Silicon Valley Bank Collapses

[bdunham7]

The alternative to fractional reserve banking is keeping ones money under a mattress.
The required fraction to hold as reserves is a matter of regulation.

There are reasonable alternatives and during the GFC they came a bit closer to a decent solution, but abandoned it.  Put simply, you can define 'deposits' as money in the bank that can be demanded at any time and 'investments' as money loaned to the bank for them to earn a return and share some with the customer.  Deposits can and should be fully guaranteed without limit and that probably means little or no interest, perhaps even bank fees.  The program I'm referring to was the temporary unlimited guarantee on non-interest transactional accounts.  Interest-bearing investments, such as CDs and savings accounts over some limit ($250K is good enough) would not be guaranteed.  So the customer would have an informed choice about how to store their assets.  Banks could offer services such as distribution of deposits among insured institutions (CDARS as it is currently known) or money market and treasury options. 

[bdunham7]

The deal went down while I was at a pub quiz with friends. My route home has me change trams at Paradeplatz. That’s me just now, with the Credit Suisse headquarters behind my left shoulder and UBS headquarters over my right.

Maybe they can put one of those glass bridges between the buildings now.  Although I suspect that UBS will be consolidating pretty severely and quickly, so there might be some prime real estate available by next year.

[tooki]

The deal went down while I was at a pub quiz with friends. My route home has me change trams at Paradeplatz. That’s me just now, with the Credit Suisse headquarters behind my left shoulder and UBS headquarters over my right.

Maybe they can put one of those glass bridges between the buildings now.  Although I suspect that UBS will be consolidating pretty severely and quickly, so there might be some prime real estate available by next year.

Rumor has it that “the banks” have vaults under Paradeplatz with lots of gold and whatnot; maybe they could just join up underground! 

Jokes aside, if they do merge the real estate, I hope they keep the CS building, built in 1877. It’s so much better looking than the UBS building from 1960.

Beyond that, I don’t have any stake in the matter, since I don’t bank with either one of them, nor own shares. I do have a bit of schadenfreude, though: investment banking is kind of a scourge IMHO. Living in Zurich you encounter investment bankers now and then, and they’re just the worst kind of people.

[jonpaul]

With todays continuing contagion to AT1 tier bonds and  USA First Republic, my notes are even more relevant.

1/ Since The inception of Fractional Reserve banking by English financier John LAW in 1715, at the Bank of France, (plaque still exists at the Bourse, in Parois!) he has initiated 250 years of chaos.
The US Founding Fathers knew the dangers and impact of political manipulation of currencies by the British overlords, Kind Henry etc.
Thus the unit of account of the United States was defined as a Dollar, a Spanish milled gold coin at the time.

2/ The  US Constitution Art 1 sec 10 Clause 1   
"No State shall ........ coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts; ......."
Art 1 sec 10 clause 1 has not been repealed nor affected by any amendements.

3/ Since its illegal inception in 1913 by 5 New York banks the US So called Federal Reserve have debased the US unit of account by 98%.

4/ References:

 The Creature from Jekyll Island: A Second Look at the Federal Reserve
https://www.amazon.com/Creature-Jekyll-Island-Federal-Reserve/dp/091298645X/
 
Pieces of Eight: The Monetary Powers and Disabilities of the United States Constitution
by Edwin Vieira Jr.

https://www.amazon.com/Pieces-Eight-Disabilities-Constitution-Foundation/dp/0967175917/

Have an ABSOLUTELY FANTASTIC day!
Jon

[Marco]

The US Founding Fathers knew the dangers and impact of political manipulation of currencies by the British overlords, Kind Henry etc.

Private transactions are more than sufficient to allow fractional banking to persist though. Unless government intervenes, people are suckers for interest on "demand" deposits ... not all the bank runs in the world could kill fractional reserves.

Full reserve banking can only happen by the barrels of government guns forcing it on people.

[bdunham7]

Unless government intervenes, people are suckers for interest on "demand" deposits ...

The problem is that the Fed itself is setting the de facto rate for interest on "demand" (overnight) deposits by not allowing any space between the Fed funds rate and the overnight reverse repo rate.  There is no free market at the short end.

[Marco]

Reverse repo and interest on excess reserves are crisis tools. Banks build up liabilities during the good time, when those are completely irrelevant.

The world has had free banking. After the fractional reserve meme arose, free banking overwhelmingly used fractional reserves. There is absolutely no reason to expect any differently now. Full reserve is a statist solution and there is nothing wrong with that, except for libertarians who can't compromise and like it :p

Central Bank Digital Currencies are probably the easiest road to full reserve banking.

[TimFox]

Full-reserve banking is basically paying for a safe-deposit box.

[bdunham7]

Reverse repo and interest on excess reserves are crisis tools.

They should be, I agree.  However, that isn't the current policy unless you think we've been in a crisis for the past two decades.  Mandated negative interest rates on reserves as an economic stimulus was the most insane example. 

[bdunham7]

Full-reserve banking is basically paying for a safe-deposit box.

But if you limit the full-reserve requirement to actual demand deposits and thus explicitly differentiate between demand and time deposits, the whole thing becomes workable.  Right now I'm getting higher interest on my demand savings account (not even mentioning money markets) than I'd get on a 10-year treasury.  That's broken.  There's also a big spread between treasuries and retail FDIC-insured bank CDs when the CD actually has less overall risk. 

[nctnico]

Full-reserve banking is basically paying for a safe-deposit box.

But if you limit the full-reserve requirement to actual demand deposits and thus explicitly differentiate between demand and time deposits, the whole thing becomes workable.

But it would not be as profitable. In the end it is the customers wanting low banking costs that drive banks towards partial reserve banking.

Back in the old days it was even worse. Banks would sit on a money transfer for a couple of days and increase their cash position that way. As an upside you got a bank account for free. Nowadays bank transfers are near instant (even within the EU) but banks charge money for having an account. Heck, some even have a surcharge to cover the costs for mandatory background checks.

[Rick Law]

SVB ex-CEO was spotted in Hawaii, Greg Becker and his wife have escaped to their Maui townhouse worth $3.1 million source
Must be nice to cash in $3.6M of stock ($84M over the past 2 years) and sit on a beach.

That's the CEO game.

The unintended consequences of government action.  This is a reminder for us all why government "pain relief" may cause even more pain.

In the Clinton era, tax (rules on deductability when amount exceeded a certain magic numbers) was change to reduce pay-differential between fat-cat level senior executive salaries vs average worker salaries.  While the President can claim that he reduced the huge pay differential between senior exec and average employees, almost immediately senior exec's stock-based "incentive" ballooned to compensate for the salary drop.  That came with very negative side effects, short time stock prices become way too significant to the executives personally -- share prices matters when they cash-in their options or grants.

So while one may want the government to act to relief pains caused by the SVB collapse, the relief itself may end up being more painful.

[coppice]

I didn't know about Deutsche Bank. I thought the EU, like the UK, had put strict liquidity rules and 'financial challenge tests' in place [Edit: following 2008]. Credit Suisse on the other hand have had a somewhat chequered history, scandal wise, lost money for the past two years and aren't predicting profitability until 2024 (that's probably a maybe now). Saudi Bank have said that they won't inject any more money.

From a quick look it seems Deutsche Bank's position may have improved. The rating agencies considered them dodgy for a long time, but seem to have upgraded them a few months ago. Then again, the rating agencies are worth about as much as a campaign promise.

From the news today it seems my original comment about Deutsche Bank might have been more accurate one. For all the Europeans have done about liquidity requirements for their banks, a bank who's plays in derivatives markets go poorly can be in hock for staggering amounts that they can't fudge indefinitely.