But what about the size of the population of banks. Is it much less than the 1980s? If so, it is the % of failure that is significant not the gross number.
I came to US in early 70's and the years that show almost 500 bank failures to me looked like a great time to work and make money, better then the supposedly boom years.
In that context 300 bank failures are nothing. It feels much more like the second graph.
A few posters have predicted bank failures this year running as high as 300. If they were distributed linearly, we should be seeing about 6/week. Thus far we are running well behind that average (at 1 in 4 weeks). FDIC appears to prefer to do the closings on a Friday.
If the number actually climbs sharply upward, what will happen when 10 banks are taken over by OTS/FDIC on some Friday morning ?
How will the White House, the MSM, FDIC, Treasury, et al, spin this to the consumers/depositors (who do not currently have a grasp that some of the banks are shaky) ?
Once the news settles in, how many of those depositors will spend the weekend watching CNBC/CNN/Fox, talk to their friends, relatives, and neighbors, and then run right down to their own bank on Monday morning and yank some cash ("just in case") ?
If the number of failures is concentrated in a period of several months, can the average consumer/depositor stand week after week of news reports of more bank failures without (unintentionally) triggering a Northern Rock type of event ?
I'm asking all these questions both from an operational perspective (do the banks keep sufficient vault cash on hand) and a psychological perspective (can the guys inside the Beltway spin this event before it spins totally out of control).
Ray
P.S. the only person I know who actually when thru the 1929 mess is my grandmother (now 92). I asked her how it was back then... "terrible" was the only word she replied.
I tried to pull out 35K a while back, and was told they'd have to 'order' it. It did make me wonder, if they had a system in place to avoid bank runs and the economic damage they cause?
"Bad" businesses will be weeded out (specially those responsible for the recessions).
That's a more optimistic scenario.
A more pessimistic scenario is that we preserve these bad businesses and still have a serious recession, coming out the other end having traded the long-term health of the economy for marginal gains in short-term growth.
You could construct a similar graph with "Investor" - "Hedge Fund" - "Market"
The point is the intermediary, who gets short-term rewards and is protected from long-term risk, deliberately hides/obscures these risks to maximize their own gains while greatly amplifying aggregate losses in the end.
I agree with everyone here - Jas should be totally banned, whether it requires registration or making it a paying site for comments, or whatever. He says things that may be true, but I do not like to hear them and neither do my other American friends. He is like those few jerks, who were criticizing Iraq war in 2002 while we were all gung ho about it. It is better to have most of us here, who agree about the posted topics rather than those who stir the pot once in a while. Moreover, it is CR and Tanta's blog. Therefore, the comment sections should allow only those people who mostly agree with what they posted.
"A more pessimistic scenario is that we preserve these bad businesses and still have a serious recession, coming out the other end having traded the long-term health of the economy for marginal gains in short-term growth."
Quite. I fear that sort of interference from the government. Supply and demand can take care of this, but it won't make everyone happy such as those tied to the businesses that fail. I'm all for the long term preservation...
To put some perspective on Depression bank failures: most of the big banks back then were well-run, and survived just fine. (The big exception was the famous Bank of United States failure, which Friedman & Schwartz attributed as much to antisemitism as anything else.) It was the little banks--particularly those with lax regulation--that got hit in the neck. The banking system did poorly in the Depression, but the real economy did far worse.
I'm not sure that the current situation compares. The system is more concentrated today, and the big banks have tended to be more exposed to securitizations and derivatives. Some small banks will be in CRE trouble, but most will not.
Banks that made a lot of construction loans and unsecured loans to small biz are gonna get killed...because small business is heading into really rough times.
Mandatory health insurance and higher business taxes are coming. Higher costs are a problem across the board, and small biz doesn't have ability to pass it through.
It won't be a big spike like the late 80s. It will just be slow death for a lotta small and mid-size banks, maybe over as long as a decade.
Yeah, as I read a few years back, bank's overall exposure to RE (RRE, CRE, MBS, C&D, etc.) is greater than that of Texas banks to oil in the 80's. BTW, none of the latter survived.
On Friday a trader at the banks London office suggested that events had unfolded in a more complicated way than Soc Gen has admitted. [Kerviel] was doing it in the bosss books, so when it emerged that something was wrong it was the boss who was called in and the boss who was fired, said the trader.
and who were the two American banks that extended the lifeline to SG ?
A true run on the banks won't show up as lines in the streets until very late in the process.
When Continental Illinois went down, there was a silent run of big money wiring funds out of the bank.
After all the big money has lined up at the exits to redeem their uninsured deposits, then the rumours will hit the news and the little people will line up to get their currency. The muggers will have a field day.
My grandmother was in front of one of those banks, and I grew up hearing of the great Depression (1).
In the end the small wealth of my family was preserved and my 84 year old mom is enjoying it today. My grandmother absolutely hated FDR, for reasons that I don't understand today.
To the end of his days, my grandad said how happy he was that he sold his butter and egg business in 1928, and went to work for a boring, but solid insurance company, which is still in business today, which has merged and changed names but is still there.
My grandparents, as far as I can see, didn't suffer at all. They owned everything free and clear. My grandma was a total cheapskate, so pinching pennies fit her personality. My mom was the kid on the block with the bike and the new doll.
They were in the stock mkt, in really solid stocks. My mom's at&t that she inherited at my grandmom's death was purchased in the 19th century.
I guess that the lesson is that if you have no debt, have a solid job etc, you may have some hair raising times, but will survive. But how many Americans does this apply to?
I'm going to get flamed for this, but... I say the probability of a bank run in this country is nearly zero. The FDIC is a pretty competent organization, there would be no haircut like there is (was) in the UK for smaller accounts, and most people with significant financial assets have them placed in the "markets" with a non-bank firm like Fidelity. If there was a real financial crisis, I wouldn't be surprised if bank deposits went up due to people taking money out of their investment accounts and moving it to "safer" banks. A few older folks might pull money significant amounts of money from this bank or that. But for most people, as long as the expected balance showed up on their ATM reciept, they wouldn't change things around.
