Except for a brief reprieve during SVB's failure, the Fed continues to let the treasury and agency bonds it previously purchased mature, without recycling the proceeds it receives to purchase replacement bonds (i.e., the Fed is destroying the money):
Every day, the US Treasury must issue new bonds to replace those bonds it repays.
Given that the Fed is not stepping in to buy more treasury bonds in the open market, the private sector -- individuals, 401(k) plans, pension plans, endowments, mutual funds, etc. -- must find additional liquidity somewhere to buy the new bonds. The US Treasury will issue those bonds at the market-clearing price.
Banks bought up a bunch of US treasuries at close to nothing interest rates during the last two years. This is where a bank typically parks their cash reserves because the audit requirements require them to hold a certain amount of cash and cash basically == treasuries.
Now they're holding a bunch of treasuries that won't mature for a while. If they simply sold them they'd have to book a bunch of losses (because as rates rose the price of treasurys falls). They don't do that and instead hope holding them to maturity will be fine to service their existing commitments (i.e., pay interest on deposits).
The problem is that they bought treasurys that yield close to nothing and they have to make a profit on those and pay out an interest to customers, so they take their cut from the 2% and pay the customers a 0.03% interest on deposits or whatever.
The customer sees that their savings account is yielding 0% and they could just go park their money in a money market account that yields ~5% (thanks to overnight rates being that high) and moves their money from their bank to a brokerage account.
Bank deposits fall resulting in a standard bank run. Sure well run banks maybe have their risk profile in a better place (didn't actually go out and buy a bunch of 30yr treasurys like SVB did and instead got more short duration stuff) but they can't just pivot to instantly increasing the interest rates to match the money market account and so will continue to bleed deposits.
> Banks bought up a bunch of US treasuries at close to nothing interest rates during the last two years. This is where a bank typically parks their cash reserves because the audit requirements require them to hold a certain amount of cash and cash basically == treasuries.
You're ignoring Fed Repos. Aka: overnight deposits at the Federal Reserve. Which counts as cash and today is returning 5% APY.
Today, a bank will very strongly consider Fed Repos, because 5% is a much better rate than the rates from 2 years ago (aka: 0% to 0.25%)
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This also means that a 10Y bond you bought at like 2% or whatever is making less than Fed Repo overnight deposits today. So banks who are on 5Y, 10Y, or 30Y treasuries are in practice feeling like they've lost a lot of money. (And in SIVB or FRC's case, collapsed in part because of this mismatch, combined with depositor flight).
They could have hedged their rates risk with swaps and other instruments. They didn’t do that extremely basic risk management for a bank because they didn’t want to reduce deposit interest payments or reduce profits. They essentially left unhedged a tail risk that was fairly likely (interest rates wouldn’t stay in zero range forever and mean reversion will set in at some point), and predictably it ate their lunch. The confounding factor is they probably assumed rates would rise gradually. The Feds decision to rapidly raise rates without checking rates exposure across the banking and asset management world speaks to gross incompetence. SVB and others were relatively transparent about how poorly they were managing rates risk and even basic due diligence by any of the multitude of regulators for a bank would have revealed their risk exposure to rates and the jeopardy the feds whip saw policy put them in. The fact they didn’t check to see what stress sudden and rapid rate increases would have on banks outside the too big to fail class is unforgivable.
Jerome Powell is a polisci major. That’s a great degree for getting drunk daily and still graduating. He’s not the brightest bulb that has sat in his seat. Yellen at least was a PhD in economics from Yale who was famous for her meticulous attention to detail. Notice when the regional banks blew up the treasury and associated executive functions stepped in and shored up the Feds mess, and the fed just stood there saying “oops!” The fact he was picked by DJT, the Jerome Powell’s primary qualifications (given the cabinet selection process) were likely looking the part and flattering the boss.
Why don't larger banks (who presumably have hedged properly) not pay a real interest on deposits at this point? I don't think it's just greed.
The current bank of america / chase interest rate on savings accounts is 0.01%. No rational buyer should accept that when a money market is yielding 5%. People are moving deposits to money markets. That should force the banks to bump up rates.
