Reserve requirements are pretty silly. Many countries never had them.
What you want to keep banks afloat are capital buffers, not reserves.
Expressed differently: reserves are like cash in a vault (or electronic equivalents). What you want instead is a big buffer of equity in the capital structure, so that shareholders can absorb huge losses long before creditors do.
In regulatory terms something like this is called 'minimum capital adequacy ratio'. But it's generally better to set up the rules of the game so that banks naturally want to have more of an equity cushion, instead of giving them strict rules on capital buffers but leave lots of incentives to work around those rules.
As an example of incentives: many tax codes around the world let you pay interest with pre-tax money but dividends have to be paid with post-tax money. (That's simplified, since there's lots of different taxes.)
Right, but reserve requirements are in the order of a few percent, certainly not enough to prevent a bank run, or preventing you from being insolvent when the bonds you're holding went down in value by 20% due to interest rate movements. At the end of the day what you actually care about is whether you have more assets (cash or equity) than liabilities.
Reserves are but one tool in the arsenal and it's also for tightly managing the maximum leverage. If all your assets are not cash-equivalent and they fluctuate in value then there is no maximum leverage that can be guaranteed a priori and there is operational risk.
The bank also had very few chocolate coins (probably none), but that doesn't mean requiring them to hold more of those in their vault would have improved matters.
The problem is that the bank is insolvent; not so much that the bank is out of liquidity.
If they were solvent, someone would lend them the liquidity they need.
I get that other countries are also doing this but “oh this bag is equities is safe because it’s diverse” proving to be false all the time feels like a good argument against this logic.
Granted if SVB had all these bonds that would pay out “guaranteed” that feels pretty strong
What I was glibly saying was that “we have securities X Y and Z that are in aggregate worth T dollars at current market prices, thus this is like we have T liquid dollars” shortcuts have lead to so many problems when macro economics happen.
I am being glib, though I am very wary of the safety of things that aren’t just like… cash. “We haven’t had to take over a bank for 2 years!” Isn’t as much of a vote of confidence in a system as I’d like.
I’d be curious to hear why such a cadence (let’s say 15 years) is an acceptable price to pay in your book. Do you think this system leads to such substantive increases in American standard of living that it’s worth giant banks toppling do often?
Just treat these leveraged entities like SEC would have brokerages treat margin accounts. There are different leverage ratios counted depending on the risk of the position and if you don't maintain margin you get called and liquidated. Such regulations should be uncontroversial but I guess SVB lobbied for infinite margin and then used it!
What makes you think they had infinite margin? (Or lobbied for it?)
They had assets on their balance sheet that lost in value. They lost enough value to wipe out all the equity, and become insolvent.
Very similar to how your brokerage account can go to zero, if you trade on margin.
The brokerage liquidating your account is pretty similar to the FDIC taking over SVB.
(Yes, in a technical sense SVB went to infinite leverage for a brief moment. Just your brokerage account can go to zero if the market moves faster than your broker pre-emptively liquidates your stuff.)
>Expressed differently: reserves are like cash in a vault (or electronic equivalents). What you want instead is a big buffer of equity in the capital structure, so that shareholders can absorb huge losses long before creditors do.
That sounds like a Ponzi scheme. Wiki:
>A Ponzi scheme (/ˈpɒnzi/, Italian: [ˈpontsi]) is a form of fraud that lures investors and pays profits to earlier investors with funds from more recent investors.
What you want to keep banks afloat are capital buffers, not reserves.
Expressed differently: reserves are like cash in a vault (or electronic equivalents). What you want instead is a big buffer of equity in the capital structure, so that shareholders can absorb huge losses long before creditors do.
In regulatory terms something like this is called 'minimum capital adequacy ratio'. But it's generally better to set up the rules of the game so that banks naturally want to have more of an equity cushion, instead of giving them strict rules on capital buffers but leave lots of incentives to work around those rules.
As an example of incentives: many tax codes around the world let you pay interest with pre-tax money but dividends have to be paid with post-tax money. (That's simplified, since there's lots of different taxes.)