That in itself isn't an issue. The problem was the deposits were primarily short term 'overnight' deposits. Their 'cash equivalents' were 10 year bonds at a fixed interest rate.
but its a bank collapse caused by the Fed , first lowering interest rates too low and inflating the prices of government bonds and then rising interest rates too rapidly over the last year but not taking into consideration that many banks and financial institutions are required by regulations to hold those very assets. This will probably put a stop to rising interest rates for now.It's a typical back collapse really.
Value of bonds going down, on it's own might not be enough to bring the bank down if it was business as normal. Yes it might eat into profits and possibly capital but it might have been okay. But then throw in a bank run and the need for fire sales and crystallisation of those losses and it became a vicious circle.
Bad management caused the collapse. The banks were operated in a way that meant it was not able to withstand the rising rates.but its a bank collapse caused by the Fed , first lowering interest rates too low and inflating the prices of government bonds and then rising interest rates too rapidly over the last year but not taking into consideration that many banks and financial institutions are required by regulations to hold those very assets. This will probably put a stop to rising interest rates for now.
but also bad management by the Fed and by extension all the global central banks. A year ago our own former Central Bank governor was saying there would be no interest rate rises by the ECB when they were at zero and now they talking about 5% before they stop . When the Central banks don't know whats happening how can a mere bank be on top of things especially when a key asset they are required to buy, government bond interest rates are controlled by the world's central banks.Bad management caused the collapse. The banks were operated in a way that meant it was not able to withstand the rising rates.
If this is an isolated incident of 2 badly run banks it shouldn't impact monetary policy... But it's a bigger if then it was a week ago.
but also bad management by the Fed and by extension all the global central banks. A year ago our own former Central Bank governor was saying there would be no interest rate rises by the ECB when they were at zero and now they talking about 5% before they stop . When the Central banks don't know whats happening how can a mere bank be on top of things especially when a key asset they are required to buy, government bond interest rates are controlled by the world's central banks.
I looked at their annual report and noninterest-bearing demand deposits went from $81bn to $126bn in the course of 2022.But if they did not have excessive deposits they would not have had to look for a risky home for them.
interesting that in this case the crises was sparked not by loans going bad but by too much money "invested" in low interest rate government bonds whose value then fell. Maybe they would have been better off to lend out more money to businesses than to put them in government bonds. In other words the spark for this crises is the exact opposite of the 2008 financial crash, too much money in low and zero interest rate bondsOtherwise I don't see the insolvency as being particularly difficult to execute. There's no indication of poor performance in the loan book, and the other assets can be valued very easily as they are marketable.
Maybe they would have been better off to lend out more money to businesses than to put them in government bonds.
Alternatively just do what Irish did with the pandemic deposits - take it in and just deposit it with the central bank.They would lend as much as they can to creditworthy customers.
They should have done what Coyote suggested and turned down big deposits. Banks hate doing that and many credit unions resisted it. But where there is not enough loan demand and plenty of cash, it's the right strategy.
Brendan
All depositors of this institution will be made whole. As with the resolution of Silicon Valley Bank, no losses will be borne by the taxpayer.
Shareholders and certain unsecured debtholders will not be protected. Senior management has also been removed. Any losses to the Deposit Insurance Fund to support uninsured depositors will be recovered by a special assessment on banks, as required by law.
a tech firm who parked all $30m of reserves in one bank should be punished with a haircut of 2% or 3%.
I'm not a moral hazard monster, but surely a CFO of a tech firm who parked all $30m of reserves in one bank should be punished with a haircut of 2% or 3%.
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