Banks Failing: Is It 2008 Again?

[Abey]

ELI5 please. What's mark, and mark to market?

https://www.investopedia.com/terms/m/marktomarket.asp TL:DR real actual value

[Ver hut gazugt]

One part that bothers me. Is that many of these “depositors” were not depositors rather they had loans from the bank  and were required to keep the non spent cash at the bank. So essentially it’s a loan not a deposit. So why should we insure a loan?. Some sort of haircut should have happened.

[aygart]

One part that bothers me. Is that many of these “depositors” were not depositors rather they had loans from the bank  and were required to keep the non spent cash at the bank. So essentially it’s a loan not a deposit. So why should we insure a loan?. Some sort of haircut should have happened.

Why did the source of cash make a difference?

[CountValentine]

One part that bothers me. Is that many of these “depositors” were not depositors rather they had loans from the bank  and were required to keep the non spent cash at the bank. So essentially it’s a loan not a deposit. So why should we insure a loan?. Some sort of haircut should have happened.

Let me see if I have this right. You loan me 1mm. You require me to let you hold that 1mm until I use it.
So, you want to keep my 1mm and still have me payoff the 1mm loan?

I have a better idea. Give me my 1mm on deposit and you can keep the 1mm loan and we will call it even. 

[ExGingi]

Let me see if I have this right. You loan me 1mm. You require me to let you hold that 1mm until I use it.
So, you want to keep my 1mm and still have me payoff the 1mm loan?

I have a better idea. Give me my 1mm on deposit and you can keep the 1mm loan and we will call it even. 

Not exactly. But it's not uncommon to see banks say we will give you a $20MM loan against a variety of collateral but we want to see you bank with us and keep at least $1MM of cash on hand. (I pulled the numbers out of thin air, but that's a concept I have seen).

[Ver hut gazugt]

Why did the source of cash make a difference?

if the loan needs to stay in the bank then any withdrawal is a new loan. Why do we need to fully subsides a new loan that’s loosing money?

[Ver hut gazugt]

Let me see if I have this right. You loan me 1mm. You require me to let you hold that 1mm until I use it.
So, you want to keep my 1mm and still have me payoff the 1mm loan?

I have a better idea. Give me my 1mm on deposit and you can keep the 1mm loan and we will call it even. 

you can modify the loan.

[CountValentine]

Not exactly. But it's not uncommon to see banks say we will give you a $20MM loan against a variety of collateral but we want to see you bank with us and keep at least $1MM of cash on hand. (I pulled the numbers out of thin air, but that's a concept I have seen).

I have no issue with that. They are saying we are going to keep your collateral, but you still owe the full amount of the loan.

[CountValentine]

you can modify the loan.

Take the money I had in my account and apply it to the loan, fair?

[Ver hut gazugt]

Take the money I had in my account and apply it to the loan, fair?

at least to some degree. Why is it not fair.

[CountValentine]

at least to some degree. Why is it not fair.

Maybe I am not understanding how this works.
I have 1mm I owe them on a loan.
I have 1mm in savings they hold.
They go belly up.
FDIC says we are only insuring 250k max.
What happens now?

[haltkup]

MTM comes with its own set of issues, it does not necessarily solve the issue, only that SBV would have been insolvent months before. many financial institutions would be insolvent today if MTM is instituted. These investments are not risky, money good and will amortize back as they come closer to maturity. There is a reason the feds new banking fund program includes risk free assets  as collateral held at par. The only issue is if unrealized losses coincides with a liquidity event and bank is forced to sell. therefore stronger liquidity requirements are needed.

[Abey]

ill say it 1 more time MTM comes with its own set of issues, it does not necessarily solve the issue, only that SBV would have been insolvent months before. many financial institutions would be insolvent today if MTM is instituted. These investments are not risky, money good and will amortize back as they come closer to maturity. There is a reason the feds new banking fund program includes risk free assets  as collateral held at par. The only issue is if unrealized losses coincides with a liquidity event and bank is forced to sell. therefore stronger liquidity requirements are needed.

I strongly disagree, list the issues and lets discuss. Not all financial institutions are expected to show up with the cash as needed, Banks are. MTM can be done in a responsible way to shield from sudden volatility i suggested a monthly mark but I'm sure there are other ways. We cannot predict liquidity requirements for multiple conflating events and depositor bases etc. as we just witnessed therefore adding liquidity req wont necessarily predict the next crunch . Besides not all assets are risk free assets, there were many bad ones that were marked at full value. One more thing, time = Money and this fed action is not without consequences and def not a plan for the future.