Maybe they lose more by bumping up rates than they do by keeping them the same and losing deposits but I struggle to see that.
Because they don’t have to. You deposit there because they’re too big to fail or have such an excellent retail experience or are so brand saturated you don’t make a choice. They are sitting on too much deposits as is, but even without that fact it is purely greed - or, to use another phrasing, it’s the right business decision for maximizing profits. They literally have no reason to improve returns on deposits.
Goldman is trying to buy their way into retail banking and offer very competitive rates. Other more established retail banks are leveraging their size and reputation to maximize profits as they don’t see any upside to increasing rates. They don’t need more deposits, and they won’t lose a meaningful deposit base.
> They are sitting on too much deposits as is, but even without that fact it is purely greed - or, to use another phrasing, it’s the right business decision for maximizing profits. They literally have no reason to improve returns on deposits.
Can I look up deposit volume per bank somewhere? I assume even banks will care at some point. 1% probably not, 10% probably yes?
Where do you think your money go when you buy a share in MMF? They do not disappear, instead they get added to bank deposit of one who sold you the share. It will be different only if the bonds which back your MMF are sold by the Treasury or the Fed.
The treasure would've sold them regardless of your investment into a MMF, just for a slightly higher price. So counterintuitively enough, by investing into a MMF your actually reduce amount of deposits lost by banks.
A bank buying investments assets doesnt change the reported deposits. It isn't the net sum of (customer account balance - investments the bank makes/purchases). Deposits are just the first.
I'm not sure of the mechanics, I know for a fact that most people are moving $ to brokerages and parking it in something like VMFXX (or equivalents in Fidelity etc.)
Do you know what the mechanics are when you put some money in to VMFXX? Who does vanguard get the treasuries from?
In any case there are no mentions of bonds in this report. It's irresponsible for the FDIC to not even mention this in this report. A huge part of the banking problem is not being addressed in this report.
If you are interested in the macro situation in finance I cannot recommend Lyn Alden high enough. She wrote (among other things) a number of articles covering liquidity state, Fed and Treasury interplay, effects of TGA drawdown, etc.
> That sounds like a way to lower the money supply, which is exactly what I'd expect of a central bank trying to fight inflation.
Not the best idea if the problem with inflation is on the supply side - energy costs and so on, corporations have to find a way to cover these and the easiest way is to raise prices. Reduction of money supply will make fall in demand and those corporations will find it difficult to cover day to day - either they'll have to increase prices even more or go bankrupt.
If they really wanted to fight inflation, they should have looked at easing supply side problems.
Indeed, the Fed often seems like a Pavlov's dog, salivating at the sound of "inflation" and hastily raising interest rates. But as we all know, not every economic hiccup can be cured with the same medicine. Sometimes, it's more prudent to pass the baton to the government and let them address the root causes, rather than reflexively resorting to the same old monetary tricks.
> Sometimes, it's more prudent to pass the baton to the government and let them address the root causes, rather than reflexively resorting to the same old monetary tricks.
That’s not the Fed’s choice. The Fed has a mandate to target specific outcomes with a narrow set of monetary policy tools, acting within the existing fiscal framework.
Congress can make whatever fiscal interventions it chooses, whenever it chooses; the Fed doesn’t pass the baton to Congress when it feels monetary policy is inadequate, Congress passes it to the Fed by inadequate fiscal policy to acheive the goals Congress mandates the Fed to intervene to correct towards.
If you think a situation calls for a fiscal response that osn’t happening, you shouldn’y blame the Fed for not passing the baton, you should blame Congress for not acting. Congress isn't subordinate to the Fed.
> The Fed can _only_ do monetary tricks. That's all they're authorized to do.
When you only have a hammer, everything starts looking like a nail. Not everything can be solved by monetary tricks, but it seems like they just have to do something for the sake of it, regardless if that means tanking the economy. But hey, once economy dies, there will be no inflation! Genius.
Your graph shows declining interest rates as well?
You're not posting very much evidence that the Fed often raises interest rates.
Your graph clearly shows the 15%, 17%+ federal funds rate of the 1970s, and the 5% we're at today, and the 0% we spent the last decade at. The error is clearly that we've overcorrected and dropped rates too low.
