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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 9:20 pm to Diamondawg
The idea is that of an English Lord.
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 12:13 am to TerryDawg03
quote:
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.
It is a felony to encourage a run on a bank. However, we are in a period when our government does not enforce laws it chooses to not enforce, so what good would your proposal do?
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 1:19 am to Tarps99
Remember the TikTok that blew up last week where a dude made half of his lease payments before he realized he wouldn't own the car at the end of the lease?
That's what we're dealing with. Irrational actors that don't take their own duty to protect themselves and their finances seriously in any way, shape or manner. They withdraw their $15k out of fear, even though they're fully protected in FDIC insured institutions. However, the flip side is that maybe they paid attention to how long it takes the State Department to renew passports, and figured they wouldn't get their money out for years. They could be more rational than I assumed. (IRS refunds super slow, but taking the money from you is a 72 hour process, etc.)
That's what we're dealing with. Irrational actors that don't take their own duty to protect themselves and their finances seriously in any way, shape or manner. They withdraw their $15k out of fear, even though they're fully protected in FDIC insured institutions. However, the flip side is that maybe they paid attention to how long it takes the State Department to renew passports, and figured they wouldn't get their money out for years. They could be more rational than I assumed. (IRS refunds super slow, but taking the money from you is a 72 hour process, etc.)
Posted on 4/30/23 at 2:02 am to Tarps99
quote:
So there is already a mechanism for insuring the losses, backed by the Federal Reserve, ie the Federal Government.
There is not one bank in the US that can sustain a "bank run". Not one.
Deposits are liabilities to the bank. They must invest those funds in order to remain solvent. The unique issue that caused this problem was that they had an unusually high percentage of the deposits that would not be insured (over the 250k limit) and they had invested with the strategy of low interest rates which the fed had maintained for a very long period of time. When the fed begain raisin the rates rapidly, their strategies had become outdated and they did not have the liquidity needed. Then the run happened, and there was nothing they could do at that point.
Posted on 4/30/23 at 6:35 am to HorseShoeHenry
quote:
THIS banking crisis was caused by the government, not the banks.
Exactly! Remember the crash of 2008? Banks made massive amounts of home loans because our government forced them too. When the foreclosures started rolling in, everybody wanted to point the blame finger at the banks, instead of the true culprit. CONGRESS!
Posted on 4/30/23 at 8:58 am to HorseShoeHenry
quote:
When the fed begain raisin the rates rapidly, their strategies had become outdated and they did not have the liquidity needed.
Was their inability of changing strategies quick enough not deserving of some blame, leading to not having the liquidity needed?
Instead of having a strategy team focused on changing with the tide, they were focused on ESG Woke stuff.
We really have a problem with the Govt forcing traditional institutions of our capitalistic foundation to focus on stuff that don't mesh. Banks, stock market, etc arent focusing on what we all have known and been taught and it's throwing a wrench inti the spokes.
This post was edited on 4/30/23 at 9:00 am
Posted on 4/30/23 at 9:06 am to Tarps99
Don't worry Mr. Depositor. We have the FDIC, which keeps a fractioned reserve of .0000000014% of total deposits to protect us from a 100% run. You see, we will get the US Treasury, you know Ms. Yellen, to just print money if we have too.
Just like a newly formed, but growing, insurance company (which the FDIC is not) with just enough reserves to meet requirements getting nailed and losing a lawsuit 3X their reserve capital. Don't worry, by the time we fund the loss our premium income will comfortably afford it.
The Fed has frigged us once again!!
Just like a newly formed, but growing, insurance company (which the FDIC is not) with just enough reserves to meet requirements getting nailed and losing a lawsuit 3X their reserve capital. Don't worry, by the time we fund the loss our premium income will comfortably afford it.
The Fed has frigged us once again!!
This post was edited on 4/30/23 at 9:10 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.
Posted on 4/30/23 at 9:13 am to GhostOfFreedom
Yep, before the Federal Reserves, bank executives and shareholders lost when their bank lost.
Now, when the bank loses, it is either swallowed up by a bigger bank (one usually connected to the original Jeckyll Island group) or
the US Taxpayers foot the bill, especially when the "bank is too big to fail". Now that is one hell of a shift.
Now, when the bank loses, it is either swallowed up by a bigger bank (one usually connected to the original Jeckyll Island group) or
the US Taxpayers foot the bill, especially when the "bank is too big to fail". Now that is one hell of a shift.
Posted on 4/30/23 at 11:30 am to Timeoday
quote:
Yep, before the Federal Reserves, bank executives and shareholders lost when their bank lost.
Now, when the bank loses, it is either swallowed up by a bigger bank (one usually connected to the original Jeckyll Island group) or
the US Taxpayers foot the bill, especially when the "bank is too big to fail". Now that is one hell of a shift.
The investors / shareholders of SVB lost everything, they were not bailed out.
Posted on 4/30/23 at 11:41 am to HorseShoeHenry
quote:
The investors / shareholders of SVB lost everything, they were not bailed out.
They lost only their share value. They did not lose cash deposits. Nor will any other asset they have be seized to help pay for the SVP losses.
You want correct bank activity, then make it personal for the banker(s)!! Get the gooooooooooooooberment and the Fed out of it. If the bank needs liquidity, it can pay a premium for it.
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