I think that it is already happening. After several years of our auto insurance going down, this year it went up $100. Nothing changed, no claims and no tickets.
I think that the company is making up for loses in the credit markets.
One thing to consider when studying CR's excellent analysis is the 1994 passage of Riegle-Neal, which finally authorized interstate banking, something the industry had dreamed of since the 1920s.
As an aside, interstate banking probably would have been authorized in 1930 had it not been for the stock market crash. California's Bank of America, for example, had already purchased a Long Island, New York bank in anticipation. The New Deal and Glass-Steagall killed it.
Of course, the industry has concentrated since the passage of interstate banking. Sometime around 1993 or 1994 (I have a copy of it somewhere), I recall seeing a letter written by the then-president of the Richmond Fed explaining that the Fed expected to end up with four--count 'em--U.S. banks holding 90% of the retail business. The Fed thought that a good thing.
The unit banks are pretty much gone, gobbled up for branches by the megabanks. IMO, it concentrated risk and banking became less responsive to the needs of the local community, but that's not the topic here.
My family didn't talk about the Depression much, but here are some impressions that I picked up over the years:
My grandfather felt that if your workers needed or wanted a union, it was a sign that you didn't treat them right and that you failed as a businessman. [Prediction: we are going to have a lot of pissed off unions in a few years.]
At my grandfather's funeral, several retired doctors came up to my parents and mentioned that my grandfather had helped the local hospitals meet payroll during the Depression. Other small businessmen reported the same thing. No one in the family had heard anything about this. My grandfather never mentioned it, but the people that he helped remembered.
My aunt and father remembered that their parents were concerned that angry workers might march from the rubber factories and burn down the Firestone mansion down the street. They were concerned that the workers might burn down all the other houses on the street, including my great-grandfather's and my grandparents.
My maternal grandmother described how the small businessmen organized themselves into patrols to keep things from getting out of hand which would have given the company guards an excuse for busting heads. She also described how businesses cut back on individual worker's hours so that they could share the work, layoffs could be avoided, and family breadwinners would have something. She also stressed living within your means and that debt was to be avoided.
That was the same generation that made a battleship a week during world war one and everyone cut back on gas, nylon etc. Unfortunately I think those times are gone.
Taken together, the signs from the world economy are troubling. The credit binge will not unwind quickly or gently. Asset prices will fall. But central bankers and regulators have the tools to stop a downturn from becoming a slump, so long as they use them sensibly. Reacting to market panic with panicky rate cuts is likely to make things worse rather than better. The Fed should always be the calm centre of a financial storm.
"It's interesting to note that even with the failure of almost 3,000 banks and thrifts during the S&L crisis, the overall economy was healthy."
What do you mean by healthy? Interest rates at 15%? The second huge Florida real estate bust during our residence here (the first was in 73-74). The recession of 1981-82? Unemployment rates of over 7 to almost 10%? Boy - those were really the good old days.
What we are going through now - at least as of today - is nothing compared to the recession of the early 80's - the recession in '73-'74 - and earlier post WWII recessions. And if you speak to people like my 90 year old father - nothing post WWII is anything like the 30's.
I think it's important to keep things in perspective. Roby
CR, another bit of minutae just bubbled up in my cortex.
If memory serves, weren't most of the failures in the 20s state chartered banks? Most weren't subject to federal regulation because they didn't want the restrictions associated with a federal charter.
Thank you CR and Tanta, you ROCK. I have been following your blog for the last year. And following the very insightful logic on this blog, in July I sold my home and now I have four years of my yearly income in CDs, and the interest I make on them more than pays my rent.
I was watching FOX news last night and they were complaining about the choices for president, basically saying none of the candidates where qualified, then on the same show, they were saying this is a "great time to buy a house." How can then can they say that, when they're saying basically we don't think any of of candidates are qualified yet tell people to go out an buy a house??? MSM at it's best. Why would anyone buy a house now ... why wouldn't they wait until AFTER the election to see who's in charge. Thanks for this wonderful, insightful blog.
The fear is that the back to back bubbles in the dotcoms, real estate, and credit, couple with devastating Republican policies of over spending, under taxing, off shoring jobs and importing low wage workers will cause something far worse than any post WWII recession.
My grandfather felt that if your workers needed or wanted a union, it was a sign that you didn't treat them right and that you failed as a businessman
I support collective bargaining, but this is true. If you look on Fortune's annual 10 Best Employers list, Wegmans grocery is always on there near the very top. No unions, and they aim to keep it that way.
Wegmans, which is not a high-end grocery chain (it's the dominant grocery chain in down-and-out upstate NY), isn't popular because of the prices (not particularly low)... it's just a pleasant place to shop, mainly because the employees are so sickeningly nice.
A RAFT of European hedge funds have been forced to introduce emergency measures to protect their businesses from collapsing in the wake of the turmoil in financial markets.
Up to 10 European hedge funds have suspended redemptions after investors clamoured for their cash when the managers made severe losses.
A London prime broker told The Sunday Times that even before last weeks extreme gyrations, nearly two-thirds of London-based hedge funds had lost between 4% and 10% of their value. A significant number had lost much more, he said.
I heard a lot about the Depression from my granfather, who went in with $600 in cash (he said he kept it in the mattress. He drove a truck, and I often wonder where he got the cash), purchased assets and business interests for pennies on the dollar, starved his family to make a go of it, came out a wealthy man, split the family fortune among lawyers and my grandmother during a divorce, sold his businesses and got burned, retired before age 50 and lived to be 84. We still have very limited wealth acquired by this man (in the form of property).
Here's what he taught me:
Always keep some cash stashed away.
When hard times come, don't spend money on anything you don't absolutely need (in his opinion, his family didn't need food or heat - my mom tells stories of bread and milk for dinner, frequently).
Always have a paid-for vehicle.
Always get a signed contract (never do business on a handshake).
Never pay interest.
Always charge interest.
Always get collateral.
Never lend a friend or family member money. If you do, make sure you have a signed contract, and be ready to overlook your friendship/family relationship should push come to shove. Better to give a gift and save a friendship than to loose both friend and money.
