Bank of America's unrealized losses on securities rose to $131.6B
reuters.com
reuters.com
So likely the Fed wouldn't let something similar happen to BoA.
You mean implicitly, because there is no explicit guarantee ANYWHERE saying so.
> it’s not allowed to fail due to its systemic importance
Agency MBS. Fed has no mandate to keep buying and they're not. BoA can definitely fail. It would be disastrous to NOT let it fail.
Just because it’s a GSIB doesn’t guarantee that the US tax payer would pick up the tab on all deposits if push came to shove.
Excluding deposits over 250k and non-personal deposits but I believe these are a minority for a bank like BoA, which is mostly retail.
Anyways this is kind of a nonsequitur because GSIB goes quite a bit beyond just FDIC coverage.
It may not be written down explicitly in the definition of gsib, but it definitely goes beyond just fdic
Besides in Cyprus case the reliable Northern Europeans managed to keep the financial system stable.
To paraphrase Kissinger: "if Europe has a financial crisis who do I call?". The answer is Berlin.
In practice this might be true, but I'm not sure every bank would have a multibillion dollar hole in its balance sheet if all customers withdrew their deposits.
There's probably a point to be made that banks with large unrealized losses would lead to customers losing deposits, while banks with a positive net asset would not.
Most business deposits are 85% uninsured because they are about the $400K limits.
We have already set the precedent of full deposit insurance.
What is your source for that information?
SVB had about $7b venture debt, and the total venture debt market ballooned during the pandemic. VCs and banks like SVB were hyper-inflating start-ups with venture debt (which is totally worthless unless it can be flipped) and they continued doing this into 2022 and 2023 despite inflation and rising rates.
10 years ago venture debt was a fraction of what it became because it’s stupid-risky, especially for a bank. But with crypto and especially the rampant fraud within crypto, VCs found a few friendly banks and created a bubble.
That $7b might as well have been a hole in the balance sheet, just like what FTX did. The banks and VCs had 12-16 months to de-risk and all they did was cut deal volume. Blaming the collapse in any way on the Fed is as specious as Musk trying to walk out on Twitter because of “bots.”
Here’s e.g. one article on the SVB loanbook https://www.forbes.com/sites/amyfeldman/2023/03/19/silicon-v...
https://www.npr.org/2023/03/19/1164531413/bank-fail-how-gove...
But the aggravating factor is that the vast amount of their deposits was VC money fueled by QE and "easy money" that was no more. Even without a bank run in the first place, the total deposit amount would drop significantly, and easy to put two and two together and realize SVB is in trouble... and then the bank run becomes inevitable.
A bank makes money by making loans and deals with its working capital. If you have half the working capital you did before because the rest is locked in to an increasingly unfavorable position you have a problem.
Also when you think of a bank share as a percentage of the value of the company you basically have half the value you did before. The stock basically reflects that.
When I hear statements like "the lender has strong liquidity with consumer deposits and higher capital," I immediately think about a run-on-the-bank. If I had my money there, and I read a statement like that, I'd be discreetly moving it elsewhere.
The article concludes "this is a problem only if you have to sell them." That doesn't seem like an unreasonable scenario.
Banks are extremely leveraged by their nature, BA has like $3T in assets and $2.8T in liabilities, so minor swings in assets value move the equity by amounts that are comparable to the market cap.
It's not like we live in a world where we've been banking for thousands of years without this ever being a problem. It was most recently a problem this year, and if your memory is fuzzy, it wasn't just Silicon Valley Bank. If you're going to excuse that away, then it was most recently a catastrophic problem in 2008, which isn't exactly "hasn't been a problem since the Roman empire" or anything. And if you're going to make excuses for the Global Financial Crisis and how that doesn't actually matter and doesn't need to be incorporated into anyone's models of how banks work, well, our world views are irreconcilably different. I can promise you the banks don't believe it's irrelevant.
For example US Bank has $50B market cap, $500B deposits, and closer to $700B total assets.
Islamic banks aren't.
These aren't the Signature Banks and SVBs of the world and for that reason the concern on this board about what happens if the trend line extends still further-- it won't be. The concern really should be that this all represents a policy response that cannot be sustained, and so it won't be.