[aygart]

if the loan needs to stay in the bank then any withdrawal is a new loan. Why do we need to fully subsides a new loan that’s loosing money?

How so? They are paying interest on the full amount and still owe that full amount to whichever entity ends up owning the debt?

[haltkup]

A 100 bond paying 5% you get 105 at year end, sudden shift to 10% makes the value today 95 but still getting 105 at YE. if rates drop to 0 value is today 105 but at YE im getting 105 (and you cant sell today because nowhere to invest for better rate), at the end of year all 3 scenarios are the same no matter the rate... now my balance sheet will look different in all scenarios which makes it almost impossible to manage.
why are you assuming that todays rate is the true value of the bond when markets are fluid liquidity can dry up causing rates to move all over the place in secondary market(what it will be priced today) while you know that your counterparty is money good and you will get full value when bond matures (example is the 2yr rate 5% like last week or 4% like yesterday),
So you are advocating creating this FAKE volatility because the market is schizophrenic which can lead to more companies not being able to remain solvent or rather sure up stress tests and liquidity requirements for times of Stress.
I strongly disagree that its impossible to predict liquidity needs, also there are times when even after stress tests companies will go under.

[ExGingi]

if rates drop to 0 value is today 105 but at YE im getting 105 (and you cant sell today because nowhere to invest for better rate)


why are you assuming that todays rate is the true value of the bond when markets are fluid liquidity can dry up causing rates to move all over the place in secondary market(what it will be priced today)

If rates drop to 0 you CAN sell today (though you'll probably get a tad less than 105, unless the market believes rates are going negative). The fact that you won't get more anywhere else is of no consequence. If you received your full value now, you have the cash available now.

The market for US treasuries is one of the most liquid markets in the world.

[Joe4007]

https://twitter.com/LynAldenContact/status/1635377627212177408

[haltkup]

If rates drop to 0 you CAN sell today (though you'll probably get a tad less than 105, unless the market believes rates are going negative). The fact that you won't get more anywhere else is of no consequence. If you received your full value now, you have the cash available now.

The market for US treasuries is one of the most liquid markets in the world.

thanks for clarifying, it was more of an illustration. Regarding liquidity, are you sure that treasuries are that liquid? If market had enough liquidity the 2yrs would not move 100bps in a span of 30 hours. This is the mistake markets make assuming teeing of liquidity in assets without realizing the cost of liquidity.

[Moshe123]

https://twitter.com/LynAldenContact/status/1635377627212177408

And then everyone deposits there because it's the least risky, and from where will you get a mortgage?

[Abey]

A 100 bond paying 5% you get 105 at year end, sudden shift to 10% makes the value today 95 but still getting 105 at YE. if rates drop to 0 value is today 105 but at YE im getting 105 (and you cant sell today because nowhere to invest for better rate), at the end of year all 3 scenarios are the same no matter the rate... now my balance sheet will look different in all scenarios which makes it almost impossible to manage.
why are you assuming that todays rate is the true value of the bond when markets are fluid liquidity can dry up causing rates to move all over the place in secondary market(what it will be priced today) while you know that your counterparty is money good and you will get full value when bond matures (example is the 2yr rate 5% like last week or 4% like yesterday),
So you are advocating creating this FAKE volatility because the market is schizophrenic which can lead to more companies not being able to remain solvent or rather sure up stress tests and liquidity requirements for times of Stress.
I strongly disagree that its impossible to predict liquidity needs, also there are times when even after stress tests companies will go under.

1. you are conveniently leaving off the far riskier assets which were def not worth their book value although that wasn’t what caused the crash so let’s move on.

2.I am not assuming, you just saw how they weren’t able to get more and there’s a reason why, Time = Money. I get your point that liquid doesn’t equal value but it is not completely unrelated either and mark their value would shore up balance sheet until that time risk passes and real value realized.

3. I gave suggestion to protect from sudden shifts of volatility but it is clear to me that should the value go down for an extended period of time you should be forced to report that and shore up you balance sheet.

Your ability to predict liquidity needs are only informed by past history and I don’t see how you predict the next crunch, it’s not about % it’s about predicting a million factors that will force you to show up with cash

I don’t see how you say protect from volatility yet all it does is roll the ball further down until it turns into an avalanche.