Always address business associates as "Mr." or "Ms." - never as you would a family member or social acquaintance. (archaic nowadays)
Buy a farm at the first opportunity. (When he said, "buy", he didn't mean "mortgage". This is starting to seem very sensible in light of our current situation)
Never look too willing to buy or sell anything.
Make sure your employees understand their jobs and do the full days work they are paid to do. Reward those who understand both sides of the contract, fire those who don't.
Keep hard working employees, even if it means taking a cut on your own income.
If you have a real business, you won't have time to play golf.
Never try to break a horse if horse-breaking is not your primary occupation. (bad farm accident - ouch)
Other than that, he was a straight-up, old-fashioned, no-nonsense guy, who could make a person stop talking with a hard look.
I wish he was around today. I sure hope I'm cut out for what's coming.
It's interesting to note that even with the failure of almost 3,000 banks and thrifts during the S&L crisis, the overall economy was healthy. - CR
It wasn't healthy overall out here in flyover... from the Rockies to the Appalachians and from the Canadian border to Texas oil patch the mid 80s was a disaster. Now, while no one of these states is as populous as California or New York the region in total is more populous than either state - just spread out spatially.
It was the prototype precursor for your 'frozen microwave burrito'.
All of this talk made me wonder about what the population of the US was during the 1929 event (and associated years). Found this page at the US Census site...
What makes people think that a run on banks is not all ready happening but in a different way. Any large withdrawal has become difficult. many may just be gradually removing funds as they see problems arising.
My mom always said that the song, I Can't Give You Anything But Love", always reminded her of the depression - when having a baby was the last thing anyone wanted, but sex was the only fun and free thing people had.
I can't cite the source, but I believe that in 1929, 95+% of Americans lived on, or had direct access to a farm. I think that today we're at under 3% and we sport a 300,000,000 population.
I drive from DC to Philly regularly. I always amazes me that among all of the thousands of people traveling I-95, not a damned one knows where his food is coming from.
Lordy, I feel like a geezer. I'm not that old, but my mom is 90, and my dad was even older. I heard so much about the Depression and the War I feel like I lived through them.
Certainly economic conditions help shape personalities. My dad was a tinkerer, and built secret compartments around the house to stash a little cash. Mom used to hide enough cash for the monthly bills (no more, though), and just use the bank for Christmas clubs and such. (Remember that--saving for Christmas every week for a year?)
Times change.
Oh--my one relevant question: Any readily-understandable source to sniff out warning signs, such as large pre-failure depository movements, or small banks with big CRE exposure?
He provided links that show banks are borrowing to meet their reserve requirements. Banks are broke, empty and devoid of cash.
Sorry for the caps, but I want to get a point across....
RESERVES ARE NO LONGER RELEVANT TO
THE US BANKING SYSTEM.
If you don't understand that, it's impossible to interpret what mp and others are saying.
Bank reserves consist of non-interest paying deposits at the Federal Reserve + vault cash. Since they pay no interest, excess reserves are a drag on profits. That makes them a bit like the old-maid card. No bank wants to get stuck with excess reserves as the end of the day.
Excess reserves deposited in electronic form at the Federal Reserve are usually easy to get rid of. Banks lend those funds out over-night through the interbank market. The interest rates may be poor, but it's better than zero.
Bank cash is a bit tricker. The big reason that banks get stuck holding excess reserves is because of vault cash. Banks have spent a lot of time doing better "cash management" to reduce the amount of cash they have on hand. It's the reason you now need to "order" large cash withdrawls. Banks, in general, would be much happier if all money was electronic.
The total required reserves in the banking system are generally pretty constant. The only reason they would change is if there was a sudden shift of money from savings accounts to checking accounts.
So, why the sudden demand for reserves? Why did non-borrowed reserves go negative?
The reason is that some banks are hoarding reserves. Instead of lending them out at the end of the day, the banks decided to hold onto them. Basically, the interbank market froze.
So, the real question is, why did it freeze? Maybe banks aren't lending because they aren't sure they can get their money back. Maybe it's because banks are worried about their own ability to borrow money from the interbank market and wanted a little cushion.
Whatever the reason, it created havoc.
Banks had to raise deposit rates to attract cash to get the money they needed to balance their books. Even though the Federal Reserve was cutting interest rates the fierce demand for deposits kept the cost for money high. Worse, many of the banks loans were tied to the prime rate and dropped along with the FFR.
Higher deposit rates, lower interest payments from loans meant lower bank earnings. Less earnings, less capital, less capital, fewer loans, fewer loans, less total money in the economy (and maybe a bankrupt bank or too).
To solve the problem, the Fed essentially decided to open up big, fat deposits with each of these banks to lower demand for deposits. It did that through the TAF auctions. The bank gives the Fed some loans and the bank gets back a big deposit at from the Fed.
Banks could have done it for themselves through the discount window but weren't willing to go that route.
With the Fed opening up big, fat deposits accounts at reserve short banks the deposit rates should fall. Lower deposit rates, higher profits.
And, that's what it's all really about. Trickling money into troubled banks balance sheets by goosing profits.
The question is, will the trickle be enough to offset the losses?
"I tried to pull out 35K a while back, and was told they'd have to 'order' it." -- Average Citizen
And this surprised you? The cage at any casino on the strip wouldn't be phased by that, but your average bank teller has never seen a customr pull that kind of cash.
I can say from personal experience that it's no big deal to get 5K from the drive thru at Chase, but 7x that is going to be a freakishly large cash transaction from one customer at a lot of branches (and only bring you unwanted attention). Who says you have to get it all at the same time or branch?
I find it interesting you guys talk about "zombie S&L's" from the 1980's in several other posts, but then fail to see the correlation between them and the sharp rise in failures during relatively good economic times like 1989 and 1990.
No lagged effect there just maybe?
Like F. Frederson, i think the traditional banking industry as a whole is going to see reintermediation (i.e. more deposits) as people take their money out of the stock market and put it back into the banking system.
I suspect a lot of folks who are just now noticing some trouble with making large cash movements are the ones who paid zero attention to PATRIOT Act and assorted Homeland Security nonsense for years, thinking it would never affect them.
