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With the failure of First Republic Bank on Friday, three of the four biggest bank failures ever have occurred within the last two months. I am an equities person from Wall Street and know little about debt and commercial banking. I asked some people who do know about banking.
Me- “Help me understand a very basic banking issue. If I as a depositor puts $100,000 into a regional bank, what does the bank do with it? The fact that the banks cannot make everybody whole when they go and ask for their money back tells me that the banks invest this money into shady bad investments that have now become underwater. What type of bad investment did they put their money and they can’t liquidate it?
By definition, a bank is supposed to turn deposits into loans. So, the reason a run on the bank will always put a bank out of business is because the money has been converted into an illiquid loan, I suppose.
This is the trillion-dollar question. Nobody knows exactly what all of these shady investments are that the banks made, or they are covering it up? Janet Yellen and others are not letting us know exactly how bad the balance sheets look.
I think they are intentionally staggering the bank failures. They want one big bank on every Friday to fail. They are intentionally timing these.”
A Wall Street banker replied, “On the liability side of the ledger, banks are funded by equity, deposits, and institutional debt. On the asset side of the ledger, they carry reserves and make loans. Those loans can range anywhere from short-term to 30-years — which gives rise to duration-mismatch inherent in banking (i.e., long-term assets, short-term liabilities). And their reserves can be held either in cash (yielding very little) or invested in Treasuries.
SVB went under because they had invested their reserves in Treasuries (to get some extra yield) but the movement in interest rates meant that the value of those Treasuries declined. When SVB’s depositors started withdrawing deposits, those Ts had to be sold at a loss. Under accounting regs, because those Ts were classified as “hold to maturity” assets, they did not have to reflect current market value on their balance sheet and income statement.”