[1] https://www.reuters.com/markets/us/fed-is-cutting-staff-afte...
[2] https://www.wsj.com/articles/the-new-bank-bailout-fed-member...
If SVB can't fail gracefully, then anything larger certainly has the full faith and credit of the US Gov't behind its deposits, just like the Federal Reserve itself. That is why drawing comparisons between them makes sense.
For the next year or so, BOA can borrow at 100% nominal value for ALL of their US govt debt, so they are basically guaranteed to survive for a year, regardless of what anyone does.
Probably what they would do, if BOA were to fail, would be to let it "pretend fail", where they essentially just replace all the senior officers and CEO(and all their equity goes to zero), and then give the new management team a big fat loan to help them get back on their feet.
There is very little chance that the FDIC would let BOA get swallowed up by another TBTF bank, that would be letting even more concentration into public banking, something I don't think they want. Even if we are way more diversified in banking than every(?) other country.
There is zero chance they would swallow it up and become a bank themselves like you are suggesting.
SVB failed because they were incompetent people running the bank. They had no risk management dept for a long time before failure, and had no diversification of any kind. When they saw the writing on the wall, instead of trying to deal with the problem, they tried to play Ostrich. Their equity in the bank went to zero like it should.
BOA has a risk management department, and they are working hard to keep the lights on. I'm a BOA/ME customer and am not worried.
Are you implying increased interest rates, as set by Federal Reserve, will not continue? Or that Federal Reserve plan to pump underwater bank UST holdings will be enough to make it all OK?
"The Bank Term Funding Program (BTFP) is a lender of last resort facility. It was created in March 2023 ..."
https://www.brookings.edu/articles/what-did-the-fed-do-after...
This is a recurring meme in Silicon Valley. To the point that I think executives at SVB believed it: that the Fed is constrained in raising rates by things like balance sheet losses or the interest cost of the federal debt. (It's not. It's constrained by job losses.)
To clarify, I think it is likely increased interest rates will continue. Federal Reserve follows interest rates / inflation numbers, and war brings inflation.
https://olui2.fs.ml.com/Publish/Content/application/pdf/GWMO...
The preferred deposit account has always paid very competitive savings rates amongst all FDIC insured accounts.
If you want an FDIC-insured savings account from a large institution, Marcus offers 4.4%, and it isn't even the highest -- Synchrony isn't as big a name but it offers 4.75%.
And while I can see keeping an intermediate buffer in such an account (since you can ACH directly from it), it's not much more hassle to use a money market fund (details do matter a little), e.g. FZFXX, VUSXX, or SNSXX (those are Treasury funds; prime funds typically give a slightly higher rate), for around 5%. Even there you're giving up a little vs. laddering T-bills, but it's so easy and it's completely liquid.
The only reason not everybody does this has to be that they're just not used to brokerage accounts, or that they don't have enough money to bother.
Probably most people who want to hold cash should just open an account at Fidelity, and put any money that can afford a couple day's lead time into FZFXX.
I observe, with two USA war fronts, broad inflation will remain high and Federal Reserve will follow inflation with increasing rates.
Treasury's Yellen says we can afford it.
https://www.foxbusiness.com/economy/yellen-says-us-afford-su...
Then Bank of America needs to be shattered into as many pieces as it takes to no longer be in the "too big to fail" category.
For TEN YEARS we have all had the ability to be our own bank. TEN YEARS ago I was telling people that within a year people would be carrying their net worth in their pocket and everyone would be their own bank in 5.
Now, TEN YEARS later we still have people bemoaning the fack we are "dependent of banks".
Lol, we are dependent on banks like a heroin addict is addicted to his fix, their cheap, easy free money. Banks are a sickness.
At least as long as you can‘t pay taxes in crypto and can‘t pay most services.
But the "hold net worth in pocket" part does sound like crypto.
Congratulations! Whether intentional or not, you're trying to start a bank run! Please don't!
The reality of the matter is literally any bank could not survive a bank run. Even JPMorgan. The entire business model of a bank is to take deposits, hope people ask for them in a predictable way, and then lend them out to people (often as mortgages or Treasuries, but also as a lot of different things).