Does anyone really think that in the post 9/11 world our banking procedural regulation would always be a whole lot smarter than our airport security? If so, how come?
What you're dealing with in some cases is a mixture of practical anti-money-laundering procedures, banks playing float games with your money, and Mickey Mouse PATRIOT Act stuff that is the financial equivalent of taking knitting needles away from little old ladies before they board planes.
I would therefore never assume that your difficulties necessarily mean that the bank's vault is empty. Perhaps so, but it's quite likely that you just discovered the other side of Homeland Security running unopposed for seven years.
TO me there seem two important conclusins jumping out of the bank failure charts:
a) There is a "season" for bank failures (K-fall and K-winter), and then there are long periods of times where there are virtually no failures at all
b) the FDIC along with other changes to the FED were beneficial in that even in the season of bank failures we were at lot better of in the 80s and 90s than in the twenties and thirties
--
So 2008 is when we would expect to see more of these small and mid-sized institutions start to fail, but the number of failures will probably be small as compared to the '80s.
That is because there are lot fewer small and mid-sized institutions. No? Some here have already pointed that out.
Banking and Finance Crooks made use of the too big to fail clause of the American System and started to get bigger and bigger. They also know that American People are politically impotent to act against them, so they face no challenge to their abuses. Their iron grip on the Federal Reserve and the Federal govt was an essential element.
The repeal of the Glass-Steagall Act by Weill-Rubin-Greenspan gang was the last nail in the coffin of checks on the Banking and Finance Crooks. Era of the American Financial Nazis had begun. They are unchecked and unchallengeable. They own all the candidates who have a chance at the nomination of either party for the 2008 election.
All TAF did was to create liabilites which banks are masquerading as cash temporary to dress up there balance sheets. We saw a spike in TAF interest at YE 2007 and we'll see more spikes at quarter ends as the banks have to report financials.
Unfortunately these borrowings aren't creating the same level of NIM because of the decreased prime rates everytime the Fed cuts. This is affecting all Variable rate loans and all new volume which is being booked. You can also bet that this new volume is dramatically underpriced for the risk being assumed.
Banks need capital derived from profitable operations which is tough when you are getting squeezed by lower income, higher cost of funds, and higher deliquencies / decreasing asset prices all at the same time.
Those with ample capital and sound risk management and credit policies will survive....the others need to go under. Plain and simple.
Even before Homeland Security there always was a reporting requirement for cash transactions over 10K, and not only at banks.
Don't remember the exact details but everyone always avoided them so as not to stand out.
Are there any data series showing the actual deposit amounts that were at these failed institutions over time.
I have no idea, but I'd guess there were a lot of itty bitty banks in the '20s. My intuitive (be that what it is) understanding of our financial system is that the numbers of banks, over time, have gradually been approaching 1.
(That's just my cheesy way of saying that the banking system in the U.S. has been gradually consolidating over time.)
If I could get me hands on the actual deposit amounts, then I could graph it out as a percentage of GDP, and even as multiple of currency outstanding. That would be illustrative.. possibly.
ha.. glad this isn't the newest thread, and I'm not wasting people's time by re-posing the most obvious question that was asked in the first few comments..
We saw a spike in TAF interest at YE 2007 and we'll see more spikes at quarter ends as the banks have to report financials.
It's not so much the banks, but the money market funds that are causing the spike in TAF interest at quarter end.
The money market funds are dumping anything that may look fishy before they have to report holdings at the end of the quarter. That means banks with conduits and SIVs have to move more of the paper on their books and more demand for deposits.
There have been only 42 Bank & Thrift failures in the last 10 years (as of 4/2007) In the 10 years prior to 1997, there were 2,179 Bank & Thrift failures.
The DICMCA's effect of allowing CBs to compete with S&Ls, MSBs, CUs, MMFs and other financial intermediaries was to reduce the size of the financial intermediaries, reduce the supply of loan-funds (available savings), increases the proportion, and the total costs of Commercial bank time deposits.
The commercial banks suffered no disintermediation but the financial intermediares went through an S&L crisis. Why? CBs don't loan out savings. CBs create new money when they make loans. In contrast the financial intermediaries loan out savings by borrowing short & lending long.
But the nail in the coffin was allowing S&Ls to engage in any type of lending, deregulation without legal safety nets.
Interest rate risks transformed into credit rate risks.
In retrospect, the banks as well as the thrifts should have been subject to more intense, not less, regulation. In re-organizing our financial institutions the first requirement is to recognize that the competitive freedoms of the mercantile marketplace cannot be applied to the institutions that create our money, or protect our savings. More that 75 years ago this wisdom was recognized by the inauguration of the FDIC (Banking Act of 1933), the FSLIC (National Housing Act of 1934) and many other changes in our banking structure.
Deregulating financial institutions to the extent that the thrifts have been deregulated, combined with the governments guarantee of the liabilities of these institutions, was an invitation to financial disaster.
There were a high number of bank failures in the 20's and 30's due to the fact that there was a "bank on every corner". Less so in the 80's and far less now in 2008. The number of bank prone to failure is considerably less now. Most banks these days are diversified in their holdings and can absorb losses. It's the lenders and small institutions (of which there are few) that are in serious trouble).
But what about the size of the population of banks. Is it much less than the 1980s? If so, it is the % of failure that is significant not the gross number.
Why would any healthy bank want to get into bed with developers?
How about a dollar amount of the deposits at the banks instead of the number?
Is that easy to come up with?
That seems much more relevant.
If the bottom 50% of banks closed shop noone would notice.
If the top 1% closed shop we'd be in depression.
Vader is right. Perhaps % of total bank deposits would be a better metric.
Does anyone know what the FDIC's reserves are like? How many failures of midsize banks could it handle?
Check previous posts by Conjure Bag.
He provided links that show banks are borrowing to meet their reserve requirements. Banks are broke, empty and devoid of cash.
We have been warned. The stage is set and the actors are ready.
The second graph puts it in perspective.
