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by complex_exp
1261 days ago
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> Banks work a bit differently, btw, they should also have more $ assets than liabilities, but there's generally no direct 1:1 link as described above. The total difference between assets and liabilities is the common stock (equity). This also shows why it's a very bad thing when the stock of a bank goes to zero, it means some liability will not be covered and thus the bank can be considered bankrupt. I'm simplifying here. From this point we can take a history tour to the 2008 meltdown, when we had this situation everywhere: bank A would short the common stock bank B because bank A had a lot of assets in bank B (which show up in bank B as liabilities). Bank B did the same thing to bank A for the same reasons. This is not as stupid as it sounds, because banks are not the only players in capital markets, using those shorts they essentially spread the default risk all over the equity markets. While this whole clusterfuck of nobody-trusts-nobody is going on the SEC comes out all of a sudden and bans the short sale of bank stocks, because shorting is evil or something. Imagine how much that made things worse after the only way to hedge entire banks going under was suddenly removed. |
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