It's a weird system, but it's what we got.
What is happening here is that the resale value of treasuries fall as interest rates rise. This is due to the weird quirk of treasuries having a set payment schedule, which forces the face value to change in order to reach parity with market interest rates. The amount that the government owes BoA at maturity is still the exact same number.
Nothing about those Treasuries has actually changed other than the fact that they earn less interest than a newly issued treasury and if BoA needed to sell them quickly, they would be worth less than what they were paid for.
As you'd guess, this only becomes a problem when people run the bank and the bank needs to sell those Treasuries to meet deposit requirements.
In reality, if BoA gets in trouble, since it is a GSIB, the US government would just spot the bank the original value of those Treasuries (since again, nothing about them has actually changed and the government still owes BoA the original price eventually), everyone would complain, and then we'd move on.
Things will be a lot nicer if we don't have to do that, so please stop!
What are you talking about? This is literally how all bonds work. It's not a "weird quirk"
That was a big part of why the LIBOR scandal was such a big deal?
This rate was published in financial newspapers on a periodic basis, and other loans and things started to rely on this fact to price them. If you had, for example, an adjustable-rate mortgage, the tiny print would say something like "the interest rate will change on June 1 of each year and will be the LIBOR rate published in the Wall Street Journal on the third Thursday of May, plus 4%". This allowed both sides to independently verify the rate and to estimate what it would be as the adjustment date came closer.
The scandal was when it became public that multiple banks were reporting estimates that were not good faith estimates, and that some of them were tipping off traders so that they knew what direction LIBOR was going to move before it actually happened.
I am not aware of any connection that LIBOR had to adjustable rate bonds
Here's Freddie Mac talking about how the LIBOR scandal forced them to change their benchmark for bonds.
https://freddiemac.gcs-web.com/news-releases/news-release-de...
Ever wonder what FRN stands for? They've issued them every month for the past decade.
https://home.treasury.gov/system/files/221/Tentative-Auction...
Just because you haven't heard of things doesn't mean they are not real.
I just wouldn't call treasuries weird or quirky when fixed coupons are the textbook definition of a bond taught in school.
But yea the vast majority of bonds (treasuries or otherwise) are not variable rate. Close enough to "all" that it seems needlessly pedantic, I agree.
Here’s a primer from 2011. The Treasury and Feddie call theirs FRNs.
https://www.morningstar.com/etfs/bats/flot/quote
Please be careful about overconfidence.
https://home.treasury.gov/system/files/221/Tentative-Auction...
Just because you haven't heard of things doesn't mean they are not real.
Like here's Freddie talking about their floating rate debt. I sort of feel like I'm taking crazy pills, or maybe its the classic Hacker News Dunning-Kruger thing.
>Freddie Mac issues a variety of fixed and floating rate medium term notes (MTNs) of various sizes and maturities.
Deposits are just a cheap way for them to reduce the delta between what they owe other banks and what other banks owe them (settlement)
When a bank writes a loan it simultaneously creates an asset (the loan, which has returning cash flows) and a cash deposit (in the borrowers account)
The deposit is only a liability for the bank if it is paid to another bank or withdrawn in physical cash. Otherwise it's all make believe.
If I borrow $1000 from BoA and spend it on a guitar, and the previous guitar owner puts that money in to their BoA account, then it's all just a complicated no-op.
Even if the new deposit is withdrawn or transferred somewhere else, the bank can still borrow any deficit overnight from other banks at a daily rate that is lower than what they're earning on the loan.
Do you think the majority of loans just sit in borrower's accounts, instead of getting paid to home sellers, vehicle sellers, other debtholders, etc?
That banks are just playing with pretend money because somewhere down the chain someone might park it back in the same bank and not touch it for a long time? Loans are entirely about getting that money sitting in deposit out into circulation instead, yes, but you can't simply write those loans without having "real money" to give out for them.
That seems like a good, profitable, impossible-to-screw-up business model, the way you describe it, without needing any actual cash funding.
Sooo why don't you start one of these banks that doesn't need funds and report back.
