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Bank failures, bank runs and other musings
March 17, 2023
5:17 am
savemoresaveoften
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butterflycharm said

Probably right to say that no bank keeps 20% cash as they go by the rules which allows them to invest away over 90%.

Probably wrong to say no matter how strong requirements are they won't withstand a 20% run.

Had they made the requirement to have 30% cash on hand then a 20% run would not have been an issue. So it is possible to have different rules. They invested within the rules sounds like and if that is so then the rules are the issue.

From all this, CNY or RUB might come ahead?  

Sure, if u make them hold mandatory 20% cash, then a 30% run kills them, if u make it 30%, then 40% run will kill them. If u make them hold 100%, they won’t even exist in the first place, cuz no money to be made whatsoever.

So ur solution of changing the rule is definitely NOT a solution. It’s no different from saying we want to reduce car accident by 100%, and do it by banning cars totally,

March 17, 2023
8:03 pm
Loonie
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The goal is not to make it impossible for the bank to make money. The goal is a useful level of regulation that is likely to avoid disasters.

Details are important:
https://www.factcheck.org/2023/03/what-to-know-about-trump-era-bank-deregulation-and-bank-failures/

March 17, 2023
10:30 pm
Norman1
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Bank reserve requirements are not useful.

Canada eliminated reserve requirements for its chartered banks decades ago, in the 1990's. The chartered banks argued that other deposit-taking lenders, like credit unions and trust companies, don't have any reserve requirements.

In the US, as of March 26, 2020, the Federal Reserve set the reserve requirement to 0%.

There is a lot more to liquidity than keeping some arbitrary percent of deposits in cash.

March 17, 2023
11:01 pm
butterflycharm
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Loonie said
The goal is not to make it impossible for the bank to make money. The goal is a useful level of regulation that is likely to avoid disasters.

Details are important:
https://www.factcheck.org/2023/03/what-to-know-about-trump-era-bank-deregulation-and-bank-failures/  

Well written read.

Are percentages of "hot money" vs "slow money" of Canadian banks / unions public data? And how about the same for US banks?

P.S. Finally what happened with SVB non-insured deposits of over $250k? Was it only the stock holders that lost or also depositors over $250k too?

March 18, 2023
7:22 am
COIN
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butterflycharm said
P.S. Finally what happened with SVB non-insured deposits of over $250k? Was it only the stock holders that lost or also depositors over $250k too?  

According to President Biden all deposits will be covered and any shortfall will be funded by increased FDIC premiums on healthy banks.

Over time, the assets held by SVB will mature and hopefully payout 100% of the contractual proceeds.

March 18, 2023
7:31 am
suburbs4life
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Speaking of bank runs… how do people feel about home trust liquidity and stability here in Canada at present? I have some money above the cdic limit there. Not a crazy amount above. Am I now being paranoid to withdraw the excess to leave it at 100k?

March 18, 2023
7:39 am
Wrayzor
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I haven't been comfortable going over the CDIC limit with them. You have some options to increase your coverage (if you haven't already done so).

If your amount is all with Home Trust, you could open an account with Home Bank to double your coverage. And if currently in one name only, open joint accounts.

March 18, 2023
7:44 am
Bill
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I never exceed the limit at Home, just peace of mind. And if you have a partner you can have 6 accounts there (Oaken) so that can help.

March 18, 2023
7:55 am
Norman1
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Home Trust Company (not Home Bank) has a DBRS debt rating of BBB.

So, deposits with Home Trust Company above CDIC limits have the estimated risk of a BBB-rated bond. That's like the risk of a BCE Inc. bond which are also rated BBB.

Deposits with unrated Home Bank above CDIC limits have the risk of a junk bond.

March 18, 2023
9:54 am
suburbs4life
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Unfortunately, its a business savings account so some limitations but its insured under hometrust which is the best option. In general Ive never been keen to go over CDIC limits but its not practical to open up numerous accounts for 100K due to more accounting and cost come tax time. Oaken generally has the best business savings account rates. I am in the process of opening a tangerine business account to play the promo games for the busines side now. Been waiting a week already to have it opened. Hoping for greener pastures. Ill just lighten the balance at Oaken to be safer.

Thanks for your responses everyone.