I came to US in early 70's and the years that show almost 500 bank failures to me looked like a great time to work and make money, better then the supposedly boom years.
In that context 300 bank failures are nothing. It feels much more like the second graph.
All, you can get all the detail you want at this FDIC site
. Use the "Detail" report and you can get the dollar numbers.
Best to all.
I like the caption on page 8 of the report:
Smaller institutions rely more on net interest income for their revenue.
Maybe because smaller institutions are actually banks, not hedge funds masquerading as banks?
Eh, what do you expect in a recession?
"Bad" businesses will be weeded out (specially those responsible for the recessions).
Good thing I'm in the power and metals industries...
CR,
A few posters have predicted bank failures this year running as high as 300. If they were distributed linearly, we should be seeing about 6/week. Thus far we are running well behind that average (at 1 in 4 weeks). FDIC appears to prefer to do the closings on a Friday.
If the number actually climbs sharply upward, what will happen when 10 banks are taken over by OTS/FDIC on some Friday morning ?
How will the White House, the MSM, FDIC, Treasury, et al, spin this to the consumers/depositors (who do not currently have a grasp that some of the banks are shaky) ?
Once the news settles in, how many of those depositors will spend the weekend watching CNBC/CNN/Fox, talk to their friends, relatives, and neighbors, and then run right down to their own bank on Monday morning and yank some cash ("just in case") ?
If the number of failures is concentrated in a period of several months, can the average consumer/depositor stand week after week of news reports of more bank failures without (unintentionally) triggering a Northern Rock type of event ?
I'm asking all these questions both from an operational perspective (do the banks keep sufficient vault cash on hand) and a psychological perspective (can the guys inside the Beltway spin this event before it spins totally out of control).
Ray
P.S. the only person I know who actually when thru the 1929 mess is my grandmother (now 92). I asked her how it was back then... "terrible" was the only word she replied.
Check previous posts by Conjure Bag.
mp, you've been upstaged!
Nice graph from mish's site.
http://bp2.blogger.com/_nSTO-vZpSgc/R5VesXtCUwI/AAAAAAAAB50/gUcUZpYFey8/s1600-h/Model-For-Fraud.png
I tried to pull out 35K a while back, and was told they'd have to 'order' it. It did make me wonder, if they had a system in place to avoid bank runs and the economic damage they cause?
Eh, what do you expect in a recession?
"Bad" businesses will be weeded out (specially those responsible for the recessions).
That's a more optimistic scenario.
A more pessimistic scenario is that we preserve these bad businesses and still have a serious recession, coming out the other end having traded the long-term health of the economy for marginal gains in short-term growth.
Nice graph from mish's site.
You could construct a similar graph with "Investor" - "Hedge Fund" - "Market"
The point is the intermediary, who gets short-term rewards and is protected from long-term risk, deliberately hides/obscures these risks to maximize their own gains while greatly amplifying aggregate losses in the end.
I agree with everyone here - Jas should be totally banned, whether it requires registration or making it a paying site for comments, or whatever. He says things that may be true, but I do not like to hear them and neither do my other American friends. He is like those few jerks, who were criticizing Iraq war in 2002 while we were all gung ho about it. It is better to have most of us here, who agree about the posted topics rather than those who stir the pot once in a while. Moreover, it is CR and Tanta's blog. Therefore, the comment sections should allow only those people who mostly agree with what they posted.
Oops, wrong thread. Is there any way to move the comment? Or I am going to repost in the other thread.
CR, when do you think S&P will release the results of their 'stress test' of MBIA and Ambac?
Calculated Risk: S&P: Bond Insurer Review to be Completed Next Week
I want to see fireworks, soon!
A new CR post.
Greasemonkey and killfile cleaning up the comments.
Life is good.
Thanks once again CR and Tanta. I just hit the tip jar.
Landesbanks' subprime exposure 80 bln eur -report
| Reuters
Run on the banks becoming more real?
ac | 01.26.08 - 8:58 pm | #
"A more pessimistic scenario is that we preserve these bad businesses and still have a serious recession, coming out the other end having traded the long-term health of the economy for marginal gains in short-term growth."
Quite. I fear that sort of interference from the government. Supply and demand can take care of this, but it won't make everyone happy such as those tied to the businesses that fail. I'm all for the long term preservation...
Dimitry,
Saw that. It just never seems to stop.
Just wonder about Monday DOW p reopening- -500?
I long ago decided that,
just for laughs ,
if ANY run-on-the-bank happens here.
I plan to get in line, yelling ..
" I WANT MY DADGUM MONEY "
icky twerp:
careful bro'. Someone might call you "drunk and disorderly" while organizing the line and Taser your sweet self.
If I see a bank run, I'll head the other way to my bank's nearest branch and make a withdrawal.
To put some perspective on Depression bank failures: most of the big banks back then were well-run, and survived just fine. (The big exception was the famous Bank of United States failure, which Friedman & Schwartz attributed as much to antisemitism as anything else.) It was the little banks--particularly those with lax regulation--that got hit in the neck. The banking system did poorly in the Depression, but the real economy did far worse.
I'm not sure that the current situation compares. The system is more concentrated today, and the big banks have tended to be more exposed to securitizations and derivatives. Some small banks will be in CRE trouble, but most will not.
NorkaWest,
Yeah, I already thought about that ,
I plan to be near the end of the line;
NOT near the doors.
Colorado credit union developments:
https://www.norlarco.com/pdf/January_Member_Update.pdf
9NEWS.com | Colorado's Online News Leader | Federal regulators take over Norlarco Credit Union
Dimitry,
A lot depends on if they can get a buy / bail out of the monolines.
Banks that made a lot of construction loans and unsecured loans to small biz are gonna get killed...because small business is heading into really rough times.
Mandatory health insurance and higher business taxes are coming. Higher costs are a problem across the board, and small biz doesn't have ability to pass it through.
It won't be a big spike like the late 80s. It will just be slow death for a lotta small and mid-size banks, maybe over as long as a decade.
It depends a lot on what Rogue Trader tells the police, and whether or not he agrees to appear on Oprah.