Well, perhaps "no one" is an overstatement. "No one" seems to conveniently exclude those of us running businesses, juggling skyrocketing energy costs, and witnessing first hand the daily impact of supply-side pressures. It seems "no one" in this context refers to those comfortably ensconced in the boardrooms of central banks and the ivory towers of the economically detached, where the nuances of different types of inflation are lost in a haze of aggregates and theoretical models.
By all means, let's keep simplifying complex economic phenomena to fit neatly within preferred policy approaches. It's much easier to adjust the monetary supply levers than confront the thorny reality of supply chain bottlenecks and surging commodity costs. After all, those dealing with these realities on a day-to-day basis – the small businesses, the consumers, the workers – they aren't "anyone", are they?
So let me clairify, supply and demand always exert influence. The question is which is a bigger factor at a given time.
Supply constraints can be pushing prices up, but demand pressure can be pushing prices up MORE.
If you look at your comodity costs, the question is if less of them are being produced than before, or similar numbers are being produced, but competition is willing to pay more for them.
To take a look at something simple like beef, supply keeps going up year over year. Producers in general have a healthy profit margin. However, people are willing to pay more for beef. Would you call this a supply driven problem or a demand problem.
Until recently the Treasury was draining TGA, which was equivalent to doing QE. In other words, it was spending money which it got earlier from Fed by selling it treasuries. Now Fed does not buy treasuries anymore, so the Treasury has to refill TGA by attracting liquidity from the open market. It's equivalent to QT, which will be added to tightening performed by the Fed. Yes, it will lower money supply, but not without serious risks for the economy.
Minor nitpicking: The Fed cannot buy bonds directly from the US Treasury. It can only buy them from third parties in the open market. Otherwise, you're right.
You are right, but I think that everyone understands that today it's nothing more than a formality which feeds those intermediate banks at the expense of taxpayers.
The Fed does not target the monetary aggregates. Its impossible. They target interest rates, that is, the price of money, by buying and selling treasury securities and by paying interest on reserves. If they were to target monetary aggregates they would be unable to target interest rates.
> The Fed is not stepping in to buy more treasury bonds, so the private sector -- individuals, 401(k) plans, pension plans, endowments, mutual funds, etc. -- must find additional liquidity somewhere to step in to buy the new bonds
That's true but the treasury will price their interest rates to get buyers. If it goes high enough buyers will emerge unless there is nobody with faith in the government paying it back.
Any loan getting repaid technically "destroys" the money unless new replacement lending is made. It's because the money was created when it was lent out, i.e. banks are allowed to lend money they don't have up to a point (called the reserve ratio). When it's repaid the interest is kept by the bank but the principal goes back to their balance sheet as money they can lend.
For central banks this is taken to the next level as I'm not sure they do anything with interest.
This is important. I think this is not well understood and these misunderstandings lead to misplaced anger about things like "government spending" and "student loan forgiveness" or government fiscal responsibility in general.
The money the government spends or forgives still goes on the balance sheet and will either come due at some point, or will result in the default of the US Treasury. That would be like me saying that spending crazy amounts of money on a new sports car doesn't matter because I have a huge line of credit. Eventually, that money for the car needs to be repaid.
You can absolutely see examples of this in city and state governments in the US that have failed to make pension payments. Kicking the can down the road will eventually catch up with someone.
When the treasury department spends, deposits are created at Fed bank member accounts. Ultimately these deposits end up buying treasury securities or getting paid IOR (Interest on Reserves) in Fed reserve accounts. So the same money that is spent by Treasury "re-cycles" into new treasuries ad infinitum or till we hit the debt ceiling.
It's interesting how many different opinions there are about how this works. You say one thing, and in the replys there are several different views of how this works.
Do the decision makers have a similar diversity of opinion on how this works?
I think you're talking about reverse of QE. This will reduce bank's reserves at the fed, but doesn't affect money supply or retail deposits. When a private investor buys a bond the cash goes to the seller, it doesn't disappear.
I dont really understand why the title of the HN post takes a single point out of a dozen different things that the report is about, and even that point doesn't have any actual context, which the report expands on.
I'm guessing it's trying to subtly editorialize the report.
