I can't count the number of economists, analysts or other experts stressing how much better banks are capitaliczed now compared to before the GFC. "Total capital buffer in the U.S. banking system: $2.2 trillion. Total unrealized losses in the system, as calculated in a pair of recent academic papers: between $1.7 trillion and $2 trillion. In other words, if banks were suddenly forced to liquidate their bond and loan portfolios, the losses would erase between 77 percent and 91 percent of their combined capital cushion. It follows that large numbers of banks are terrifyingly fragile." https://www.washingtonpost.com/opin...er&utm_medium=social&utm_campaign=wp_opinions
Yes this seems reasonable as profit margins. It only matters how the losses are distributed among the too big too fail banks and institutes.
It always bothered me when economists tried to convince everyone how reserve ratios around 10% could possibly be sufficient in times of stress. The US Fed even lowered the reserve ratio during covid to 0%. 10% proves sufficient under the best of circumstances, but when the shit hits the fan this is really begging for trouble.
But one thing I don't understand is WHY do they all of sudden need to liquidate? Just to meet the depositors' demand to withdraw their funds? But what are the depositors going to do with the money that they withdrew from the banks? To put them under their mattress or in the freezer and make themselves vulnerable to a home robbery? LOL People are just trying to be Michael Burry to somehow create this next "Big Short" now. What Michael Burry did was take advantage of a market anomaly created by fraud and cover-up; basically he shorted a bigger scale "Enron". In this case, there is no fraud, no "Enron", what is happening to the banks is very typical to anybody who invested in long-term fixed-income instruments. I invested in long-term deposits just before the interest rate was increased so now I am locked in much lower rates than what I could've earned if I had invested now so am I all of sudden bankrupt? That I need to go to my parents for a bailout?? Of course not and neither are the banks. As a matter of fact, rate rises actually increase banks' profitability because an increase in interest rate would increase the banks' deposit rate which would give banks more money to invest in more short-term instruments that are more sensitive to interest rates and make more profit. https://www.investopedia.com/ask/an...anges-affect-profitability-banking-sector.asp And even from the long-term bond holdings, the banks are still collecting coupon payments and earning money. So sorry to burst your bubble, this is not the "Big Short". No Black Swan for you. You are gonna have to find volatility somewhere else.
I am not saying we are in a repeat of the GFC. The losses are real as we witnessed last week. When depositors want their money, it is not there. That is real. You cannot tell depositors to wait until maturity. The money goes to too big to fail banks. That is what played out last week and will continue tomorrow when Credit Suisse takes center stage.
The losses were created from SVB needing to sell the bond portfolio in order to satisfy the withdrawing demand. Otherwise there are no losses except on books. But even for those withdrawal demands, they were confined to specific banks that like I mentioned many times before,were relatively undiversified in their businesses and were undertaking activities in sectors that were having trouble like the crypto industry or slowing down like the IT industry. That's not what characteristics of the banking industry in general. People are not withdrawing money; instead people are depositing more money to the larger banks like you said to take advantage of the higher interest rates and that actually increases banks' profitability. All I am saying is, one shouldn't be looking for black swans or worse trying to create one when there isn't one. That's not how it works. Michael Burry wasn't looking for black swans to make money in the beginning; he just stumbled upon one when he was examining the mortgage-paying records and nobody was doing anything about it so he decided to profit from it to correct this anomaly. In this case, there is no anomaly. What's happening to the long-term fixed-income instruments when the short-term interest rate rises is very normal. Some banks had trouble adjusting to what was happening and failed and the government agencies took swift action to correct it. And the government has taken action to prevent something similar to happen again in the future.
Does anyone remember not too long ago (unless you're some millennial know-everything) what they were saying just before the Savings & Loans crisis? The S&L industry had learned their lessons from past history. Nothing would go wrong... nothing terrible at least. And then after that shit-down ended and went bully up... We then heard again: Banks are better now than ever before! This sort of thing with S&L will NEVER happen again. It's all ok, we've learned our lesson and the financial institutions who take your money are perfectly safe! They were still stressing how much "-better banks are capitaliczed now compared to before the S&L crisis."[sic] Yup, that was said right into the the shit-storm of 2008. Here we are again, full circle. How many times now? Now what?
This crisis may have not been happened if the original Dodd-Frank rules had not been partially rolled-back by Trump's admin. This whole requirement of certain banks smaller than a certain size not having yo undergo a stress test each year? I think EVERY financial institution, including fuggers like TD Amerischwab and First republic, should undergo it every 6 months! How hard it is to run a damned simulation!