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Comment by cperciva | Hacker News Reader

The model you describe is exactly why S&L happened. Small banks with highly correlated deposits holding their own loan books is a recipe for maximizing vulnerability to economic shocks. Interest rates go up and the loan book loses value; the local housing market drops and the loans get foreclosed and lose value; a major local employer goes out of business and depositors all start pulling their money out instead of reliably depositing paychecks.

Banks don't work that way any more because it's a really bad way to run a bank.

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This is a rather skewed perspective that ignores the fact that if you have FDIC insurance for depositors then that can be gamed unless you have strict regulation of the banks:

> "The roots of the S&L crisis lay in excessive lending, speculation, and risk-taking driven by the moral hazard created by deregulation and taxpayer bailout guarantees."

https://www.investopedia.com/terms/s/sl-crisis.asp

This is why a lot of people worry that Silicon Valley Bank, First Republic, etc. might be the tip of an iceberg. If they've all leveraged themselves on risky speculation bets in the hopes that they'll get bailouts if it all goes sour (even though depositors greatly exceeded FDIC insurance limits) then you could have a domino situation.

Note also that it's a perfectly good way to run a bank as long as you don't get greedy and go for big risky bets, but the only way to ensure bank managers don't get the Las Vegas bug is to enforce the banking regulations in a fairly strict manner.

SVB and FRC did not “leverage themselves on risky speculation bets.” They made lots of very safe investments but did not adequately hedge against large and rapid rate increases. Also not good but it’s a big difference, IMO.

The only safe investment is a hedged investment, antthing else is up to your priors.

While interest rates going up as much as they did may have seemed unlikely, it was still irresponsible not to hedge their risk.

Not even most hedged investments at large scales. Hedging doesn't make risk disappear: It just shifts it somewhere else, either to someone even larger, or dispersed among many parties. When the risk is correlated with the risk from others, like the trillions in underperforming treasuries that the bing banks have in their balance sheets, who is the safe counterparty? Not the next bank, which also has a similar position. We saw this with the housing crisis and synthetic CDOs, and we see this on insurance against sufficiently large natural disasters.

So sure, small banks failing to hedge is irresponsible, but at a large enough scale, someone holds the bag.

I'm not an expert on interest rate securities, but with e.g., physical goods the bag holder has physical goods or contracts for supply that allows them to meet their obligations.

Is something similar not possible with interest rates? I imagine for instance someone with lots of cash and little desire for risk could lend their money to the banks at overnight rates, collect the interest, and then offer swaps against that steam, no? Of course, no one's going to get their 10th mansion off of this. A little riskier, someone holding variable payment debts could do the same, as long as the loans are diverse the risk could stay low. In this way, the risk at least shifts from "we're screwed if interest rates change" to "we're screwed if interest rates change and many diverse loans start to fail to make payments" in which case you're probably screwed regardless.

Oh absolutely. My point was just that if you truly wanted to make a big risky bet, you would definitely not be going out and buying a bunch of agency bonds.

Sure, I'm just pedantic :) Re: the risk of interest rate backed securities "I too like to live dangerously" as they say.

I read one of their customers on here raving about the mortgage rate they got through SVB because it was so much better than anything offered by anyone else.

I don't see any evidence of any overall prudent investing on their part considering the entire bank had to be bailed out and FDIC limits relaxed.

I think an overlooked issue here is that, beginning in 2020, SVB suddenly had tons of deposits. Yields all around were zero-ish and they had money burning holes in their pockets. I can sorta see how they could be incentivized to close some loans.

Also, I think that as with FRC, their loans tended to have fairly low credit risk, so again not super sketchy, just poorly hedged.

Hindsight may be 20/20 (01/11/2023)

> "SVB's focus on the innovation economy was a big winner in the past but may not remain so in the future, according to Dick Bove, the prominent banking analyst at Odeon Capital Group. The U.S. economy, in Bove's view, is shifting from a consumer-oriented economy driven by plenty of low-cost capital to a manufacturing economy marked by limited access to capital that's relatively costly."

https://www.bizjournals.com/sanfrancisco/news/2023/01/11/svb...

> "And despite his downcast report, Bove maintained his hold rating on SVB's stock. Investors seem to be a bit more optimistic. After SVB's shares lost two-thirds of their value last year, they're up nearly 11% so far this year, closing Wednesday at $254.99 a piece."

Reading the tea leaves is an imprecise art, I guess.

The S&L crisis started before the deregulation. In fact, the deregulation of S&Ls was an attempt to address the fact that many of them were already insolvent due to holding long-term fixed-rate mortgages in a rising-interest-rate environment.

One thing I don't understand, and perhaps you could explain, is why anyone in the US would ever keep more cash in any one bank account than what was covered by FDIC insurance. It's precisely the reason I don't e.g. take my savings to an offshore bank that offers much higher interest rates. Is this just a matter of people taking trust in a bank's solvency for granted?

Banks can offer incentives for certain levels of deposits. Better interest rates, better cards, better loans. SVB offered perks to bank exclusively with them.

https://www.cnbc.com/2023/03/12/silicon-valley-bank-signed-e...

