Banks BalanceSheet
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When the financial crisis erupted at the end of September 2008, there was an unusual sense of incredible panic among banking executives and government officials. These two establishment groups are known for their conservative, understated approach and, above all, their stiff upper lip. Yet at the time they appeared to the public running about like headless chickens. It was chaos.
The Largest Heist in History
House of Commons - Memorandum from Greg Pytel
Building the Great Pyramid: The Global Financial Crisis Explained When the financial crisis erupted at the end of September 2008, there was an unusual sense of incredible panic among banking executives and government officials. These two establishment groups are known for their conservative, understated approach and, above all, their stiff upper lip. Yet at the time they appeared to the public running about like headless chickens. It was chaos. A state of complete chaos.(This article is a technical analysis dedicated to the CEO of one of the largest and most famous banks in the world, referred to in the article “Liquidity risk” , who took care to write to the author of this blog.) The key issue about banks liquidity is money multiplier. Money multiplier is a ratio of banks balance sheets to cash in circulation. It answers a question: how many pounds on the banks balance sheets does £1 real cash has to cover?
Loan to deposit ratio and banks liquidity
Q&A: Northern Rock crisis
This has made the Newcastle-based firm the highest-profile UK victim of the global credit crunch, triggered by the sub-prime mortgage crisis in the US. Unlike most banks, which get their money from customers making deposits into savings accounts, Northern Rock is built around its mortgage business. It raises most of the money which it provides for mortgages via the wholesale credit market - primarily by selling the debt on in the form of bonds. Following the widespread losses made by investors in loans to US homebuyers with poor credit history, the so-called sub-prime loans, banks and investors who have had their fingers burned have become wary of buying any mortgage debt, including Northern Rock's.
In response to the assertion by the author of this blog that the financial system was turned into a pyramid scheme, the CEO of one of the world largest and best known banks wrote to the author, justifying his denial of this assertion (calling it ”completely baseless” ): "Banks certainly undertake a process of maturity transformation – that is the fundamental responsibility of banks: to borrow short and lend long. In doing so, banks take what I would call liquidity risk: the risk that at any point in time a creditor might demand repayment, but the bank is unable to provide that because it does not have cash to hand because the borrower is not due to repay their loan for some time. That is wholly different from a pyramid scheme where the borrower has no idea where the funds are going to come from when the obligation is constructed." The author of this blog responded:
Liquidity risk
how does it work?
For those who cannot visualise how lending with loan to deposit ratio above 100% pumps out cash of bank reserves and creates a financial pyramid below is a simplified example based on two banks financial system. Please go with pen and paper line by line and follow the growth of bogus balance sheets. 1. Two Banks A and B are set up.
Today I will describe TARP II, the plan we (the Bush Administration) implemented, in which the government made direct equity investments in banks to help fill their capital holes. We called this the Capital Purchase Program. Large Bank has downside risk on its balance sheet due to the uncertain value of these bad loans. That downside risk makes the firm’s value uncertain and scares away investors.
Intro to TARP — TARP II: Direct investment | KeithHennessey.com
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The “using TARP funds for stimulus” gimmick | KeithHennessey.com
I lost money on this – so you can take my analysis with the caveat of a slightly angry grain of salt. But I still think the seizure of Washington Mutual is the most capricious government action of this cycle and possibly the worst thing that has happened to American Capitalism this cycle. But that takes a little explaining. Lets do it on a typical current account deficit country bank. In a country with a current account deficit the loan to deposit ratio of the bank is usually something like 130.
The reckless, irresponsible seizure of Washington Mutual: please
Deflation and bank bailouts in Japan
Given what is happening with Fannie Mae at the moment I should share a little of the history of non-US bank bail outs. I will start with and later do . was an unusual bank collapse. It happened despite excess savings in the system .
The Norwegian bank collapse – a fixed currency model with a curr
In my post about the Japanese bank collapse I showed how insolvent banks could remain liquid and hence operating for decades provided that they had (a) sufficient deposit funding and (b) low enough interest rates. [ Please read the Japan post before you read this one. ] Given that the Japan situation required sufficient deposit funding I argued the Japanese deflation model was not a good model for how the situation would wind up. I promised to talk about the Scandinavian bank collapse in a follow up post. As I wrote this post I realised that I did not know enough about the Scandinavian collapse generally to write a useful post. But I know plenty about the Norwegian collapse.Quelle Surprise! Big Banks Who Got TARP Funds Reduced Lending «
Before we get to the particulars of tonight’s Wall Street Journal story, we need to step back a second. Just like the war in Iraq, which had a ton of justifications served up by the Bush Administration, none of which added up (and the most obvious one, that the Bushies wanted to control the second biggest oil reserves on the planet, somehow never gets mentioned in polite company in the US), we’ve also had too many rationales offered for the TARP in its very short life. The one that has stuck with Congress and in the public’s mind is that it was meant to get banks lending again. And the Journal tells us that measured against that benchmark, it hasn’t worked. Like the war in Iraq, it’s a given that the stated rationales for the TARP were not the real one. Cynics see it as a plutocratic transfer, son of the grossly inflated outsourcing contracts to Halliburton and friends in the Middle East, a last opportunistic looting of the Treasury (literally, in this case).The Federal Reserve Bank Discount Window & Payment System Risk W
In 2005, the Federal Reserve announced the implementation of separate valuation processes for loans pledged in a designated format through our Automated Loan Deposit process (ALD) or "individually deposited," versus loans pledged in an alternative format or "group deposited." At that time, it was also noted that lendable values for group deposited loans would be based on assumptions regarding the average risk characteristics of the loans and subject to periodic changes. Effective April 27, 2009, the Federal Reserve will make the following changes to the lendable values for group deposited loans pledged to the Federal Reserve Banks for discount window or PSR collateral purposes, to reflect recent trends in the values of some types of loans:On a nationwide basis, Fannie Mae and Freddie Mac own or guarantee 60 percent of the mortgages outstanding, but they account for only 29 percent of seriously delinquent loans, obviously a much lower proportion than their share of the market. Even though the Enterprises have a smaller share of seriously delinquent loans than other market participants, they account for just over half of all Home Affordable Modification Program, or HAMP modifications. Between HAMP modifications and their own proprietary loan modifications, Fannie Mae and Freddie Mac have completed more than 1.1 million loan modifications since the fourth quarter of 2008.
Calculated Risk
by CalculatedRisk on 4/26/2009 11:57:00 AM Note: I took some short cuts to make this simple - think of this conceptually . I'm intentionally mixing financial institutions. For commercial banks, the FDIC stopped the bank run by upping the FDIC insurance. For investment banks, the Fed provided the liquidity. Please think of this conceptually or I'll have to write 100 pages ...
Calculated Risk: Bank Balance Sheet: Liquidity and Solvency, Par
Bal Sheet Governance
Bank Funding
Securitisation Bonds etc