Daily reminder that bank runs wouldn't be a thing if we did duration matching, forbidding banks from borrowing short and lending long.
As always, the underlying problem in banking is that the banks are lying, telling two or more people they own the same dollar at the same point in time. If they locked deposits for a period of time they could safely (and morally) loan that money out without lying, and, in fact, there wouldn't need to be a reserve ratio at all.
Demand deposits should cost a low service fee, since the money can't be safely lent.
> Daily reminder that bank runs wouldn't be a thing if we did duration matching, forbidding banks from borrowing short and lending long.
If we really want to prevent bank runs, shouldn't we just forbid lending?
Snark aside, transforming duration is a big part of the value that banks add. In general, there's a lot of demand for lending short and borrowing long. Banks add value (and risk) by taking the opposite side of those trades. I'd rather have banks that suffer occasional runs (which really aren't that common at this point) than banks that don't transform duration
This pre-supposes a pretty radical (yet normalized nowadays) economic philosophy: that growth per se is good.
A more nuanced approach would be to value and triage lending opportunities according to how much they contribute to the heating up of the economy, and how much opportunity for future sustainability they provide.
The only "natural" organism that grows without attempting a quasi-stable, dynamic equilibrium with its environment is cancer. The exponential processes you refer to are not "natural" in the general sense and only represent the barest, simplest models.
This is kind of like saying we can eliminate most automobile fatalities by eliminating cars and making everyone walk or take the train everywhere.
Yes, it would solve one type of problem. But nobody wants your solution because it’s an unreasonable trade off for everyone to solve an extremely rare edge case.
Single-minded optimization for single edge cases is really easy in fantasy worlds, but in the real world people choose trade offs even if they come with rare edge case risks.
> Daily reminder that bank runs wouldn't be a thing if we did duration matching, forbidding banks from borrowing short and lending long.
In other words, no liquid deposits allowed. Banks charge customers to hold their liquid cash because they can’t do anything reasonable with it.
So yes, you could make one type of extremely rare problem go away by removing a desirable feature used by hundreds of millions every day. I don’t think people would actually choose this, though.
> As always, the underlying problem in banking is that the banks are lying, telling two or more people they own the same dollar at the same point in time
Either you don’t understand how banking works, or you’re trying to project a crude misunderstanding onto the general public.
The concepts of assets and liabilities are well understood in the business world. Banks aren’t “lying” and fractional reserve banking does not mean that banks are creating fake dollars. Liabilities have always been part of the equation.
> Yes, it would solve one type of problem. But nobody wants your solution because it’s an unreasonable trade off for everyone to solve an extremely rare edge case.
Can you explain why this is bad? People lived with hard-ish money systems for extremely long periods of time.
> The concepts of assets and liabilities are well understood in the business world. Banks aren’t “lying” and fractional reserve banking does not mean that banks are creating fake dollars. Liabilities have always been part of the equation.
I mean, it's really about how you define words.
Most people believe that they have money in the bank. When in reality, they have unsecured debt to the bank. Although to be fair, for most people that debt is backstopped by FDIC/NCUA.
But, of course, that unsecured debt is often referred to as money, so I can't really blame them too much.
> Can you explain why this is bad? People lived with hard-ish money systems for extremely long periods of time.
The problems those systems caused are the reason we created the Fed and soft money. Hard money ruined many lives, caused many panics, and is an intellectually bankrupt idea that only cranks are still devoted to.
It’s a pretty involved topic. “ The Price of Peace: Money, Democracy, and the Life of John Maynard Keynes” gives a good narrative that exemplifies some of the problems.
> People lived with hard-ish money systems for extremely long periods of time.
True, but most of human history was also pretty awful. If subsistence agriculture is your idea of a good time, nobody's going to stop you. But it's definitely not what most people want.
> True, but most of human history was also pretty awful. If subsistence agriculture is your idea of a good time, nobody's going to stop you. But it's definitely not what most people want.
I can't tell - are you arguing that soft money is a necessary precondition to industrialization?
I'm saying that your argument is bunk. People also lived without effective dental care for long periods of time. People lived without all sorts of things. If you want to show that something is unimportant, you have to do more than wave vaguely at recorded history as if it were all pretty great.
What an odd choice of analogy. Incidents where someone driving a car hurts or kills someone else is in fact an extremely common "edge" case. It happens, like, several hundred thousand times more frequently than bank runs do.
hilarious attempt at a metaphor, traffic deaths from personal automobiles have been in the top 10 causes of death worldwide for the better part of a century lol
While that would obviously solve the (relatively minor, all things considered) problem of bank runs, the demand for long term loans is not nearly as large as the supply of long term money. Maturity transformation provides real value to the economy by consolidating short term deposits into things like mortgages and long term business loans.