Yeah, as I read a few years back, bank's overall exposure to RE (RRE, CRE, MBS, C&D, etc.) is greater than that of Texas banks to oil in the 80's. BTW, none of the latter survived.
Times Online: Bank's billions burnt in 10 days
more about the Société Générale near-disaster.
On Friday a trader at the banks London office suggested that events had unfolded in a more complicated way than Soc Gen has admitted. [Kerviel] was doing it in the bosss books, so when it emerged that something was wrong it was the boss who was called in and the boss who was fired, said the trader.
and who were the two American banks that extended the lifeline to SG ?
Dimirty:
A true run on the banks won't show up as lines in the streets until very late in the process.
When Continental Illinois went down, there was a silent run of big money wiring funds out of the bank.
After all the big money has lined up at the exits to redeem their uninsured deposits, then the rumours will hit the news and the little people will line up to get their currency. The muggers will have a field day.
My grandmother was in front of one of those banks, and I grew up hearing of the great Depression (1).
In the end the small wealth of my family was preserved and my 84 year old mom is enjoying it today. My grandmother absolutely hated FDR, for reasons that I don't understand today.
To the end of his days, my grandad said how happy he was that he sold his butter and egg business in 1928, and went to work for a boring, but solid insurance company, which is still in business today, which has merged and changed names but is still there.
My grandparents, as far as I can see, didn't suffer at all. They owned everything free and clear. My grandma was a total cheapskate, so pinching pennies fit her personality. My mom was the kid on the block with the bike and the new doll.
They were in the stock mkt, in really solid stocks. My mom's at&t that she inherited at my grandmom's death was purchased in the 19th century.
I guess that the lesson is that if you have no debt, have a solid job etc, you may have some hair raising times, but will survive. But how many Americans does this apply to?
I'm going to get flamed for this, but... I say the probability of a bank run in this country is nearly zero. The FDIC is a pretty competent organization, there would be no haircut like there is (was) in the UK for smaller accounts, and most people with significant financial assets have them placed in the "markets" with a non-bank firm like Fidelity. If there was a real financial crisis, I wouldn't be surprised if bank deposits went up due to people taking money out of their investment accounts and moving it to "safer" banks. A few older folks might pull money significant amounts of money from this bank or that. But for most people, as long as the expected balance showed up on their ATM reciept, they wouldn't change things around.
Hard to tell what people will do in a Panic. The young'uns have never seen even slightly hard times.
Fascinating graphs. Thanks very much, CR.
rich
I think that it is already happening. After several years of our auto insurance going down, this year it went up $100. Nothing changed, no claims and no tickets.
I think that the company is making up for loses in the credit markets.
Finucane, are you in the Kingsport line
I, somehow, lost confidence in the gov. ability to manage crisis . FDIC will have lot explaining to do if panic starts. Thanks for your respond
Tanta,
I missed Saturday rock blogging. Any thing on tap for Sunday?
F. Frederson
I don't think the problematic thing is the bank run, but rather that bank failures represent ill economic health.
We pay for bank failures both via fees at banks, and when the FDIC is tapped, our tax dollars. Not clear when the bank failures become significant.
One thing to consider when studying CR's excellent analysis is the 1994 passage of Riegle-Neal, which finally authorized interstate banking, something the industry had dreamed of since the 1920s.
As an aside, interstate banking probably would have been authorized in 1930 had it not been for the stock market crash. California's Bank of America, for example, had already purchased a Long Island, New York bank in anticipation. The New Deal and Glass-Steagall killed it.
Of course, the industry has concentrated since the passage of interstate banking. Sometime around 1993 or 1994 (I have a copy of it somewhere), I recall seeing a letter written by the then-president of the Richmond Fed explaining that the Fed expected to end up with four--count 'em--U.S. banks holding 90% of the retail business. The Fed thought that a good thing.
The unit banks are pretty much gone, gobbled up for branches by the megabanks. IMO, it concentrated risk and banking became less responsive to the needs of the local community, but that's not the topic here.
Lawyerliz-
"The young'uns have never seen even slightly hard times."
I take mine down and make them play in piles of dirt and glass often, makes them appreciate how the other half lives.
My family didn't talk about the Depression much, but here are some impressions that I picked up over the years:
My grandfather felt that if your workers needed or wanted a union, it was a sign that you didn't treat them right and that you failed as a businessman. [Prediction: we are going to have a lot of pissed off unions in a few years.]
At my grandfather's funeral, several retired doctors came up to my parents and mentioned that my grandfather had helped the local hospitals meet payroll during the Depression. Other small businessmen reported the same thing. No one in the family had heard anything about this. My grandfather never mentioned it, but the people that he helped remembered.
My aunt and father remembered that their parents were concerned that angry workers might march from the rubber factories and burn down the Firestone mansion down the street. They were concerned that the workers might burn down all the other houses on the street, including my great-grandfather's and my grandparents.
My maternal grandmother described how the small businessmen organized themselves into patrols to keep things from getting out of hand which would have given the company guards an excuse for busting heads. She also described how businesses cut back on individual worker's hours so that they could share the work, layoffs could be avoided, and family breadwinners would have something. She also stressed living within your means and that debt was to be avoided.
That was the same generation that made a battleship a week during world war one and everyone cut back on gas, nylon etc. Unfortunately I think those times are gone.
OT
Some germane articles in this week's Economist.
Premium content | Economist.com
Taken together, the signs from the world economy are troubling. The credit binge will not unwind quickly or gently. Asset prices will fall. But central bankers and regulators have the tools to stop a downturn from becoming a slump, so long as they use them sensibly. Reacting to market panic with panicky rate cuts is likely to make things worse rather than better. The Fed should always be the calm centre of a financial storm.
and on the fate of the monolines:
Premium content | Economist.com
pretty much up in the air, eh?
"It's interesting to note that even with the failure of almost 3,000 banks and thrifts during the S&L crisis, the overall economy was healthy."
What do you mean by healthy? Interest rates at 15%? The second huge Florida real estate bust during our residence here (the first was in 73-74). The recession of 1981-82? Unemployment rates of over 7 to almost 10%? Boy - those were really the good old days.