Well there's the rub. If the bank is holding loans written early pandemic at sub 3% they'd lose money on the overnight rate.
If you're paying 2% on your guitar loan and the depositor is getting 3% the bank is actively losing money. BoA deposits down 8.5% yoy, meaning they need to take out more expensive loans from other banks. This actually is a legitimate problem for them.
Many banks have hundreds of billions of $$$ sat in accounts paying close to zero interest.
A very small % of people seek out good rates on their cash.
Also, when rates rise, people tend to use their savings to pay down any debt (mortgage overpayments for instance)
Why would a rational actor with 2% mortgage (in USA fixed rate) pay it down early, when they can get 4%+ in a money market?
Most of the world doesn't have the luxury of fixing their mortgage debt for 30 years or have a Fannie and Freddie to support them.
Plain old businesses also have to tighten their belts and pay down their debts as well though.
My broader point is it's all a zero sum game. Almost all the money in existence exists because someone wrote a loan. The existence of debt or the lack of deposits is not inherently a problem. illiquidity isn't a problem if nobody wants to move their money, and interest rates rising isn't a problem if it's accompanied by inflation which will drive up asset values and wages (which support lending)
So banks will have mortgage exposure in the form of mbs, but those are not structured to be extremely long dated.
> As you'd guess, this only becomes a problem when people run the bank and the bank needs to sell those Treasuries to meet deposit requirements.
Go through a though process:
- If you can deposit your money into a bank with 5% returns and with 0.1% returns, where will you put it?
- If a bank is locked into a long-term investment with subpar yields, what kinds of interest rates can it offer?
- If other banks can trivially give higher yields, where will money go?
BOA is holding securities with (1) a lower resale value if sold now (2) lower yields if held to maturity. It's almost the same thing.
If I buy a 30-year bond with a 1% yield /on the expectation of being able to offer deposits at a 0.5% yield/, and suddenly /depositors expect a 5% yield/, I'm in deep trouble.
To answer your question, I along with most Americans will keep it in my checking account because I use it as a working capital account and not an investment account. The median consumer checking account balance is <$10k and hasn’t yielded anything above 1% in a generation. [0] I will keep a relatively flat balance in my checking account indefinitely - long enough for the Treasuries to cycle.
Your argument works for banks like Schwab, but BoA’s deposits don’t look the way you think they do. Americans looking for yield never put their money into places like BoA anyway (it’s not like they ever competed on rates as long as anyone can remember).
Besides, wouldn’t we have already seen the flight if that was going to happen? Why now are depositors going to wake up to higher yields at smaller institutions? To date, BoA’s deposits are roughly following the trend of all deposits [1]
[0] https://www.jpmorganchase.com/institute/research/household-i...
However, I would argue, at the end of the day, it doesn't matter. At some point, whatever happens, BoA will have significantly lower returns than competitors. If that doesn't translate into returns on accounts anywhere, in even a relatively efficient market, that will translate into customer service, or some other place. Competitors will have a lot more money to work with both to keep customers happy, and for profits/avoiding losses.
That's not sustainable.
Western banks. You keep thinking all banks are western banks.
Islamic banks can weather a bank run because they're required to have ALL deposits fully backed.
They bought them with money that isn't theirs and if they were to sell them all to return people's money then they would be bankrupt. So yes, a lot about those Treasuries has changed as the value of the asset is based on time and rate. Those Treasuries do in fact have a market price and although they'd return all their principal eventually, it isn't today and is actually a long time from today.
It's completely disingenuous to say "nothing has changed". Nothing has changed other than the fact that the market value of the treasury is far less than what the bank could stand if forced liquidate them. Only a fool would keep any sort of serious money with BoA that isn't FDIC insured, etc.
Yes, and if people don't run the bank, then they can hold on to those Treasuries until they mature?
I agree if they have to sell today, that's bad, but again, that's also true of any bank selling through any type of illiquid assets. We just got used to interest rates going down for 40 years and this not being a problem (banks got run for different reasons back then).