Imagine if you could only get 3-year mortgages, after which the entire cost of the house had to be repaid. That would make home ownership unattainable for the vast majority of the population. Alternatively, if you could not access your savings for 10-30 years after depositing I bet a lot of people would not bother at all.
> Imagine if you could only get 3-year mortgages, after which the entire cost of the house had to be repaid. That would make home ownership unattainable for the vast majority of the population. Alternatively, if you could not access your savings for 10-30 years after depositing I bet a lot of people would not bother at all.
Adding on...
Balloon mortgages exist, although they're usually not very convenient though, because transaction costs are real and the risk of being unable to find acceptable finance terms when the balloon payment is due is also real.
Similarly, lots of people participate in retirement accounts with substantial fees for early access. I guess you could do mortgage lending from retirement funds, but the interest rates aren't compelling (they might be if that was the only source of long term lending though).
Perhaps in a pure market sense, but that's not the world we live in. The government (doesn't really matter where you live) has a vested interest in the status quo and wants people to make long term investments. That is good for both societal stability and for longer term economic growth. Therefore, such a government will support financial institutions in providing long term loans even if that sometimes leads to bank runs. Things like FDIC and related systems in other countries make sure the risk gets smoothed out over all participants in the economy.
My point is that when you take the view from the wider society, the price of long term loans should be (nearly) independent from the chance of bank runs. Those are only a problem for the shareholders of the bank itself, but not to the society it resides in.
I don’t really understand what you mean. Isn’t ‘in the business of borrowing short-term and lending long-term’ like half the definition of a bank? The other half being that they are licensed by the state to do this short-term borrowing, get state guarantees for deposits, and have to follow a bunch of regulations making them almost an instrument of the state.
It feels to me like saying that evictions wouldn’t be a thing if we simply didn’t allow tenancies.
I roughly believe that if you gave people the choice between paying to store money in ‘cash but it’s a number in a database’ (ie the thing you describe) and investing it in some kind of ‘not a bank’ where they can earn interest and withdraw when they please but the big pot of money is loaned out, there might not be runs of the ‘bank’, but there would likely be runs of the ‘not a bank’.
> Daily reminder that bank runs wouldn't be a thing if we did duration matching, forbidding banks from borrowing short and lending long.
Yes but this is a valuable service for the economy and so society has decided that it's worth the cost of insuring the risk of a bank run in exchange for the economic benefit of banks doing this.
> telling two or more people they own the same dollar at the same point in time.
I don't remember a bank ever telling me this. I was taught how banks work way back in grade school. Surely everyone knows that banks don't literally hold the money you deposit in a vault somewhere.
I honestly don't see where banks are lying about this.
They may not be explicitly stating it but if the bank has $100m in assets most likely they are holing ~10% of that in cash and the rest in loans/real estate/bonds. If 2 members of the bank each cash out $10m at the same time they have a problem - in other words two people were owning the same $ at the same time
> in other words two people were owning the same $ at the same time
But that's not what that means at all. It's not even implied, unless people are just not understanding what it is that banks do or how they work. But I don't see how anyone can fault the bank for that.
Does that provide a better outcome for society than something like FDIC deposit insurance and the occasional run?
Seems like for the vast majority of people it does not. Most banks make enough money to pay their FDIC premiums and some interest on demand accounts and profit for their shareholders, and the few that don't are covered by insurance. That seems way better than having to pay a monthly fee to keep my money safe and liquid.
>there wouldn't need to be a reserve ratio at all.
Wouldn't there? The bank could still end up with bad loans in excess of their models and require some capital to take the loss before depositors. Or are you suggesting that banks are simply a market maker between depositors and those with loans? That seems even less optimal, societally.
Lying is wrong[1]. Therefore, it is bad to base your banking system on it. It's the typical thing where the costs to the system accrete over time and then cause a crisis: the elites are bailed out, the taxpayers eat it.
There wouldn't need to be a reserve ratio. A dollar could, in theory, be lent out an infinite number of times, so long as that dollar were lent (and saved) at increasingly shorter durations. At any given point of time, a single person "owns" that dollar. Of course, the market would signal what dollars were available when. And, also, loan losses would need to be covered out of other profits by banks (who would need to charge service fees for, well, the services they provide, rather than hiding behind long/short duration arbitrage)
(I'm also in favor of a citizens dividend for controlling money growth, and a modern debt jubilee per Steve Keen. So, yes, you can safely ignore anything I say as implausible, almost certainly wrong, and unlikely to ever be realistically considered by the powers that be. This has one advantage, however: I will never be proven wrong :)
[1] - see all moral traditions across all cultures, or ask mom
Nope. I was a gold bug once, but I don't think it's a good way to manage the total money supply: it can't grow as fast as the economy (labor productivity) does. I view money is a public social tool, and so it should be owned by all of us. Hence I am in favor of a citizens dividend for growing the money supply.