Better title would just be the "Quarterly Banking Profile"
1. Bank Deposits have not kept up with MMFs. I transferred about 85% of all my cash into a money-market fund to keep up with the Fed Benchmark rate (currently 5%).
2. Fed has been purposefully destroying money through its policy decisions. This is on purpose, because the Fed's only tool to combat inflation is to destroy money (either directly, or indirectly).
3. In regards to #2: Mortgage rates are higher, car loans are higher, etc. etc. People in practice have relatively lost a lot of money because of this and have to tap their savings. Note that this FDIC document has noted that somehow, we have less delinquencies right now. So it seems like Americans are remaining responsible and paying off their debts.
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Frankly, I'm surprised that "only" ~$500B of deposits have fled classic banks. People really should be moving their money to MMFs to take advantage of these much higher interest rates and the current Fed repo rate.
But when their policies cause M2 to go up or down, its got an effect that largely can be described as "Destroying M2", or "Destroying Money" in more colloquial terms.
on mobile, it was jarring to have the browser switch over to the pdf viewer after downloading a 2MB file over my phone connection (I don't have unlimited download)
These scary headlines are meaningless without context. If you are going to try and panic folks, at least do it right. Such a lack of effort, show some respect.
> "The FDIC said the $472 billion in deposit outflows in the first quarter was the largest it had recorded since it began collecting such data in 1984. The decline was primarily from uninsured funds, as insured deposits actually rose $255.1 billion, or 2.5%, amid the failures of Silicon Valley Bank and Signature Bank."
This apparently means there was a 5% drop in the total uninsured funds, meaning likely about one-third of those funds were broken up into cash sweeps (into multiple smaller deposits, each under the FDIC limit for insured deposits)?
A whole lot of people discovered their banks would manage spreading it around to keep it under $250k after the SVB collapse. I wonder if that's related.
Interesting. Where did these $472B go? My understanding is that this didn't go into another bank, that $472B is a net across all banks. Did people start investing more? Did this money go into the economy?
Fed policy for the last year has been to disappear money, which should eventually fix our inflation problem.
Cash is dwindling for the first time in a generation. The economy will act differently than most of us have seen in our lifetimes.
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M2, a measurement of how much money is in our economy, has been shrinking for months.
Then again, M2 expanded too much during the COVID-19 era policies (we overreacted to the problem. But I don't blame policy makers for taking bold action). So this is a somewhat natural backlash that the Fed needs to manage.
We are, and have been, undoing QE and raising interest rates simultaneously. This causes lending to be more expensive and savings to be better.
Alas, we all have debts to pay (lots and lots of individual debt, record high mortgage rates and car loan rates). We all have a bit less money as a people compared to last year.
So in practice, we are seeing personal savings dwindle and credit card debt (and other debt) balloon due to these interest rates.
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EDIT: Downvotes? Lemme explain further.
Since the peak in M2 of April 2022 at $22 Trillion, we're down to $20.9 Trillion, or roughly a loss of $1.1 Trillion in M2 (a measurement of how much money is in existence). The easiest place for cash to disappear is from liquid-savings accounts. Its very indirect: Fed raises interest rates, indirectly raising mortgages and car loan costs, raising what people are paying each money, eventually lowering savings accounts. But the "buck stops" somewhere, and its probably going to be in a liquid savings account.
No. Fed policy has been to increase the price of money or interest rates in hopes of reducing demand in the economy to combat inflation because it makes borrowing more expensive to borrowers.
It causes M2 to drop, and M2 includes savings account balances and MMFs (so it cannot be explained with "Oh, people just moved money to MMFs", because Savings+MMFs is dropping in general)
Retail component of money market funds remains part of M2. Meaning that if depositors switched their money to VMFXX (or other retail money market funds), then it'd still be part of M2.
Money (deposits) are created at the point that loans are made. Money is destroyed when these loans are repaid. The money supply (specifically M2, that includes deposits) can shrink if less loans are created compared to loans being paid off.
Raising interest rates has this explicit effect. There is a lag for this affect to be noticed in the system.