If you took that sort of agreement and bet on being bailed out in the event of a failure, you won your bet.

This is the answer that makes the most sense.

I’m not sure about personal banking (since I’ve never had enough in a bank to worry about it!), but in commercial banking I imagine it’s routine. I work at a medium sized firm and I authorize multiple payments a week that are over the FDIC limit. I’m not sure how much juggling it would take to transact at volume and never have an account go over the limit, or for long.

FDIC limit is 250k per bank, so if you have 1 million you'd need 4 banks. If you have 10 million you'd need 40 banks. Having money spread out like that doesn't seem easy to manage. Also having 10 million in one bank gives you better interest rates and service at that bank than if you only had 250k.

Cash sweep products are a thing. For example, Wealthfront will sweep your cash into a bunch of smaller banks, putting 250k in each, so on the off chance they fail, your money's not been disappeared.

The last time anything like that happened was what, over a decade ago? People forget (for real).

Also, no one seems to have lost a dollars yet in this crisis (on the depositor side), so hard to say anyone ‘lost’ this time either.

Doral Bank failed in 2015, so 8 years? Not quite 10. The GFC was 2008 which was 15 years ago though but people still remember that one.

Even though the FDIC chose to make depositors whole for SVB, Signature, and FRC, there's no written legal guarantee that they'll keep doing this, so in the face of that, I don't think people are forgetting the $250k FDIC limit.

Anyway, my point is no one's walking up and down Main St with their $10 million and opening 40 different bank accounts by hand because the finance industry invented a product (prior to SVB, even) so no one has to do that.

oh, I don't know. Lots of people walk up and down main street. No one I know keeps more than $250k in any given bank under the same name. Obviously having LLCs, wives and children etc let you spread things out in the same bank. I had to wait 10 months in 2008 for FDIC to make me whole when a local bank I had most of my savings in at the time went under. Most people have a living memory of that.

Also, I have 8 accounts at 6 different banks and I'm not even worth $1m so I can't imagine it's too hard for someone worth $10m to figure this out.

Figure what out? I'm saying people with that kind of money have private bankers*, and don't need to spend the time making 40 different accounts and managing that because their money is already protected through a sleight of financial trickery called cash sweeping.

If you like seeing the inside of bank branches, and having unnecessary zoom meetings where the background is a picture of the inside of a bank branch, that's entirely up to you.

* eg https://www.chase.com/personal/checking/private-client

Well, there are private banks/banks that specialize in private banking (like First Republic), and private bankers, which specialize in navigating the Byzantine bullshit endemic at a normal bank. I believe you pointed to the private banker division at Chase, and most large banks have them somewhere, for large net worth individuals like you’re saying.

It is definitely an entirely different experience (either way), no doubt.

If you’ve ever tried to practically use multiple banking institutions in the US, especially through the 80s-90s, you’d immediately relate to only using a single account regardless of what the statistical hazards are. It’s 2023 and my institution limits Zelle transfers to $2,500/mo. Want more, just as fast? Back to human wires and fax machines…

Really? You could always just go get a cashiers check and walk it over to another bank. Now I've got accounts at several banks with free online transfers between them (2-3 business days)... it was more of a process in the 90s, sure, but now you can open a checking account at any major bank, link it to another bank and fuel it in 5-10 minutes. Not with Zelle, just a normal domestic wire which is usually paid for by the receiving bank.

My credit union (it’s actually very worth it, so I’m not switching) has no branch within multiple states from me. A domestic wire requires phone calls and fax, can’t be done entirely online. It’s certainly more doable with a behemoth like Chase, but then you’re dealing with all the negatives of using Chase and employees that have no leeway to use common sense when solving problems.

You’ve just described days of paperwork at most banks, in my experience, and with large amounts, things can get stuck on ways that will be days more.

If you’re dealing with large sums regularly, that quickly balloons into an unmanageable mess.

They're just the tip of the iceberg. Pretty much all medium size banks have lots of underperforming assets, and they're just one minor mistake from going under, like these 3 banks. Also notice that there are still many shoes to drop: comercial real estate (a disaster waiting to happen), car loan defaults, etc.

Keep in mind that car loans get paid down pretty fast. For example, Capital One's <620 FICO customer segment has already paid off about half the auto loan principal from 2021. Their delinquency rate has flattened, quarter over quarter, as well.

New car loans are not only longer (> 6 years) and also more expensive than previous loans. Also, people stop paying when they lose their job, so the trigger may be the start of a recession.

Some of them. A bit less than half of loans at Capital One are more than 5 years, for instance. (I'm just overly familiar with that company.) But a 6 year loan from June 2021 is still almost 1/3 paid off.

The other question is if there's a recession, how much will used car prices, for cars that were new in 2021, drop.

What? How do depositor bailouts affect bank managers' incentives?

The bank manager can take more risks, knowing that the depositor's won't lose their money (over $250k if the bank they manage fails. Which is important because people tend to get mad when they lose large amounts of money.