What we are going through now - at least as of today - is nothing compared to the recession of the early 80's - the recession in '73-'74 - and earlier post WWII recessions. And if you speak to people like my 90 year old father - nothing post WWII is anything like the 30's.
I think it's important to keep things in perspective. Roby
opps I think that was WW2
Military production during World War II - Wikipedia, the free encyclopedia
(sorry for the double post)
CR, another bit of minutae just bubbled up in my cortex.
If memory serves, weren't most of the failures in the 20s state chartered banks? Most weren't subject to federal regulation because they didn't want the restrictions associated with a federal charter.
Thank you CR and Tanta, you ROCK. I have been following your blog for the last year. And following the very insightful logic on this blog, in July I sold my home and now I have four years of my yearly income in CDs, and the interest I make on them more than pays my rent.
I was watching FOX news last night and they were complaining about the choices for president, basically saying none of the candidates where qualified, then on the same show, they were saying this is a "great time to buy a house." How can then can they say that, when they're saying basically we don't think any of of candidates are qualified yet tell people to go out an buy a house??? MSM at it's best. Why would anyone buy a house now ... why wouldn't they wait until AFTER the election to see who's in charge. Thanks for this wonderful, insightful blog.
Robyn,
The fear is that the back to back bubbles in the dotcoms, real estate, and credit, couple with devastating Republican policies of over spending, under taxing, off shoring jobs and importing low wage workers will cause something far worse than any post WWII recession.
My grandfather felt that if your workers needed or wanted a union, it was a sign that you didn't treat them right and that you failed as a businessman
I support collective bargaining, but this is true. If you look on Fortune's annual 10 Best Employers list, Wegmans grocery is always on there near the very top. No unions, and they aim to keep it that way.
Wegmans, which is not a high-end grocery chain (it's the dominant grocery chain in down-and-out upstate NY), isn't popular because of the prices (not particularly low)... it's just a pleasant place to shop, mainly because the employees are so sickeningly nice.
Hedge funds blowing up, banks cant be far behind:
Error Page
A RAFT of European hedge funds have been forced to introduce emergency measures to protect their businesses from collapsing in the wake of the turmoil in financial markets.
Up to 10 European hedge funds have suspended redemptions after investors clamoured for their cash when the managers made severe losses.
A London prime broker told The Sunday Times that even before last weeks extreme gyrations, nearly two-thirds of London-based hedge funds had lost between 4% and 10% of their value. A significant number had lost much more, he said.
crispy- "A RAFT of European hedge funds have been forced to introduce emergency measures..."
Oh, joy.
crispy&cole,
Thanks for the info.
There was a rumor on wall street last Friday about a large hedge fund having trouble. I have been waiting to find out if it was true.
May we will hear more later in the weekend. Deleveraging seems to be in.
Interesting link of mp's link
Want to sue a bank? Here's who you should call - Times Online
Want to sue a bank? Here's who you should call
from the hedge fund article: what were they thinking? Kinetic Special Situations Fund? silly brits
I heard a lot about the Depression from my granfather, who went in with $600 in cash (he said he kept it in the mattress. He drove a truck, and I often wonder where he got the cash), purchased assets and business interests for pennies on the dollar, starved his family to make a go of it, came out a wealthy man, split the family fortune among lawyers and my grandmother during a divorce, sold his businesses and got burned, retired before age 50 and lived to be 84. We still have very limited wealth acquired by this man (in the form of property).
Here's what he taught me:
Always keep some cash stashed away.
When hard times come, don't spend money on anything you don't absolutely need (in his opinion, his family didn't need food or heat - my mom tells stories of bread and milk for dinner, frequently).
Always have a paid-for vehicle.
Always get a signed contract (never do business on a handshake).
Never pay interest.
Always charge interest.
Always get collateral.
Never lend a friend or family member money. If you do, make sure you have a signed contract, and be ready to overlook your friendship/family relationship should push come to shove. Better to give a gift and save a friendship than to loose both friend and money.
Always address business associates as "Mr." or "Ms." - never as you would a family member or social acquaintance. (archaic nowadays)
Buy a farm at the first opportunity. (When he said, "buy", he didn't mean "mortgage". This is starting to seem very sensible in light of our current situation)
Never look too willing to buy or sell anything.
Make sure your employees understand their jobs and do the full days work they are paid to do. Reward those who understand both sides of the contract, fire those who don't.
Keep hard working employees, even if it means taking a cut on your own income.
If you have a real business, you won't have time to play golf.
Never try to break a horse if horse-breaking is not your primary occupation. (bad farm accident - ouch)
Other than that, he was a straight-up, old-fashioned, no-nonsense guy, who could make a person stop talking with a hard look.
I wish he was around today. I sure hope I'm cut out for what's coming.
It's interesting to note that even with the failure of almost 3,000 banks and thrifts during the S&L crisis, the overall economy was healthy. - CR
It wasn't healthy overall out here in flyover... from the Rockies to the Appalachians and from the Canadian border to Texas oil patch the mid 80s was a disaster. Now, while no one of these states is as populous as California or New York the region in total is more populous than either state - just spread out spatially.
It was the prototype precursor for your 'frozen microwave burrito'.
and who were the two American banks that extended the lifeline to SG ?
RayOnTheFarm | 01.26.08 - 10:01 pm
Morgan Stanley and JP Morgan are underwriting them for a $5bn offering, I think.
dryfly- It was the prototype precursor for your 'frozen microwave burrito'.
Amen.
Kinetic Special Situations Fund? silly brits
The Ministry of Silly Hedge Fund Names has been hard at work.
All of this talk made me wonder about what the population of the US was during the 1929 event (and associated years). Found this page at the US Census site...
http://www.census.gov/popest/archives/1990s/popclockest.txt
notice the third column (population change) between 1930 and 1938.. the depression had a net negative effect of population growth.
Q: Why do banks fail?
A: Because that's where the money isn't.
Ray- "...the depression had a net negative effect of population growth."
As one of my professors liked to say, "There wasn't much procreating going on when two families were living in the same room."
