Not a big crisis, but also not a terribly well-handled one—and that is worrisome; not well-handled because there are no great options, or because people are not walking down the garden of forking p...
"our financial system’s big problem, from my viewpoint, is that we do not mobilize enough of society’s risk-bearing capacity, eliminating banks’ ability to do idiosyncratic-risk elimination via the deposit-loans channel is potentially a major social loss. But many think otherwise."
I wonder if that's quite right. My sense is that narrow banking advocates are aware of the social loss but are axiomatically committed to the position that market distortions are worse than any other harm; the social losses are like an unpleasant medicine that must be swallowed for the ultimate good of the patient. "Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate" etc.
I don't know whether narrow banking works out to a net gain in purely economic terms, but it occurs to me first, that there is such a thing as the theory of the second best, and second, that it is politically completely infeasible anyway. The modal American has no sense at all of the degree to which the American housing market is supported by socialist government intervention and doesn't want to learn. It's not just the mortgage interest deduction; the standard terms of an American mortgage - 30Y fixed rate term + refinance with no penalty - are surreal by international standards, and the reason for that is that they would never be offered by the private sector. So who is going to buy all that agency MBS if regional banks don't? The stated reason why narrow bankers don't care is that they think the mortgage market should be a purely private sector affair, but the real reason is that they don't have to bear the political consequences of this policy change. Which is to say that they should not be taken too seriously.
Open bank assistance is considered verboten since 1993, due to the requirement to not benefit shareholders. Agree that a new law could reverse that but SVB, Signature, and First Republic would always have been resolved under existing regulatory schema.
I can't say I'm surprised. Raising interest rates cuts the present value of future cash flows. I learned about that when I bought my first house in 1979 and had to sell some high yield junk bonds for the down payment. If you look at bank failures back then, the big interest raise boost didn't seem to have much impact. It was only later in the decade that banks began to fail in earnest. I'm guessing that the 1970s era bank regulation kept things calmer, but the reforms of the 1980s made the banks more vulnerable.
"Social media-triggered deposit bank run", is what most disturbs me. If SVB isn't a one-off, we need better quantify the value of the deposit franchise. I'm not sure how to do that, other than measuring deposit shares above and below the $250,000 limit.
Possibly the value of the deposit franchise has plummeted across the board. If so, we might need to vastly tighten bank regulation, increase capital and reserve ratios. Not fun.
I'm averse to explicitly limitless FDIC insurance. Large depositors should have some skin in the game. Specifically, financiers shouldn't be funneling millions into junk bond banks located thousands of miles away. We did that during the 1980s and it didn't turn out well.
Large banks are being hit with higher FDIC insurance fees. This is appropriate. Shareholders of these large banks should inquire about their efforts to resist the 2018 bank law that lowered standards for under $50 billion banks.
"our financial system’s big problem, from my viewpoint, is that we do not mobilize enough of society’s risk-bearing capacity, eliminating banks’ ability to do idiosyncratic-risk elimination via the deposit-loans channel is potentially a major social loss. But many think otherwise."
I wonder if that's quite right. My sense is that narrow banking advocates are aware of the social loss but are axiomatically committed to the position that market distortions are worse than any other harm; the social losses are like an unpleasant medicine that must be swallowed for the ultimate good of the patient. "Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate" etc.
I don't know whether narrow banking works out to a net gain in purely economic terms, but it occurs to me first, that there is such a thing as the theory of the second best, and second, that it is politically completely infeasible anyway. The modal American has no sense at all of the degree to which the American housing market is supported by socialist government intervention and doesn't want to learn. It's not just the mortgage interest deduction; the standard terms of an American mortgage - 30Y fixed rate term + refinance with no penalty - are surreal by international standards, and the reason for that is that they would never be offered by the private sector. So who is going to buy all that agency MBS if regional banks don't? The stated reason why narrow bankers don't care is that they think the mortgage market should be a purely private sector affair, but the real reason is that they don't have to bear the political consequences of this policy change. Which is to say that they should not be taken too seriously.
Open bank assistance is considered verboten since 1993, due to the requirement to not benefit shareholders. Agree that a new law could reverse that but SVB, Signature, and First Republic would always have been resolved under existing regulatory schema.
I can't say I'm surprised. Raising interest rates cuts the present value of future cash flows. I learned about that when I bought my first house in 1979 and had to sell some high yield junk bonds for the down payment. If you look at bank failures back then, the big interest raise boost didn't seem to have much impact. It was only later in the decade that banks began to fail in earnest. I'm guessing that the 1970s era bank regulation kept things calmer, but the reforms of the 1980s made the banks more vulnerable.
"Social media-triggered deposit bank run", is what most disturbs me. If SVB isn't a one-off, we need better quantify the value of the deposit franchise. I'm not sure how to do that, other than measuring deposit shares above and below the $250,000 limit.
Possibly the value of the deposit franchise has plummeted across the board. If so, we might need to vastly tighten bank regulation, increase capital and reserve ratios. Not fun.
I'm averse to explicitly limitless FDIC insurance. Large depositors should have some skin in the game. Specifically, financiers shouldn't be funneling millions into junk bond banks located thousands of miles away. We did that during the 1980s and it didn't turn out well.
Large banks are being hit with higher FDIC insurance fees. This is appropriate. Shareholders of these large banks should inquire about their efforts to resist the 2018 bank law that lowered standards for under $50 billion banks.