Thus, buy bailing out depositors to an unlimited amount, bank managers are then incentivized to take more risks investing the depositor's money because the more risks they take, the more likely it is that one will pay out, raising the bank manager's bonus, and what their stocks are worth. Of course, by taking more risks, they also increase the chances that one will fail catastrophically, but since the depositors are all covered, up to an unlimited amount, eh.

If there is no risk, nothing is risky.

Evidently, the best way to run a bank is a 0% cash reserve minimum (as was granted to US banks starting during COVID), so you can make money off of literally every last penny, and then discourage and prevent customers from taking their money out, then [externalizing all costs]/[socialize losses] onto government (taxpayer) via bailout or customer via bail-in, while privatizing all profits in the meantime. And charge poor people $30 every time they dip under $0 even by a penny.

Doesn't mean it's a good idea for the rest of us non-banks.

> And charge poor people $30 every time they dip under $0 even by a penny.

The list of large corporate banks that charge NSF fees and overdrafts is vanishingly small.

OTOH, I know of plenty of credit unions that still do both.

> The list of large corporate banks that charge NSF fees and overdrafts is vanishingly small.

True for NSF fees, absolutely false for overdraft fees.

https://files.consumerfinance.gov/f/documents/cfpb_overdraft...

I would need to see 2022 as well. Many banks announced changes middle of 2021 and 2022.

Fair, not sure when the new data comes out.

> Banks don't work that way any more because it's a really bad way to run a bank.

As compared to what we have now? With dubious financial instruments so opaque I'd have to spend 30 years lurking underneath desks on Wall Street eavesdropping on conversations just to have any clue at all how the fuck those work?

I'm almost comforted when there's a Bernie Madoff, because at least I can wrap my head around how a Ponzi scheme works (ignoring the ethics, obviously). I'm (irrationally?) worried that some of what's been going on the last few years actually makes plain Ponzi schemes look legitimate by comparison.

Not 25 years ago, we used to laugh about the stupid books with titles like "Dow Jones 100,000!" and whatnot, I think it was a Slashdot post way back when. And while we haven't quite reached that pinnacle of absurdity, it did hit 37,000 not so long ago.

None of us may be able to pick the queen of hearts, but some of us have caught on to the fact that it's three card monte. When it all falls down, should we console ourselves with "well at least the banks weren't small and local and vulnerable to economic shocks"?

The difference between a ponzi and real finance is mostly lying.

In a Ponzi you lie about asset growth. In real investments you report real asset growth. If the system fails it won't be because people lied about what their assets were. It might be because they mis-estimated what those assets were worth. But that isn't a Ponzi.

Crucially though, it is actually possible for assets to grow. As long as there is new good business to finance, the whole thing doesn't need to be zero sum. And annoyingly, growing business is so much faster with a conplex financial system, that countries with such financial systems stand no chance. So even if you don't like the risk and excess in a complex financial system, it's really hard to go without.

> And while we haven't quite reached that pinnacle of absurdity, it did hit 37,000 not so long ago.

Why do you think this is absurd? You know inflation means we’ll get there even without ridiculous multiples, right?

What sort of inflation would take it from 2700 to 37,000 since 1987? How close to the CPI is that, exactly? It seems a little off.

> What sort of inflation would take it from 2700 to 37,000 since 1987?

7.5%. Doesn't seem that unbelievable.

Well, it doesn't seem bizarrely implausible. It has spiked even higher than that in my lifetime (not even counting recently).

The trouble is that I've been told that it was far lower. By official government sources.

It would be interesting to include the DJIA into CPI though. I bet some people would lose their shit over that.

Why do you think it has to all fall down? What happens if it doesn't?

It’s more complex than that. The ideal situation for a bank is when all its depositors are customers of each other. The deposits never leave the bank so the bank has very stable liabilities.

So a local bank will be great when a community transacts mostly with itself. SL happens right around when multinationals and corporate centralization started becoming more of a thing..

We live in the era of trillion dollar corporations, fintech, and the internet so a community bank ends up more like a small big bank. Its depositors are getting paid by corporations from way outside the community, and they’re spending money on the internet or at giant multinational retailers and thus shifting deposits outside the community. In this paradigm, it’s actually better to be huge and have a diversified customer base because the best way to keep your liabilities stable is to have the largest market share possible.

You’ll notice, banks usually have generous incentives for setting up direct deposit. Direct deposit is the best way for them to have a predictable measure of incoming deposits when there isn’t a high likelihood of one particular account transaction with another.

Might be a bad way to run a bank, might not, but it's definitely not the cause of the S&L crisis. That was a story of deregulation leading to massive moral hazard, rampant speculation, and multiple high profile cases of outright fraud.

Economic shocks and rising interest rates aren't usually the reason that financial institutions engaging in risky or fraudulent behavior get caught, they usually just make it so the clock runs out on their scheme to roll over the losses or otherwise avoid getting caught.

The liquidity crisis of 2008 didn't cause Bernie Madoff's fund to collapse, the fact that it was a complete fraud from inception did. It just made it impossible to ignore.

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