March 18, 2023
10:19 am
butterflycharm
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Norman1 said
Home Trust Company (not Home Bank) has a DBRS debt rating of BBB.

So, deposits with Home Trust Company above CDIC limits have the estimated risk of a BBB-rated bond. That's like the risk of a BCE Inc. bond which are also rated BBB.

Deposits with unrated Home Bank above CDIC limits have the risk of a junk bond.  

Is DBRS the more accurate of all other rating agencies and why?

And do they just read the public records to make rating decisions or banks have to supply to them more info than they show publicly?

March 18, 2023
11:33 am
Loonie
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What was the rating on parent Home Capital in the months before it almost went bankrupt about six years ago?

And what was the rating on Silicon Valley Bank a month ago?

I don't know the answers, but the answers should give a good idea of the usefulness of ratings in detecting what is less obvious.

At the risk of repeating myself, it's not the things you see coming that will kill you (those you can avoid); it's the ones you don't see coming that are the problem.

March 18, 2023
12:48 pm
Norman1
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The debt ratings are useful. Those who understand what the ratings are understand that they are informed estimates of risk and aren't designed to catch everything.

In the case of Home Trust, the ratings didn't capture the lying Home Trust employees who were ticking the "income verified" checkboxes on applications without actually doing the verification. That how some of them were their "most productive underwriters"!

March 18, 2023
1:06 pm
Norman1
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butterflycharm said

Is DBRS the more accurate of all other rating agencies and why?

And do they just read the public records to make rating decisions or banks have to supply to them more info than they show publicly?

DBRS is one of ratings agencies recognized by regulators and investors. Others are Fitch, S&P, and Moody's.

It depends on the issuer. In the case of Home Trust, DBRS had access to non-public information for the latest rating action:

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

March 18, 2023
1:13 pm
savemoresaveoften
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Norman1 said
The debt ratings are useful. Those who understand what the ratings are understand that they are informed estimates of risk and aren't designed to catch everything.

In the case of Home Trust, the ratings didn't capture the lying Home Trust employees who were ticking the "income verified" checkboxes on applications without actually doing the verification. That how some of them were their "most productive underwriters"!  

They are as good as and equivalent to an equity analysts' putting out "research reports" with target price on a stock. Both work based on publicly available info, package it into something that "reads and looks" impressive. Both will always fail to capture "new significant events" and says its unforeseen and then revise accordingly...

March 18, 2023
1:13 pm
Bill
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The rating agencies have been criticized (sometimes apparently with some merit) various times over the decades after bad things have happened, e.g. 2008 crisis, just to give one example.

And as informed estimates are not good enough for me with regard to my savings accounts and GICs portfolio (if I'm ok with risk I'm in the markets, otherwise why risk losing savings money for an extra few bucks of interest?) I just never exceed CDIC limits unless it's the big 5 or Tangerine, pretty much. Plus saves me having to spend any time analyzing debt ratings, reading financials, etc., things only a very few people are interested in doing.

March 18, 2023
4:26 pm
RetirEd
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COIN: News reports say Silicon Valley Bank has been allowing withdrawals since Monday, and no problems.
RetirEd

RetirEd

March 18, 2023
4:40 pm
COIN
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I think rating agencies are paid by the banks they rate. Yes? No?

March 18, 2023
7:01 pm
Norman1
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The ratings agencies are paid by the borrowers they rate and by the subscribers to the rating reports.

March 18, 2023
7:15 pm
Norman1
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RetirEd said
COIN: News reports say Silicon Valley Bank has been allowing withdrawals since Monday, and no problems.

Silicon Valley Bank has been shutdown and gutted. According to the March 13 FDIC press release, deposit liabilities and most of the assets have been transferred out to a new bridge bank called Silicon Valley Bridge Bank NA:

Depositors will have full access to their money beginning this morning, when Silicon Valley Bridge Bank, N.A., the bridge bank, opens and resumes normal banking hours and activities, including online banking. Depositors and borrowers will automatically become customers of Silicon Valley Bridge Bank, N.A. and will have customer service and access to their funds by ATM, debit cards, and writing checks in the same manner as before. Silicon Valley Bank’s official checks will continue to clear. Loan customers should continue making loan payments as usual.

That USDC stablecoin fund can pick up its $3 billion, deposited with the former Silicon Valley Bank, at the new bridge bank. sf-laugh

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