I do think you should be able to trade fiat into gold and vice versa tax free, so gold can be used for savings, which it is very good at.
In fairness, nobody agrees with me on this stuff, including myself at times!
Banks are one, if not the most, regulated companies in the US.
What are banks lying about and who are they lying to?
I'd assume the government would come down on them pretty hard if it turns out that all banks are lying to their customers as federal and state regulations on banks are pretty heavy handed to make sure that the vast majority of banks are healthy at any given time.
The bank is telling two or more people they own (or, at least, have access to) the same dollar at the same point in time.
With duration matching you can have loans, but it is clear that depositor A can't get dollar X back until time point T, and that borrower B can have the dollar until then.
> The bank is telling two or more people they own (or, at least, have access to) the same dollar at the same point in time
But they don't do that. Or, I've literally never seen them do that.
What the bank tells me is what my current deposit is. That's the truth. They aren't representing that the amount they're listing is a specific dollar somewhere, they're telling me how much money I've given to them.
They are telling you you can have all that money immediately. And they are telling that to all the depositors. That's the lie. It's a bit abstracted due to aggregation, admittedly, but that's the lie.
I use a single dollar just to make the idea concrete.
> They are telling you you can have all that money immediately.
I don't think they're even telling you that. And that is absolutely not what we were taught about banks in school. I think that banks do assume that everyone basically knows how banking works, though, so they don't engage in an educational program about it when you open an account.
What banks have told me is that my deposits are safe (in the sense that I won't lose my money) up to $250k. That's true enough. And I also remember reading the paperwork I signed when I've opened accounts where they specifically say that my deposits might not be available at the moment I want to withdraw them, for various reasons.
>And, also, loan losses would need to be covered out of other profits by banks
But, like, what if they aren't? Who holds the bag when losses exceed profits? That is of course exactly the case where deposit insurance comes in handy. So I'm pretty sure you still need it.
Your model protects specifically against losses due to time mismatch between deposits and loans, but there are other ways that loans can go bad!
The bank has to make money, otherwise it cannot pay it's staff or keep the lights on.
So that's either loans, or effectively giving people a negative interest account where you lose your money. Citibank does this, they just call it "fees" and it really, really hurts the people who don't have much money.
“Sorry we have to wait for someone else to want a loan”
If you’re trying to solve one extremely rare problem (bank runs) by completely dismantling a much demanded and commonly used banking feature (interest bearing accounts with liquidity) then sure, this would do it.
You are touching on the difference between demand deposits and duration deposits.
If you were charged a small nominal fee for your demand deposits, you would likely say "OK, I'll keep a certain amount in my demand deposit account, and then put the stuff I don't need into longer duration deposits, so I can get some interest."
This would be the right thing, and that money could be safely loaned out at durations shorter than you deposited. You would then be signalling to the market exactly what the demand is for money over time, and it could respond appropriately.
To an extent you do this today: you don't keep all your money in demand deposits, you instead put a lot in the market or whatever. Back in the day, you might have even bought a CD, which is almost exactly what I'm describing, sans the requirement that banks not loan funds they can't guarantee are available for the duration of the loan.
So it's not as crazy as it sounds. It's still crazy, but not as crazy as it sounds.
CDs are duration deposits, but you can still get the money out minus some fees associated with the early withdrawal. That doesn't help the run on the bank situation.
So long as the bank has reserves (out of profits) they can offer to buy people out early, according to their own profit and loss calculations. But they can't be compelled to, and they must have that money available to them at the given moment.
In this make believe banking system that I am making up. :)
Well sure, but one could theoretically imagine banks which are prohibited to lend money from their customers' current accounts and only make loans based on their CDs - and one aspect of that is that they'd have to offer much better terms for CDs since they would be in much higher demand.
CDs are definitely not the same as checking and savings accounts though. Most people don't even have any CDs, and the people who do have them also have accounts where they can withdraw money immediately.
I've never seen a bank that only offers CDs. That's probably because such a bank wouldn't survive.
> telling two or more people they own the same dollar
This is the main issue, and it's called a "reserve requirement", which is a percentage of the deposits that the bank must keep on hand to mitigate risk of issues like this.