>"All of these are unrealized losses are on government- guaranteed securities," Bank of America's chief financial officer, Alastair Borthwick, told reporters on conference call discussing third-quarter earnings. "Because we're holding them to maturity, we will anticipate that we'll have zero losses over time."
This is a case where at first sight it appears that BoA is in a bad situation. On further analysis it appears this is a non-issue, for the reasons you explained. But going further still, it's obvious it IS an issue. And your flaw is assuming that when a bank says "we're holding them to maturity", they're holding them to maturity.
You see, SV did the same thing. They took some assets that they planned to hold to maturity if all goes well, but then used the same assets to tell regulators "don't worry guys, we have enough liquidity because there's these things here which we can sell if we really need to". Before SV went bankrupt a naive observer could've asked the question: if all clients decided to pull money, did they have enough liquidity without having to touch these assets, and the answer would've been No.
Whether this is a problem for BoA depends on the answer to this same question. It's far from obvious that this is a non-issue.
https://www.federalreserve.gov/newsevents/testimony/bernanke...
Scroll down to the “Too Big to Fail” section.
>March 12, 2023
>Federal Reserve Board announces it will make available additional funding to eligible depository institutions to help assure banks have the ability to meet the needs of all their depositors
2) This program linked to is because of the failure, it happened after.
3) There is absolutely no way any US govt entity will let BOA fail. They might let it "pretend fail", where they essentially just replace all the senior officers and CEO, but even that's pretty unlikely.
The FDIC let those 2 banks fail, because those 2 banks were literally idiotic in their running of the bank. SVB had nobody in charge of bank risk for a long time before it failed. They were playing ostrich and hoping life passed them by and nobody noticed how stupid they were.
BOA in the meantime has a pretty strong staff in place, their risk department is staffed and active, and they are doing everything they can to survive without needing the govt's help. It's likely(but not certain) they will survive without any extra govt help.
Imagine, in an extreme case, a bank with $1 billion par value of treasury bonds, with mark to market value of $800M. And $1 billion of customer deposits. And that’s it. (Obviously this is unrealistic.). Now the customers flee. The bank borrows against its $1bn of bonds and pays off the customers. The bank now has no customers, $1bn (par) of bonds, and $1bn of short-term debt to the Fed. They can roll that debt over forever, but they need to pay interest, and, when you imagine that $1bn (par!) of bonds as being worth $1bn, that’s only if they are held, earning essentially no interest, to maturity.
So the bank has no income and is obligated to pay interest to the Fed until the bonds mature, and they can’t. Not can they sell the bonds because they will take a loss and be unable to roll over the loan. In other words, they’d be insolvent. They’re in the hole by $200M of present value, and they need assets or an income stream to back that up.
The normal business of banking can provide that income stream. For example, sufficiently lazy customers will deposit funds at less than market interest, and the bank can earn the difference.
More importantly, the actions of the FED after SVB signaled they'll do whatever it takes to keep the system stable.
If a single bank was getting close to your hypothetical scenario, you'd probably see a forced merger. If the majority was at risk, you'd probably see actions to ensure higher margins (such as using reg Q to impose maximum rates on deposits)
Not doing something along these lines is fairly expensive right now.
Our government decided that the banks needed to consolidate in order to be more stable then enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act which was put in place to "promote the financial stability of the United States."
If you really want to ensure banks don't go through this again I would encourage you to call your elected officials to make sure they not just protect the Dodd-Frank act, but to expand the way it helps to protect consumers from banks being shady.
Our government decided to do what was best for the banks and the bankers. Meanwhile millions of people lost their homes and some have never recovered. Those that caused the problem were rewarded with golden parachutes and a comfy retirement.
I am not keen to see that repeated and will support a primary challenger to any politician (of any party) that suggests it's time for "Too big to fail Part 2: even bigger". Let's hope it doesn't get there.
The reason UBS ended up buying Credit Suisse is because the Swiss government got involved and it was much easier to _convince_ a bank to buy another in the same country, especially when it is backed and supported by the government.
They're still losses even if you don't mark them to the market. I think the next round of bailouts there is going to be a lot more corporate bond buying and subsidized borrowing by banks against bonds at par value.
Also BoA: wanna buy my 6.55% bonds?