Banking Crisis 2023

Hygro

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Ok so the banking crisis is on. The Fed decided to raise rates again, today, after this all started. It's looking worse and worse.

Banks are holding treasuries to manage risk. Banks are always leveraged such that a depositor run on the banks will collapse any bank. To mitigate that risk they hold various assets, which means the debts of others. A big one is federal treasuries. In many ways, treasuries are just money. But they aren't exactly, and their value can fluctuate somewhat wildly the further out they are from maturing into regular dollars. Since the interest on new treasuries is much higher than old ones, no one is buying old low interest treasuries years out from maturing except at a super discount.

So the total value of assets of these banks holding low rate bonds is suddenly very low, and their liabilities remain high. They are very vulnerable.

The Fed has allowed the banks to use these bonds as collateral, valued at their maturation-date face value, in securing new loans to secure their positions in the market in case anyone starts pulling their deposits or similar. This should do a lot to make those bonds worth today what they are going to be worth eventually, and therefore "safe" again.

In terms of the numbers it's looking really bad. In terms of leadership things are definitely better than 2007, but with Republicans in the house the government isn't going to be necesarily united in preventing nor solving the crisis.

Every time Powell raises rates, the banks are that much closer to failure from one of their asset groups to another. And already a month into the banking crisis, Powell has chosen to continue raising rates.
 
It's the first real American banking crisis since 2007. Obviously the people who run banks have perverse incentives and we should expect nothing else but for them to follow incentives.

So far the USA bailouts (SVB and Signature) have been to deposit holders and not to investors so there's one change. The questions I pose are:

1) is it going to spread to a generalized "financial crisis", of which the USA has had between 2 and 5 in the past century depending on how you count, with 2-3 being the general consensus.

2) how do you think the government responds to the scenario of your prediction?

3) how bad does it end up getting?
 
It's the first real American banking crisis since 2007. Obviously the people who run banks have perverse incentives and we should expect nothing else but for them to follow incentives.

So far the USA bailouts (SVB and Signature) have been to deposit holders and not to investors so there's one change. The questions I pose are:

1) is it going to spread to a generalized "financial crisis", of which the USA has had between 2 and 5 in the past century depending on how you count, with 2-3 being the general consensus.

2) how do you think the government responds to the scenario of your prediction?

3) how bad does it end up getting?

Not sure on 1 or 3, 2 is inflation wins in the short term,
 
1) is it going to spread to a generalized "financial crisis", of which the USA has had between 2 and 5 in the past century depending on how you count, with 2-3 being the general consensus.

The core implication of higher rates is that capital will be available to a much narrower group of entrepreneurs, compared to few years back. The wealthy groups, not excessively leveraged, are going to fare ok during troubled times, while buying out the less fortunate ones for cents on the dollar. The 2008 crisis was systemic, in a sense that the ability to pay out large chunk of obligations at once was fictional. Market swings exposed the shortfall and now legislation prohibits excessive degree of collateralisation within banking establishments, once widely available. What we have now is likely not “faulty machinery threatening the collapse of the factory”, but rather extra Capital becoming a luxury very few will be able to afford. Loans @ 7-12% exclude wide array of businesses, who’s profit margins are not high enough to compensate for interest rates. More centralisation, stronger monopolies - likely outcomes of current events. Not a full fledged systemic collapse, just further redistribution of wealth in favour of usual suspects.
 
More bankers need to go to jail and stay there for longer.
 
The core implication of higher rates is that capital will be available to a much narrower group of entrepreneurs, compared to few years back. The wealthy groups, not excessively leveraged, are going to fare ok during troubled times, while buying out the less fortunate ones for cents on the dollar. The 2008 crisis was systemic, in a sense that the ability to pay out large chunk of obligations at once was fictional. Market swings exposed the shortfall and now legislation prohibits excessive degree of collateralisation within banking establishments, once widely available. What we have now is likely not “faulty machinery threatening the collapse of the factory”, but rather extra Capital becoming a luxury very few will be able to afford. Loans @ 7-12% exclude wide array of businesses, who’s profit margins are not high enough to compensate for interest rates. More centralisation, stronger monopolies - likely outcomes of current events. Not a full fledged systemic collapse, just further redistribution of wealth in favour of usual suspects.
Yeah, more "broken system" stemming from the issue that we don't break monopolies anymore. When we're too weak to pick up the Teddy's Trust-y Big Stick, we'll get hit with it over the head instead.
 
