US banks are now finding themselves in a situation where homeowners don’t have to make mortgage payments for few months, and renters don’t have to pay rent for a while, which leaves many landlords unable to make their mortgage payments – not to speak of the many Airbnb hosts that have no guests and won’t be able to make their mortgage payments. Commercial real estate is in turmoil because the tenants have closed shop and cannot or won’t make rent payments, and these landlords are going to have long discussions with their bankers about skipping mortgage payments. And subprime auto loans and subprime credit card loans, which were already blowing up before the crisis, are now an unspeakable mess, as tens of millions of people have suddenly lost their jobs.
Amid this toxic environment for the banks, here come the New York Fed and the FDIC and tout the “Value of Opacity in a Banking Crisis,” explaining, supported by empirical data from the Great Depression, that it’s better to stop disclosing balance sheet information about individual banks.
So here we go, as to why it’s important for “authorities” to lie about banks during a crisis. It’s not directed at households, as we’ll see in a moment – but at corporations, hedge funds, PE firms, state and local government entities, and other institutional bank customers whose bank balances by far exceed deposit insurance limits and that would yank their mega-deposits out of that bank at the first sign of trouble.
The authors of the article, a joint production by the FDIC and the New York Fed, cite Great Depression data before the arrival of FDIC deposit insurance to show how lying about balance sheets of individual banks is beneficial in ending runs on weak banks. They’re talking about accounts that were uninsured at the time, and that’s the key for today, as we’ll see in a moment. (...)
It U-turns right at this spot in a conclusion, titled “Why Does This Result Matter Today?”
Few households have daily liquidity needs that exceed FDIC deposit insurance limits, and savers can spread their bank deposits to different banks and stay within the FDIC limits with each deposit account.
Also, these “call reports” are not easy to dig up and read – though they’re available online. This is something that normal households have neither the time nor the expertise to deal with. So this suppression of information is not directed at savers and households.
But it is directed at businesses, state and local government entities, hedge funds, PE firms, and other institutional bank customers that need big balances in their accounts to fund their operations on a daily basis, engage in transactions, and the like, and that have the staff and expertise to study the call reports and use them as actionable data. And they’d yank their mega-deposits out of that bank at the first sign of trouble appearing in the call reports. (...)
It is interesting that the “value” of suppressing information about bank balance sheets are being touted now as banks are suddenly finding themselves stuck in a financial crisis so vast that the Fed decided to unleash the biggest amount of money printing in history in an attempt to bail out all aspects of Wall Street.
And it is even more interesting that this is so clearly directed at business and institutional bank customers and counterparties that apparently need to be kept in the dark about the health of their banks, lest they yank out their large deposits.
Runs on the bank don’t take place today by people waiting in line at the branch to take out their $500 in savings. They happen when corporations, financial entities, and counterparties lose confidence in the bank and yank their millions and billions out.
Amid this toxic environment for the banks, here come the New York Fed and the FDIC and tout the “Value of Opacity in a Banking Crisis,” explaining, supported by empirical data from the Great Depression, that it’s better to stop disclosing balance sheet information about individual banks.
So here we go, as to why it’s important for “authorities” to lie about banks during a crisis. It’s not directed at households, as we’ll see in a moment – but at corporations, hedge funds, PE firms, state and local government entities, and other institutional bank customers whose bank balances by far exceed deposit insurance limits and that would yank their mega-deposits out of that bank at the first sign of trouble.
The authors of the article, a joint production by the FDIC and the New York Fed, cite Great Depression data before the arrival of FDIC deposit insurance to show how lying about balance sheets of individual banks is beneficial in ending runs on weak banks. They’re talking about accounts that were uninsured at the time, and that’s the key for today, as we’ll see in a moment. (...)
Having deposit insurance makes household depositors much less sensitive to bank-level information; once they are insured, depositors no longer have an incentive to monitor banks and so they pay less attention to the publication of balance-sheet statistics.
As a result, the introduction of deposit insurance makes irrelevant the gains from making the balance sheets of state-charter banks more opaque, placing national‑charter and state-charter back on an equal footing.But wait… That’s not where this story goes.
It U-turns right at this spot in a conclusion, titled “Why Does This Result Matter Today?”
Even with the FDIC’s deposit insurance program, public disclosure of the portfolio of assets held by banks matters because banks issue significant amounts of debt that is not insured (for example, a significant fraction of bank deposits today are not insured by the FDIC).These uninsured deposits are in accounts that exceed by a wide margin the FDIC deposit insurance limit of $250,000. They’re held mostly by businesses, institutions, state and local government entities, hedge funds, PE firms, and the like. They may have hundreds of millions or even billions of dollars in their transaction accounts.
Few households have daily liquidity needs that exceed FDIC deposit insurance limits, and savers can spread their bank deposits to different banks and stay within the FDIC limits with each deposit account.
Also, these “call reports” are not easy to dig up and read – though they’re available online. This is something that normal households have neither the time nor the expertise to deal with. So this suppression of information is not directed at savers and households.
But it is directed at businesses, state and local government entities, hedge funds, PE firms, and other institutional bank customers that need big balances in their accounts to fund their operations on a daily basis, engage in transactions, and the like, and that have the staff and expertise to study the call reports and use them as actionable data. And they’d yank their mega-deposits out of that bank at the first sign of trouble appearing in the call reports. (...)
It is interesting that the “value” of suppressing information about bank balance sheets are being touted now as banks are suddenly finding themselves stuck in a financial crisis so vast that the Fed decided to unleash the biggest amount of money printing in history in an attempt to bail out all aspects of Wall Street.
And it is even more interesting that this is so clearly directed at business and institutional bank customers and counterparties that apparently need to be kept in the dark about the health of their banks, lest they yank out their large deposits.
Runs on the bank don’t take place today by people waiting in line at the branch to take out their $500 in savings. They happen when corporations, financial entities, and counterparties lose confidence in the bank and yank their millions and billions out.
by Wolf Richter, Wolf Street | Read more:
[ed. Kind of raises a red flag, don't you think? See also: ‘It will not go forgotten’: One Seattle business and its tale of two landlords during the coronavirus crisis (Seattle Times).]