Total deposits is the money individuals placed in banks, (e.g. cash in a checking account). If a bank gives you a mortgage, it does create money due to the fractional reserve, but it doesnt change the underlying deposits (The deposits are the reserve)
The titular loss is simply people moving cash savings to money markets.
This is actually a very common misunderstanding. Fractional reserve banking, as commonly learned, doesn't apply to most countries.
The amount of money in the system made up of currency deposited into a bank is less than 10% of overall money in the system (I think it was 7% in the UK last I checked). The rest is money (deposits) created from thin air at the moment that a loan is granted. The Bank of England website actually has some very good articles on these subjects. Loans literally create money. Paying off a loan destroys it, minus the interest paid to the lender, that stays in the system.
Banks do have a minimum reserve amount that they have to hold with the central bank, in the US and the UK this reserve percentage is currently 0 (zero).
I have a few downvotes it seems. I'd be very interested in where the gaps are in my knowledge as it's something I've been learning a lot about recently.
>Money (deposits) are created at the point that loans are made
>The rest is money (deposits) created from thin air at the moment that a loan is granted.
You are conflaiting deposits and money in cirulation but they are not interchangable. Deposits refer specifically to cash held with a bank, not debt. As such, deposits do not change when loans are granted or repayed.
>Money is destroyed when these loans are repaid.
Similarly, Money is not destroyed when loans are repaid. Loans are repaid with real money, which remains in circulation.
Your link is completely unrelated to what we're discussing.
Think about what you're saying for a second. If you take $100 loan from a bank to go to the pub and repaid $200 for the principal and interest, do you think they delete the full $200? Of course not. Do you think they delete the $100 you spent at the pub? Of course not. The bank keeps $100 profit on the loan and the barkeeper keeps $100. You now have $200 in circulation, the total loan repayment amount.
Your research on how Banks calculate their total deposits is incorrect and your research is insufficient. Take a look at this link and scroll down to the real world example[1].
Deposits are the some total of money people have deposited in the bank. It is not marked down by the loans a bank has made. The total deposits held by a bank minus the total loans the bank has made is called the net worth of the bank.[2]
> Your link is completely unrelated to what we're discussing.
Do you mind explaining this? The linked article has an example very similar to yours, explaining how bank loans create money. Does this not apply to your scenario? Or is it talking about a completely unrelated concept on the banking system? Or is it that you simply think the article is wrong.
I’m asking in an attempt to better my understanding of the subject. Please don’t turn this into an unnecessarily heated discussion.
While this is a single headline picked out from multiple pages of detail information, the economy (both US and worldwide) has certainly seen better times.
For the last few months, especially the smaller, regional banks in the US felt the effects of fear the recent collapses have caused. That said, with the general slow-down and the risky game the SVB and others were playing, this had to happen eventually.
Would money moved to higher yielding bonds/money market accounts count towards this "loss"? If so, I personally have convinced tons of people to move their cash to vanguard VMFXX which currently has a 5.04% yield (after their fees too!).
a) No it doesn't. Here are mainstream news outlets that uses the word "Lost" in the context of bank deposits decreasing, and we all know what they mean, and no way implies that they don't know where the money went.
If you're going to refuse to use common definitions and usages for words, even when used within appropriate context, I don't really know what to do with a completely different reality
> On the other hand, the bank’s franchise value (if any)
is lost
> For example, some assets might have lost value because asset management
> In addition to the fees, loan
servicing transfers may impose indirect costs, such as lost information or delays or miscommunications in
addressing delinquencies.
> A senior tranche is the least risky tranche in a securitization and takes losses only when all the other tranches
have lost their full value.
It doesn't seem like the FDIC has any issue with using the word "lost" in the context of "numbers went down"
https://fred.stlouisfed.org/graph/fredgraph.png?g=15IkH
Every day, the US Treasury must issue new bonds to replace those bonds it repays.
Given that the Fed is not stepping in to buy more treasury bonds in the open market, the private sector -- individuals, 401(k) plans, pension plans, endowments, mutual funds, etc. -- must find additional liquidity somewhere to buy the new bonds. The US Treasury will issue those bonds at the market-clearing price.
A similar logic applies to agency bonds.
Every day.
Of course bank deposits are dwindling!