The 2022-23 Economic Crisis Megathread

[Tamas]

Since I have been recommending channels, this guy's summary on SVB also worth watching: https://www.youtube.com/watch?v=GdfYnqyu7v8

He is "a hedge fund manager, a university professor and a former investment banker". Despite the deadpan humour he is pretty good and makes what seem well-researched and interesting videos.

[viper37]

It seems to me the focus on SVB's asset book is misplaced.  SVB may have had its problems but it seems pretty glaring that there was a big problem on the liability side, namely high concentration of uninsured deposits among very similar kinds of depositors.  Once the whispers trigger a run, all the risk management and hedges in the world can't save the bank.  To my mind talking about the hedges on the asset book in that context is like debating the merits of different kinds of body armor after the target has been vaporized by a direct artillery hit.

I haven't read much about this bank, but what I've read so far is as you said plus that they were extremely concentrated in treasury bonds, i.e. lack of diversification of their assets, somewhere above 60%, while other banks average 25-30%.

But since I have not read much about it, it could be that this was a very recent development.  Historically, they may have been more balanced.

Ultimately, no matter the bank, when everyone all at once wants their money back, there's not much a bank can't do.

[Tonitrus]

They need to make a good George Bailey speech. 

[Admiral Yi]

Apparently they successfully lobbied to defang the Dodd-Frank Act, which made them fall outside the scope of many controls.

Citizens United paying off again.

Is there any indication this defanging played any part whatsoever in their collapse?

If anything, if Joan's version is to be believed, the problem was caused by a regulatory reporting requirement, not the lack of one.

[grumbler]

The problem with SVB was, as I understand it, a decision to meet the letter of the law in such a way as to maximize profits but minimize stability.  By measuring their reserves in future US treasury bond values rather than current market values, they were able to technically meet the reserve requirements but had no hedge against a need to sell the bonds at market value rather than at maturity.

So, there was a clear failure of the regulations to account for institutions that didn't understand what their actual reserve needs were and at the same time were willing to constrain their size to avoid external auditors checking on their actual reserve needs (e.g. via stress tests).

[Tamas]

Credit Suisse is also being bailed out by its central bank.

At which point should we acknowledge that pretentions of a free market are no longer sustainable? I am not saying that standing idle while these banks collapse are the better decisions, I don't know nearly enough to judge that, but such a system where central banks prop up everything, making profit individual but risk collectivised, is at best, state capitalism.

[Josquius]

Privatise the profits, nationalise the losses, this is the law of the world.

[viper37]

Credit Suisse is also being bailed out by its central bank.

At which point should we acknowledge that pretentions of a free market are no longer sustainable? I am not saying that standing idle while these banks collapse are the better decisions, I don't know nearly enough to judge that, but such a system where central banks prop up everything, making profit individual but risk collectivised, is at best, state capitalism.

So far, we do not know that risk is collectivised in this situation.  Afaik, it was a liquidity crisis, i.e. not meeting short term needs.  The bank had long term assets. We'll see if they were still worth something for the government.

[grumbler]

There's never been a "free market" in modern banking.  It's simply not possible for potential investors to have full information about a bank's assets and liabilities sans a regulatory regime that forces banks to meet certain operating criteria and disclose a lot of information.  Regulation mean that the market is no longer "free."

This is true about a lot of elements of the overall economic market.  We are not moving away from a free market that never existed, we are adjusting the regulation of the market that exists.  SC being able to borrow money from the SNB doesn't mean that the debt of CS is being collectivized.  The SNB just becomes another creditor, and the net value of CS to its shareholders goes down by the amount borrowed.  If this eases a liquidity crisis, rather than just propping up a leaning corpse, it's a good move for the public at large.  If CS is fundamentally unsound, it isn't.

[Admiral Yi]

Privatise the profits, nationalise the losses, this is the law of the world.

SVB shareholders just got wiped out, erased.  That doesn't fit your Occupy slogan.

[HVC]

Privatise the profits, nationalise the losses, this is the law of the world.

SVB shareholders just got wiped out, erased.  That doesn't fit your Occupy slogan.

The board and upper management seemed to have done ok.  That's what I understand privatize the profits means.

[grumbler]

The board and upper management seemed to have done ok.  That's what I understand privatize the profits means.

I'm not sure what you mean.  How did they do "all right" in the takeover, given that their jobs disappeared?

[The Minsky Moment]

If anything, if Joan's version is to be believed, the problem was caused by a regulatory reporting requirement, not the lack of one.

That wasn't exactly the point I was trying to make.  It's true that disclosure requirements can cause problems for companies if there are losses or other issues.  But the alternative is a lot worse.

My reaction is mostly to the narrative that chalks the whole problem up to simple mismanagement at a single banks or small set of banks.  Not necessarily because it is wrong but because it misses the more important point.

the financial industry is not Lake Wobegon, not all bankers are above average. In thinking about the design and regulation of a financial system, one has to assume and take into account that there will be non-trivial numbers of incompetently run banks.  A system that depends for global solvency and stability on high levels of competence across the board is doomed to fail.

The flip side is that even well run banks can have losses from time-to-time.  And ANY BANK - no matter how well operated - is vulnerable to a depositor run.

[HVC]

The board and upper management seemed to have done ok.  That's what I understand privatize the profits means.

I'm not sure what you mean.  How did they do "all right" in the takeover, given that their jobs disappeared?

They did all right in their salaries and bonuses before the shit hit the fan. The phrase, again as I understand it, is upper management reaps the reward of higher risk knowing that any fallout will be covered by the public at large.

[The Minsky Moment]

This is true about a lot of elements of the overall economic market.  We are not moving away from a free market that never existed, we are adjusting the regulation of the market that exists.  SC being able to borrow money from the SNB doesn't mean that the debt of CS is being collectivized.  The SNB just becomes another creditor, and the net value of CS to its shareholders goes down by the amount borrowed.  If this eases a liquidity crisis, rather than just propping up a leaning corpse, it's a good move for the public at large.  If CS is fundamentally unsound, it isn't.

Acting as lender of last resort has been a core central banking function since the age of Walter Bagehot.