I wonder how the following passage works in light of the Silicon Valley Bank failure?
"In practice, this does not happen (outside of old movies and fevered internet theories). Even if a run occurs, it will take some time to get momentum."
The SVB failure was triggered by capital adequacy concerns but the bank was brought down by liquidity issues that developed within a day or two.
Good catch. I will have to update it, but the bank was believed to be insolvent if its held-to-maturity portfolio was marked to market. Once you are insolvent, you are toast. As for the depositor run, it was large VC companies - who acted exactly like wholesale funding providers. The small depositors only lined up hours before the FDIC shut the bank down. This is what you saw with Northern Rock, etc.
The problem with SVB is that their “depositors” were behaviourally indistinguishable from “wholesale funding.” Any modelling effort that treated their depositors the same as a vanilla regional bank would have been misleading.
The argument I have seen online that this herding behaviour is new, and the result of social media. I don’t entirely buy that, the SVB depositor base was atypical.
What's your thoughts on the Short Term Repo facilities that are springing up at the central banks as QE is reversed?
It seems to me that the Central Banks are trying to get away from the political problem of paying interest on reserves by trying to manoeuvre the banks into a position where they are regularly borrowing liquidity from the central banks against government bond collateral. Then it is the Treasury that is paying 'interest on reserves' on the liquidity collateral.
Having banks permanently borrowing from the central bank is a change of stance for most of the world's banking system. It only seems normal(ish) for the Fed.
Historically, the Fed used repos to deal with short-term movements in its balance sheet size. I.e., bond purchases were “permanent,” repos could be reversed quickly (they rapidly roll off). The pre-2020 BoC had a stable balance sheet size (monetary base = currency in circulation, since no reserves), and so it could keep its balance sheet almost entirely in bonds/bills.
Right now, I think the issue is worries about turbulence in the repo market. I never was able to care about the repo “crisis” in the US in 2019 (2018?), but they will not want to have similar problems, since it is a core funding market that ties together banks and non-banks.
I wonder how the following passage works in light of the Silicon Valley Bank failure?
"In practice, this does not happen (outside of old movies and fevered internet theories). Even if a run occurs, it will take some time to get momentum."
The SVB failure was triggered by capital adequacy concerns but the bank was brought down by liquidity issues that developed within a day or two.
Good catch. I will have to update it, but the bank was believed to be insolvent if its held-to-maturity portfolio was marked to market. Once you are insolvent, you are toast. As for the depositor run, it was large VC companies - who acted exactly like wholesale funding providers. The small depositors only lined up hours before the FDIC shut the bank down. This is what you saw with Northern Rock, etc.
The problem with SVB is that their “depositors” were behaviourally indistinguishable from “wholesale funding.” Any modelling effort that treated their depositors the same as a vanilla regional bank would have been misleading.
The argument I have seen online that this herding behaviour is new, and the result of social media. I don’t entirely buy that, the SVB depositor base was atypical.
What's your thoughts on the Short Term Repo facilities that are springing up at the central banks as QE is reversed?
It seems to me that the Central Banks are trying to get away from the political problem of paying interest on reserves by trying to manoeuvre the banks into a position where they are regularly borrowing liquidity from the central banks against government bond collateral. Then it is the Treasury that is paying 'interest on reserves' on the liquidity collateral.
Having banks permanently borrowing from the central bank is a change of stance for most of the world's banking system. It only seems normal(ish) for the Fed.
The BoE's thinking is here: https://www.bankofengland.co.uk/markets/market-notices/2022/august/explanatory-note-on-operational-implications-of-apf-unwind
Historically, the Fed used repos to deal with short-term movements in its balance sheet size. I.e., bond purchases were “permanent,” repos could be reversed quickly (they rapidly roll off). The pre-2020 BoC had a stable balance sheet size (monetary base = currency in circulation, since no reserves), and so it could keep its balance sheet almost entirely in bonds/bills.
Right now, I think the issue is worries about turbulence in the repo market. I never was able to care about the repo “crisis” in the US in 2019 (2018?), but they will not want to have similar problems, since it is a core funding market that ties together banks and non-banks.