the company capitalization which is based on current ticker price and the shares outstanding.

Maybe you are confused by the words "common stock" in Basel 3 or something -- that's in the stockholders' equity line, book value, and is not defined by the market price of the company's own common shares.

(For example, you can look at PACW's Q1 press release, and see its Tier 1 capital ratio not getting cut by 2/3 by the precipitous drop in share price they endured: https://www.pacwestbancorp.com/news-market-data/news/news-de... )

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