A point here on the "banking crisis" -- the US has more than 4,000 banks, credit unions,and (a few) savings & loans. This crisis is hitting the few dozen or so major banks like Goldman Sachs or SVB. Even in the worst of the 2007 crisis, very, very few of community based banks collapsed or needed help from the Fed.

As for the Fed's recent rate hike -- considering the year-long whining over inflation (it exceeded 15% in 1982 when I was fresh out of college so 6%???) and a conservative Fed chief it's inevitable the government would pander to the citizens.
 
I bought £5000 of Schwab @$56. Was up a few hundred, now down a few hundred. Hopefully i'll be up 20-30% in a years time...
 
A point here on the "banking crisis" -- the US has more than 4,000 banks, credit unions,and (a few) savings & loans. This crisis is hitting the few dozen or so major banks like Goldman Sachs or SVB. Even in the worst of the 2007 crisis, very, very few of community based banks collapsed or needed help from the Fed.

As for the Fed's recent rate hike -- considering the year-long whining over inflation (it exceeded 15% in 1982 when I was fresh out of college so 6%???) and a conservative Fed chief it's inevitable the government would pander to the citizens.
Cut-throat margins at massive scale without needing to adequately price in risk are one of the principle tools of concentration of business. Prices efficiency of practice out of business in favor of exuberance and creativity in playing the rules.

Edit: It also re-brands "stability" as "inefficiency" by removing alternatives. When there is nowhere else to go, the business can slice out redundancy and surge capacity, think forumula shortages for everyone when one plant goes down. All the plants that aren't running 24/7 are already out of the game. Then if every store down the supply chain has been leaned to the point where there is relatively low/no held inventory, there's no "give" anywhere in the system the first time there is a hiccup. This shows up in banking, formula, all manner of things. Combating this is why I've long argued ethonol production has a purpose, and it's only secondarily fuel. It builds in a forced redundancy of supply to both food and fuel, especially food. Shortfalls cannot simply be grown in a week, or two, or twelve. There has to be a reason to have extra perishables on hand for when stuff blows up. It's exactly what government exists to force into the system. Seems banking needs to revisit the principle. Insurance too, for that matter. But those are my bugaboos.
 
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The Fed has allowed the banks to use these bonds as collateral, valued at their maturation-date face value, in securing new loans to secure their positions in the market in case anyone starts pulling their deposits or similar. This should do a lot to make those bonds worth today what they are going to be worth eventually, and therefore "safe" again.

Thank goodness.

Having too many US government bonds being a death sentence is a bad situation.

If letting banks step out of their current rate into a higher one needs to be done to save the system, I don't mind it.

The terms are probably not that great or everyone would indulge.
Plus, in a few years everyone will know which banks pressed the help button.

**Edit**
I finally started to relax a bit, but then the Fed and European Central Bank raised interest rates again!

It is like they really believe their stress test results.
 
Thank goodness.

Having too many US government bonds being a death sentence is a bad situation.

If letting banks step out of their current rate into a higher one needs to be done to save the system, I don't mind it.

The terms are probably not that great or everyone would indulge.
Plus, in a few years everyone will know which banks pressed the help button.


I finally started to relax a bit, but then the Fed and European Central Bank raised interest rates again!

It is like they really believe their stress test results.
Interest rates have been a historically low for years and they've become the new normal.

Seems to have fueled a world wide debt frenzy and housing speculation.

To get inflation under control though basically you have to hurt a lot of people so I wonder how many governments will pull the trigger.

That was us in the 80's. Interest rates hit 18% iirc.
 
Right, so the next step is the $17 billion owed to the most junior bondholders of Credit Suisse got wiped out, but the stockholders still got $3.23 billion.


The Swiss regulator's decision inverted the long-established seniority of bondholders over shareholders over the assets of a company in distress. Not only did bondholders expect protection, but UBS is paying $3.23 billion to Credit Suisse shareholders.

This angered some investors and has prompted lawyers to start investigating potential litigation.

Other AT1 bonds fell in price on Monday on fears about the prospect of losses should other banks get into difficulty.

The bonds in the $275 billion market are designed to be shock absorbers if a bank's capital levels fall below a threshold. They are then converted into equity or written off.


Technically the fine print allowed it under dire circumstances, but there are 17 billion reasons to argue things weren't that dire if the stockholders got paid.

The legendary Swiss Bank Account has been under stress this week with Credit Suisse being bought for a bit over $3 billion worth of stock by UBS.
 
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