In March 2020 the US Federal Reserve lowered it from 8% to 0%, which is where it is today. Just to give you an idea of how the economy works then, let's say you put $100 into your account at Bank A. Company X takes a loan from the bank for $100. Where do they put their money from the loan? Well, they spend most of it but part of it ends up in, let's say, Bank B. Bank B then takes that money and loans it out 100% to Company Y, who spends some of it and also puts some reserve into their bank account in Bank A. Which lends it out 100%.
So this is an over-simplified example but just to give a visual that this is where inflation is coming from. The "government" isn't printing money -- the banks are. It's a deck of cards with no safety net.
Watch the movie "The Big Short" and tell me how this isn't the same situation.
This "money multiplier" model is not an accurate description of how money creation actually works in modern central banking.
Besides a minimum reserve requirement, banks also have liquidity and (risk-weighted) capital adequacy requirements, which are practically much more relevant.
The 2008 financial crisis was effectively caused by "laundering"/structuring the risk weights.
I get what you're saying, but also I'm going to call BS on whatever liquidity testing banks need to do currently to satisfy the Fed. They're obviously not required to cover changing risks.
I think what's happening now is equivalent to 2008, it's just the underlying security was bonds and, in SVB's case, emerging equity. There were risks on all sides of the equation.
It's surprising that QT is occurring, yet there was no change in reserve requirements. It seems like a policy tool that would be part of the monetary tightening toolbelt.
> reminder that bank runs wouldn't be a thing if we did duration matching, forbidding banks from borrowing short and lending long
What is the business then? In order for it to be a business, a bank needs to earn a higher interest rate on what they lend than on what they borrow.
The bank has two choices to achieve this delta in interest rates. It can either 1. mismatch duration or 2. make loans that are riskier than their borrowings. By banning the first, you are implicitly claiming that the second is preferable. Is the second really preferable? Maybe. But not obviously.
I have no special sympathies for Silicon Valley Bank, but the reason its customers still have deposits today is that the bank leaned more toward the duration mismatch than the risk mismatch. What happens if you achieve your interest rate delta by making super risky loans and all those loans turn to goose eggs? Bye bye customer deposits.
That's insanely unrealistic in the near zero interest rate era of the past decade and merely a really terrible idea with more normal rates.
Banks have some set of relatively fixed cost, in terms of systems and staff. In a low rate environment, there's virtually no margin to be made on short term lending. Stretching the duration for higher yield is the only way to get margin to cover expenses.
Even in a high rate environment, most of a bank's reserves tend to be short term - savings accounts, 1 year CDs, etc. The things people want to borrow for (e.g. houses, cars) tend to have a longer time horizon to pay off. So if you want banks to actually make those kinds of loans, duration matching doesn't work.
That's right. Banks would have to charge fees for the services they provide, or become more efficient, or both.
They certainly would become less of a profitable and shrink as a percentage of the economy. Which is good: smart folks would be incentivized to go into things like manufacturing and research, and produce actual value.
You think banks would become less profitable by charging fees?
Retail banking is not some wildly lucrative enterprise, generally speaking - it's the boring, stable-ish segment of finance. They're gonna make roughly the same margin, whether through fees or spread.
No apparently there are still other rules that keep things in check we just got rid of that one. My understanding is that it did crank up the speed money printing quite significantly though.
I mean, yes, that is a problem, but it’s also their only benefit. The entire reason banks came into existence is to multiply the availability of currency (i.e. fractional reserve).
> If they locked deposits for a period of time they could safely (and morally) loan that money out without lying, and, in fact, there wouldn't need to be a reserve ratio at all.
Until the borrower doesn't (or can't) pay back the loan...
"Safe" and "moral" seem like inherently relevant words here and I'm unconvinced that you're proposal would be overall beneficial compared to the increased circulation we enable today.
We used to call that concept matched-funding where I used to work and it was quite an important part of Asset/Liability management within the Risk Management function.
You may be confusing solvability and liquidity. You may be well capitalised but if you run out of cash it's game over. Being well capitalised only protects you against losses (eg bad loans).
There is a product called a Certificate of Deposit[1], but I don’t hear much about them. They seem like quite a bit of hassle for not much more interest.
Not very common. Most consumer and business checking and savings accounts are demand deposit accounts here.
The default path for slightly higher interest on a fixed term in the US tends to be certificates of deposit. They’re similar but functionally more like a bond you purchase than an account you can deposit into regularly.
As always, the underlying problem in banking is that the banks are lying, telling two or more people they own the same dollar at the same point in time. If they locked deposits for a period of time they could safely (and morally) loan that money out without lying, and, in fact, there wouldn't need to be a reserve ratio at all.
Demand deposits should cost a low service fee, since the money can't be safely lent.
Yes, I'm a lot of fun at parties, why do you ask?