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Message
Great Idea To Stop These Bank Runs Going Forward
Posted on 4/29/23 at 5:24 pm
Posted on 4/29/23 at 5:24 pm
“Just as motorists are compelled to take out third-party car insurance to protect other road-users, so banks should be made to take out a certain amount of liquidity insurance in normal times so that they can access central bank provision of their liquidity needs in times of crisis,” he says. (Mervin King)
Required to take out liquidity insurance such that their liquid assets exceed deposits and other short-term liabilities, in return for guaranteed provision of central bank liquidity, banks would have to pre-assign enough collateral with the Federal Reserve to cover their liquidity requirements.
I know, I know it is probably too late for the current cycle. But I like the Idea.
LINK
Required to take out liquidity insurance such that their liquid assets exceed deposits and other short-term liabilities, in return for guaranteed provision of central bank liquidity, banks would have to pre-assign enough collateral with the Federal Reserve to cover their liquidity requirements.
I know, I know it is probably too late for the current cycle. But I like the Idea.
LINK
This post was edited on 4/30/23 at 8:58 am
9
Posted on 4/29/23 at 7:00 pm to Timeoday
I've got this other crazy idea. How about banks just maintain an acceptable level of liquidity and manage risk? If they want to ignore risk, then they'd better maintain a higher level of liquidity.
Posted on 4/29/23 at 8:31 pm to Timeoday
'liquidity Insurance'
Them insurance companies love new ways to suck excess liquidity from everyone
Them insurance companies love new ways to suck excess liquidity from everyone
Posted on 4/29/23 at 9:08 pm to Timeoday
Lloyds wouldn't take on that kind of risk without an unaffordable premium for the banks.
Posted on 4/29/23 at 10:43 pm to Timeoday
quote:
In other words, requiring liquidity insurance when their liquid assets exceed deposits and other short-term liabilities
That doesn’t even make sense.
Posted on 4/30/23 at 12:03 am to Timeoday
quote:
In other words, requiring liquidity insurance when their liquid assets exceed deposits and other short-term liabilities, in return for guaranteed provision of central bank liquidity, banks would have to pre-assign enough collateral with the Federal Reserve to cover their liquidity requirements.
I think you mean when their illiquid assets exceed deposits. If they had liquid assets, bank runs wouldn’t be an issue.
To your intended point, the end result of this would basically be how FDIC insurance is structured now.
Fractional reserve banking is what it is. Someone else will always have to guarantee the deposits if you’re looking to transfer risk.
Consider this: If the Feds didn’t guarantee deposits, would depositors be able to demand higher rates to compensate them for letting banks use their money, leading to higher rates paid on savings accounts and CDs?
Posted on 4/30/23 at 12:07 am to Timeoday
quote:
“Just as motorists are compelled to take out third-party car insurance to protect other road-users, so banks should be made to take out a certain amount of liquidity insurance in normal times so that they can access central bank provision of their liquidity needs in times of crisis,” he says. (Mervin King)
A better idea would be to address the operational risk of allowing bank runs to happen digitally.
In these recent cases, word spread virally and people were able to transfer insane amounts immediately. Every bank and FI should review their outgoing ACH limits to help prevent these from happening entirely remotely.
Posted on 4/30/23 at 12:10 am to Timeoday
THIS banking crisis was caused by the government, not the banks.
Posted on 4/30/23 at 12:32 am to Timeoday
What does F D I C stands for?
F = Federal
D = Deposit
I = Insurance
C = Corporation
So there is already a mechanism for insuring the losses, backed by the Federal Reserve, ie the Federal Government.
Member banks which are pretty much all US banks will pay premiums to this organization to insure account losses to 250k or more depending on account(s).
Now it is the responsibility of that organization to maintain that banks are keeping enough liquidity to sustain to withdrawals or be placed under receivership as was done with the bank failures this year.
So we don’t need another layer of regulation or government bureaucracy.
F = Federal
D = Deposit
I = Insurance
C = Corporation
So there is already a mechanism for insuring the losses, backed by the Federal Reserve, ie the Federal Government.
Member banks which are pretty much all US banks will pay premiums to this organization to insure account losses to 250k or more depending on account(s).
Now it is the responsibility of that organization to maintain that banks are keeping enough liquidity to sustain to withdrawals or be placed under receivership as was done with the bank failures this year.
So we don’t need another layer of regulation or government bureaucracy.
This post was edited on 4/30/23 at 6:15 am
Posted on 4/30/23 at 9:09 am to Timeoday
Also, require all bank executives to put all their own wealth on the line. If bank collapses, they have everything taken away to pay customers.
That will stop the incredibly stupid investments that SVB made.
Europe should do the same. Credit Suisse made some really bad bets, now UBS holds the bags.
That will stop the incredibly stupid investments that SVB made.
Europe should do the same. Credit Suisse made some really bad bets, now UBS holds the bags.
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