Ironically, the (former) CEO of SVB was one of the people pushing for this. As was Barney Frank, who is on the board of Signature.
In addition to pushing for and getting lower capital, liquidity, and oversight rules, they also put billions of treasuries and agency securities into their hold to maturity book instead of their available for sale book.
Most banks put those into the AFS book, since they are easily valued. The HtM book is usually reserved to loans that the bank has issued, which are very difficult or impossible to value.
The result was a book of business that was losing value (due to rising rates), but those losses were completely hidden. The HtM book’s gains and losses are hidden unless there is a default. AFS books have gains and losses flow through income, so losses will affect capital.
Had SVB put those assets into their AFS book, the need to raise capital would have been evident as soon as rates started to rise, rather than at the last second, when depositors started pulling their money out.
The other thing they did was encourage (or require?) that their borrowers hold their money at SVB, which further concentrated the depositor base. You don’t want all your depositors in the same business or likely to need cash at the same time. You want them to be highly diverse.
Anyway, those were really the reasons why the bank failed, not because they believed in the powers that be when they said inflation was transitory. All banks invest in long treasuries and agencies, but they normally don’t hide the losses, so they raise capital as needed, rather than when it’s too late.
Interesting. Would this have come out if they had to do a stress test like larger banks did?
Well, then, I would like to hear how your ideal banking system works. A bank takes my $100 and, since you don’t like fractional reserves, has to keep that hundred dollars in the vault along with every other customer of that bank, large and small, so that it’s guaranteed we’ll get our money back out when we want it.
Where then, does the bank get the money for paying the rent and utilities on the building where the vault is, buying the vault itself, and the salary of the teller behind the counter who took my money and recorded it so they knew they had it?
Let’s not even talk about dividends for the shareholders, because I don’t care about them, or interest to me, because I haven’t gotten anything significant in yeas anyway.
Is some munificent soul going to give them money? “Here, take this and use it however you see fit. No, no, no, don’t put it in an account for me. If you do, AmartAleq will insist it all goes into the vault because he hates fractional reserves.”
I’m not that close to the stress testing stuff, but I imagine so. Those stress tests are pretty severe scenarios.
The bank charges you a service fee of $1 per year to keep your $99 safe. If you write a $20 check they deduct $21 from your account.
Easy peasy.
Well, and they had no head of risk management for almost a year, and the one they got seems incompetent. There’s that too.
Credit unions use fractional reserve banking. When you keep balances under the FDIC limit, you’re still using fractional reserve banking.
Criticizing fractional reserve banking is dumb. It’s like criticizing fire insurance because it won’t work if the company spends the premiums on hookers and blow, or if every single policyholder files a claim on the same day.
I suspect your misapprehension is due to the fact fractional-reserve banking depends on regulations existing and being followed, and that there are certain factions who are constantly ignoring regulations or get themselves exempted from the controls. It’s important to understand that those same people would still be practicing FRB it were outlawed. They would skirt the law and re-invent it.
Because the fact is that money is made, and society is progressed, by allowing some people to use money that others aren’t using. It’s financially advantageous and it’s morally right, and our duty is to regulate it and do it in a responsible way. Nobody is better off if banking regressed back to 18th-century practices.
This is a joke, right?
I think it was a joke, but there’s a serious underlying point. A consequence of implementing stricter regulation of banking (boring banks, not necessarily a full reserve system) might well mean a return of fees for checking accounts and business accounts. I think this is desirable. It obviously costs money for banks to provide this service, and I don’t think it’s a great idea for banks to be trying to attract deposits with “free” services that can only be paid for by putting those deposits at too much risk.
This is how a non-lending bank would HAVE to work, unless it is supported by the taxpayer. If they can’t lend your money and earn interest, they have to defray their costs somehow. They are more akin to a safekeeping service than what we recognize as a bank.
In ancient times this would be a gold depository where your gold is fungible but the depository has to keep gold on hand to immediately satisfy demands from 100% of all customers for 100% of their deposits.
So no, not a joke. If it appears absurd it’s because there hasn’t been a bank operating in this way for hundreds of years.
ok, I think I’d have found your post easier to understand if, instead of ending it with “easy peasy”, you had said “and this is bad”.
I grew up and studied Finance in a country where banks operated without interest, either paying or charging. Many still do. They do lend money, but on a profit sharing basis. Still fractional reserve banking. In fact many of my classmates run banks that do not charge or give interest.
My concept of how banking must work might be broader than most.
I also studied Economics where Communism was studied as a reasonable alternative to Capitalism or Mixed Economy. Think of taking a month long module on “Price Discovery in the Closed Economy”. When I came to the US for grad school one of the things that shocked me was that my classmates and faculty accepted laissez faire as a dogmatic starting position.
I wouldn’t dispute that alternatives to fractional reserve banking have been modeled, but you would probably agree that none of those work without also modeling some alternative method of covering expenses. i.e. when I see an example like this:
Taken naïvely, the mathematical reality here is that this is worse than a 1% negative interest rate, as it would be guaranteed to consume your entire principal in 100 years. Moreover it’s quite regressive as it would harm smaller depositors disproportionate to large depositors. So it doesn’t really make sense unless it’s accompanied by a theory that explains the benefit (i.e. perhaps a higher social imperative to spend instead of hoard).
Given your background I assume you have an additional explanatory theory in mind that you haven’t stated. However bear in mind the current thread of conversation is about doing away with fractional reserve banking, and for some reason we’re thread-banned from talking about politics in a thread about policy, so there’s an apparent obstacle to stating your broader point.
No, because any proposal for full reserve banking would only apply to call (demand) deposits that in principle are used only for working capital - personal checking accounts or business operations accounts.
Investments would be time deposits.
With the current system, the distinction is not strict between the two, many savings accounts allow instant withdrawal.
Were these banks that operated what is called “Islamic Banking”?
Yes. Islamic banking is an umbrella term but the most prominent feature is “interest-free banking”
How much of that is because interest will break an economy that isn’t based on a currency that can handle inflation?
If I loan you $10, and expect $11 back, that $1 needs to come from somewhere. In the act of making a loan with interest, you have created more debt than there was money. For a single loan, that isn’t that big a deal, but if you keep making loans and collecting interest, and there is no increase in the money supply, you do get to a point where there’s more debt than there is money to pay it.
Seems it’s a practice that works great for the lender, but at a certain point, it crashes the whole system.
Rather less than on the specific statements about lending for interest (Riba - Wikipedia) in the Qur’an, and the understanding of inflation, interest, etc. at the time that text was written.
My point was at to why it may have been Riba. Just as it doesn’t take understanding of diseases to see that people get sick from eating pork, it doesn’t take advanced fiscal knowledge to see your economy crash every few decades, and see that the reason that it collapsed was because no one could make the debt payments demanded by the creditors.
I find it useful to look into the reasons why religious rules were created, to see if they are still applicable today. In a fiscal system like ours, where money is created by the issuance of debt, such a prohibition is not necessary.
Not to say that there are not a million other prohibitions (regulations) that are needed to keep our economy from collapsing, but I do think that the prohibition on interest is no longer relevant to today’s economies.
You can have a bank that doesn’t charge interest in today’s environment, but if all banks were like that, the economy would have a lot of difficulties.