Part of this is dealt with by the central bank. If there is an issue when the bank does not have enough money to cover withdrawals it borrows from other banks or the central bank. The central bank is the lender of last resort. This is what the central bank was originally there for, to cover the shortfalls in depositors withdrawals and the income from debt repayments. The money supply aspect of the central banking is a secondary action of the bank. If you want to read a book that explains the central bank mechanism that resolves this I recommend Central Banking in a Free Society. http://www.iea.org.uk/sites/default/files/publications/files/upldbook450pdf.pdf Banking has changed a lot the credit derivate market enabled cheaper rates due to the risk being held by the purchaser of the products. The way they were bundled up was also an attempt to lower risk. Although it did not work in my opinion. When people stopped buying these products the ability to offer lending at the lower rates finished. The risk element is now more important than before the credit crunch in 07/08. The market is as reliant on debt demand as it is debt supply. The concept that flushing the market with money will lead to more lending is no longer viable due to the high levels of debt making repayment less likely. The banking crisis is insolvency rather than liquidity. Has that helped?
They have done exactly this. Banks, in the US anyways, know that the gov't will bail them out if they overextend themselves. Extensive lobbying, and the revolving door between industry and regulators is exactly how they strategized. The S&L guys didn't do enough, they tried to use shortcuts. Remember the Keating Five? Now banks bake their strategy in from the start, using PACs, stock options, knocking the teeth out of regulations and regulators. I'm not being cynical; we just saw this happen to the tune of trillions of dollars.
I'm going to read that. Looks like a very good read. Thanks. I wanted to understand the regional bank's POV, where they are regulated by charters and have models diff't from the big inv/com banks. What is their strategy w/ this low rate enviornment and dead demand on overly inflated real estate assets?
The sad reality is that I don't think they have a strategy. The lendning market has been put on its head by the credit crunch. The macroeconomic mechanism and lending mechanism no longer work how they used to. I genuinely think there is no real direction just anarchy and no direction.
When I read about BAC cutting jobs, UBS restructuring, then I realize this mess has many more legs on it. Still the banking industry needs to function. If anyone knows about asset/liability or interest rate risk analysis, or can point me further into technical reading, please do. Thanks
Regarding this THREAD NOW. How does OPERATION TWIST affect REGIONAL/SAVINGS&LOANS THRIFTS? IF their sole profitability rests solely on mortgages loans in the community, does it mean, more regional banks will go bust? BUMP!
That's what the secondary market is for. It's not the banks that are locked in at that rate, it's (to a disturbing large extent) Fannie/Freddie who are on the hook. Which means taxpayers are the ones on the hook. For their own mortgages. Which means all they've done is shifted time-shifted future projected earnings into the present. This circle of invirtuosity will be broken, as it is fundamentally unsustainable. The only question is if voters are smart enough to take their hand out of the cookie jar, or if the jeep has to go over the cliff before voters have their "oh shit" moment.