[safog]

I don't think it's that simple.

Banks bought up a bunch of US treasuries at close to nothing interest rates during the last two years. This is where a bank typically parks their cash reserves because the audit requirements require them to hold a certain amount of cash and cash basically == treasuries.

Now they're holding a bunch of treasuries that won't mature for a while. If they simply sold them they'd have to book a bunch of losses (because as rates rose the price of treasurys falls). They don't do that and instead hope holding them to maturity will be fine to service their existing commitments (i.e., pay interest on deposits).

The problem is that they bought treasurys that yield close to nothing and they have to make a profit on those and pay out an interest to customers, so they take their cut from the 2% and pay the customers a 0.03% interest on deposits or whatever.

The customer sees that their savings account is yielding 0% and they could just go park their money in a money market account that yields ~5% (thanks to overnight rates being that high) and moves their money from their bank to a brokerage account.

Bank deposits fall resulting in a standard bank run. Sure well run banks maybe have their risk profile in a better place (didn't actually go out and buy a bunch of 30yr treasurys like SVB did and instead got more short duration stuff) but they can't just pivot to instantly increasing the interest rates to match the money market account and so will continue to bleed deposits.

[dragontamer]

> Banks bought up a bunch of US treasuries at close to nothing interest rates during the last two years. This is where a bank typically parks their cash reserves because the audit requirements require them to hold a certain amount of cash and cash basically == treasuries.

You're ignoring Fed Repos. Aka: overnight deposits at the Federal Reserve. Which counts as cash and today is returning 5% APY.

Today, a bank will very strongly consider Fed Repos, because 5% is a much better rate than the rates from 2 years ago (aka: 0% to 0.25%)

---------

This also means that a 10Y bond you bought at like 2% or whatever is making less than Fed Repo overnight deposits today. So banks who are on 5Y, 10Y, or 30Y treasuries are in practice feeling like they've lost a lot of money. (And in SIVB or FRC's case, collapsed in part because of this mismatch, combined with depositor flight).

[fnordpiglet]

They could have hedged their rates risk with swaps and other instruments. They didn’t do that extremely basic risk management for a bank because they didn’t want to reduce deposit interest payments or reduce profits. They essentially left unhedged a tail risk that was fairly likely (interest rates wouldn’t stay in zero range forever and mean reversion will set in at some point), and predictably it ate their lunch. The confounding factor is they probably assumed rates would rise gradually. The Feds decision to rapidly raise rates without checking rates exposure across the banking and asset management world speaks to gross incompetence. SVB and others were relatively transparent about how poorly they were managing rates risk and even basic due diligence by any of the multitude of regulators for a bank would have revealed their risk exposure to rates and the jeopardy the feds whip saw policy put them in. The fact they didn’t check to see what stress sudden and rapid rate increases would have on banks outside the too big to fail class is unforgivable.

Jerome Powell is a polisci major. That’s a great degree for getting drunk daily and still graduating. He’s not the brightest bulb that has sat in his seat. Yellen at least was a PhD in economics from Yale who was famous for her meticulous attention to detail. Notice when the regional banks blew up the treasury and associated executive functions stepped in and shored up the Feds mess, and the fed just stood there saying “oops!” The fact he was picked by DJT, the Jerome Powell’s primary qualifications (given the cabinet selection process) were likely looking the part and flattering the boss.

[safog]

Why don't larger banks (who presumably have hedged properly) not pay a real interest on deposits at this point? I don't think it's just greed.

The current bank of america / chase interest rate on savings accounts is 0.01%. No rational buyer should accept that when a money market is yielding 5%. People are moving deposits to money markets. That should force the banks to bump up rates.

Maybe they lose more by bumping up rates than they do by keeping them the same and losing deposits but I struggle to see that.

[fnordpiglet]

Because they don’t have to. You deposit there because they’re too big to fail or have such an excellent retail experience or are so brand saturated you don’t make a choice. They are sitting on too much deposits as is, but even without that fact it is purely greed - or, to use another phrasing, it’s the right business decision for maximizing profits. They literally have no reason to improve returns on deposits.

Goldman is trying to buy their way into retail banking and offer very competitive rates. Other more established retail banks are leveraging their size and reputation to maximize profits as they don’t see any upside to increasing rates. They don’t need more deposits, and they won’t lose a meaningful deposit base.

[safog]

> They are sitting on too much deposits as is, but even without that fact it is purely greed - or, to use another phrasing, it’s the right business decision for maximizing profits. They literally have no reason to improve returns on deposits.

Can I look up deposit volume per bank somewhere? I assume even banks will care at some point. 1% probably not, 10% probably yes?

[fnordpiglet]

https://www.mx.com/blog/biggest-us-banks-by-deposits/

[fuoqi]

Where do you think your money go when you buy a share in MMF? They do not disappear, instead they get added to bank deposit of one who sold you the share. It will be different only if the bonds which back your MMF are sold by the Treasury or the Fed.

[s1artibartfast]

The US treasury sold ~$1 Trillion in IOUs to private individuals in Q1. While Individuals trade back and forth, this represents a net outflow.

https://home.treasury.gov/news/press-releases/jy1231

[fuoqi]

The treasure would've sold them regardless of your investment into a MMF, just for a slightly higher price. So counterintuitively enough, by investing into a MMF your actually reduce amount of deposits lost by banks.

[s1artibartfast]

A bank buying investments assets doesnt change the reported deposits. It isn't the net sum of (customer account balance - investments the bank makes/purchases). Deposits are just the first.

[safog]

I'm not sure of the mechanics, I know for a fact that most people are moving $ to brokerages and parking it in something like VMFXX (or equivalents in Fidelity etc.)

Do you know what the mechanics are when you put some money in to VMFXX? Who does vanguard get the treasuries from?

[projektfu]

Money market funds expand and contract their holdings to maintain an NAV of 1.00. The money will go to buy treasuries, commercial paper, repo, etc.

[danesparza]

In any case there are no mentions of bonds in this report. It's irresponsible for the FDIC to not even mention this in this report. A huge part of the banking problem is not being addressed in this report.