Yup. To be clear, it wasn’t like the investors were buying a bond and then also handing over interest. Instead, they would buy a bond at more than 100 and only get back 100. There are storage costs associated with keeping cash, and as long as the negative interest was less than that, then it made sense.
The key word there is ‘friends’. I don’t charge interest on small loans to friends either. Notice I said that when you can’t charge interest, lending becomes more limited to family members, tribe, etc? That’s because in that situation you are taking a loss, but you are doing it to help someone you care about.
Now imagine a stranger comes to you and says, “I need $1,000. Please loan it to me for five years at no interest.” If you do so, you will lose money. If you could have invested that money in something that earns you a positive return, then in five years your $1,000 investment will be worth far more than $1,000. But if you loan it out for zero interest, it won’t. And by the way, that ‘investment’ could mean just buying better tools so you can work faster and make more money, or an investment in education so that you make more money later, or whatever.
Spending power today is always worth more than the same spending power in the future. This is not a debatable point - it’s a foundation of the economic system, and of reality.
The other reason you need to charge something to borrow is that not all loans are paid back. Therefore, you either need to charge additional interest to cover the risk, or you need to charge high fees on loans for the same reason. This is separate from the time-value of money, which is why high risk loans charge higher interest than secured loans or loans to people with good credit.
You are taking a ‘financial loss’. Sure, you get something in return, which is why you lend to friends.
Now lend that money to a complete stranger, who will vanish once they pay you back. Are you still going to do it? The stranger could go right out and make the same investments with your money that you would have made. If it results in a 10% per year return for them, in five years you get back $1,000, but the stranger walks away with $645. If you would have invested the $1,000 yourself, you’d have $1645 instead of $1,000. So why are you just giving your money away?
If I understand these terms (big if), I enjoyed this with my students loans. I managed to get them fixed at a rate which was between 2 and 3 percent at a period where inflation averaged just a little more than that. So over decades, the real-dollar value of what I paid back was slightly less than the real-dollar value of what I borrowed. (The dollar amount of the loans was high, so working this out made me feel better.)
I’m not sure what you two are arguing about. If you want to make personal loans to friends and family that’s your business. Well…not “business” technically. You’re just doing favors out of goodwill. Which is fine.
But if you were running a bank, you would expect to get paid back interest for lending out money because that’s how banks make money. They don’t do it out of goodwill.
Another big difference between a bank and “some dude lending money to his friends” is that you are lending your own money, not money different friends deposited with you for safe keeping.
I’m also assuming you didn’t buy a bunch of bonds with that money in the form of Treasuries and mortgage backed securities, then have the value drop as interest rates rose, while those friends who deposited large sums of money with you (in excess of what the FDIC insures) suddenly want to take all their money out but you have nothing to give them because the value of your bond portfolio no longer covers your liabilities in the form of deposits.
Anyhow, this seems mostly like an SVB problem (and Signature Bank for different reasons), not a systemic bank failure like the 2008 crisis.
I now see that, in #145, I made an error in my reply to you.
In #145, I said that when an FDIC-insured bank fails, you “are almost certain to be fully protected” to the full deposit amount, even if above FDIC limits. I now see that while full protection is common when a bank fails, there have been many times when deposits, above the limit, were lost. This article gives an idea of the scale of the risk, and explains how to get full protection:
As noted in my first link of this post, the long-term success of the Depositors Insurance Fund suggests that the talk of moral hazard, and of incentivizing people like yourself to continually switch deposits to the strongest banks, may be mistaken.
It seems like the market thinks this is probably over for the time being.
There are still specific concerns about First Republic, wild gyrations in that stock. It closed yesterday at $31, opened this morning at $20, now back up at $35.
2 year rates are still almost 1% lower than last week. The expectation is now that we’re near the peak of the rate rises, with at most one more 25bp hike then significant easing later in the year. The feeling is a combination of the idea that the Fed “can not” keep hiking because of the harm to some poorly-managed bank balance sheets, combined with an element of “will not need” to keep hiking because loss of confidence in the banking system would be inherently deflationary. Inflation numbers over the next few months are going to be even more intensely scrutinized, if they stay sticky high the Fed has a tightrope to navigate.
I might hope for a small silver lining here, that people will now have that much less tolerance for the fuckwits in Congress making the situation even more difficult for the Fed by playing chicken with the debt ceiling over summer. But as always, any expectation of responsible governance is likely to be disappointed.
Shareholders all but wiped out (UBS paid ~0.50 per share), and $17 billion face value AT1 bonds written down, investors in those don’t even get the token residual value given to shareholders. This was somewhat against expectations, but within the powers of the Swiss financial authorities. These almost-like-equity bonds were introduced after the 2008 crisis to shore up bank balance sheets. It doesn’t seem unreasonable that the AT1 bond investors should take the hit under these circumstances, but this may have an impact on the wider AT1 market.
At face value, it looks to me like a pretty good deal for UBS. They get Credit Suisse for a token amount, with $17 billion less debt, and a massive liquidity guarantee from the SNB. There will be a lot to sort through, but there are some solid profitable parts of the Credit Suisse business. The default market reaction here would be for UBS to open down on Monday because of the unknowns, but I think it will not lose a lot. The broader market will prefer this outcome to continued uncertainty or nationalization.
I appreciate this perspective on it. I don’t have any insight. It could make sense that UBS is taking over CS though since they’re uhmm 2 of I think 9 major banks in the world. I forget what they call it, like ‘the Bulge Bracket?’. Maybe their Bulge feeds out to all the other firms. Maybe it’s good that UBS HQ’s in Switzerland also to make govt regulation easy.
It’s actually assuring to read about these banks a little on the net. I’m not in financial services but it’s good to know a little about it. People in my life call this trivial but, I care a little.