What makes people think that a run on banks is not all ready happening but in a different way. Any large withdrawal has become difficult. many may just be gradually removing funds as they see problems arising.
mp and ray:
My mom always said that the song, I Can't Give You Anything But Love", always reminded her of the depression - when having a baby was the last thing anyone wanted, but sex was the only fun and free thing people had.
I can't cite the source, but I believe that in 1929, 95+% of Americans lived on, or had direct access to a farm. I think that today we're at under 3% and we sport a 300,000,000 population.
I drive from DC to Philly regularly. I always amazes me that among all of the thousands of people traveling I-95, not a damned one knows where his food is coming from.
Marcus- "...not a damned one knows where his food is coming from."
Good point. Also, most Americans are probably unaware of the fact that the US, the so-called breadbasket of the world, is now a net importer of food.
NY Times (topics include FDIC)
To Build Confidence, Try Better Bricks /by: Robert J. Shiller
ECONOMIC VIEW; To Build Confidence, Try Better Bricks - NY Times
Lordy, I feel like a geezer. I'm not that old, but my mom is 90, and my dad was even older. I heard so much about the Depression and the War I feel like I lived through them.
Certainly economic conditions help shape personalities. My dad was a tinkerer, and built secret compartments around the house to stash a little cash. Mom used to hide enough cash for the monthly bills (no more, though), and just use the bank for Christmas clubs and such. (Remember that--saving for Christmas every week for a year?)
Times change.
Oh--my one relevant question: Any readily-understandable source to sniff out warning signs, such as large pre-failure depository movements, or small banks with big CRE exposure?
A lot of us are still larnin' here.
Kansas City Business Journal (additional media piece)
Feds close Douglass National Bank
Feds close Douglass National Bank - Kansas City Business Journal:
He provided links that show banks are borrowing to meet their reserve requirements. Banks are broke, empty and devoid of cash.
Sorry for the caps, but I want to get a point across....
RESERVES ARE NO LONGER RELEVANT TO
THE US BANKING SYSTEM.
If you don't understand that, it's impossible to interpret what mp and others are saying.
Bank reserves consist of non-interest paying deposits at the Federal Reserve + vault cash. Since they pay no interest, excess reserves are a drag on profits. That makes them a bit like the old-maid card. No bank wants to get stuck with excess reserves as the end of the day.
Excess reserves deposited in electronic form at the Federal Reserve are usually easy to get rid of. Banks lend those funds out over-night through the interbank market. The interest rates may be poor, but it's better than zero.
Bank cash is a bit tricker. The big reason that banks get stuck holding excess reserves is because of vault cash. Banks have spent a lot of time doing better "cash management" to reduce the amount of cash they have on hand. It's the reason you now need to "order" large cash withdrawls. Banks, in general, would be much happier if all money was electronic.
The total required reserves in the banking system are generally pretty constant. The only reason they would change is if there was a sudden shift of money from savings accounts to checking accounts.
So, why the sudden demand for reserves? Why did non-borrowed reserves go negative?
The reason is that some banks are hoarding reserves. Instead of lending them out at the end of the day, the banks decided to hold onto them. Basically, the interbank market froze.
So, the real question is, why did it freeze? Maybe banks aren't lending because they aren't sure they can get their money back. Maybe it's because banks are worried about their own ability to borrow money from the interbank market and wanted a little cushion.
Whatever the reason, it created havoc.
Banks had to raise deposit rates to attract cash to get the money they needed to balance their books. Even though the Federal Reserve was cutting interest rates the fierce demand for deposits kept the cost for money high. Worse, many of the banks loans were tied to the prime rate and dropped along with the FFR.
Higher deposit rates, lower interest payments from loans meant lower bank earnings. Less earnings, less capital, less capital, fewer loans, fewer loans, less total money in the economy (and maybe a bankrupt bank or too).
To solve the problem, the Fed essentially decided to open up big, fat deposits with each of these banks to lower demand for deposits. It did that through the TAF auctions. The bank gives the Fed some loans and the bank gets back a big deposit at from the Fed.
Banks could have done it for themselves through the discount window but weren't willing to go that route.
With the Fed opening up big, fat deposits accounts at reserve short banks the deposit rates should fall. Lower deposit rates, higher profits.
And, that's what it's all really about. Trickling money into troubled banks balance sheets by goosing profits.
The question is, will the trickle be enough to offset the losses?
Kicker: No
No.
Could you elaborate?
very cool, names first
"I tried to pull out 35K a while back, and was told they'd have to 'order' it." -- Average Citizen
And this surprised you? The cage at any casino on the strip wouldn't be phased by that, but your average bank teller has never seen a customr pull that kind of cash.
I can say from personal experience that it's no big deal to get 5K from the drive thru at Chase, but 7x that is going to be a freakishly large cash transaction from one customer at a lot of branches (and only bring you unwanted attention). Who says you have to get it all at the same time or branch?
I find it interesting you guys talk about "zombie S&L's" from the 1980's in several other posts, but then fail to see the correlation between them and the sharp rise in failures during relatively good economic times like 1989 and 1990.
No lagged effect there just maybe?
Like F. Frederson, i think the traditional banking industry as a whole is going to see reintermediation (i.e. more deposits) as people take their money out of the stock market and put it back into the banking system.
I suspect a lot of folks who are just now noticing some trouble with making large cash movements are the ones who paid zero attention to PATRIOT Act and assorted Homeland Security nonsense for years, thinking it would never affect them.
Does anyone really think that in the post 9/11 world our banking procedural regulation would always be a whole lot smarter than our airport security? If so, how come?
What you're dealing with in some cases is a mixture of practical anti-money-laundering procedures, banks playing float games with your money, and Mickey Mouse PATRIOT Act stuff that is the financial equivalent of taking knitting needles away from little old ladies before they board planes.
I would therefore never assume that your difficulties necessarily mean that the bank's vault is empty. Perhaps so, but it's quite likely that you just discovered the other side of Homeland Security running unopposed for seven years.
TO me there seem two important conclusins jumping out of the bank failure charts:
a) There is a "season" for bank failures (K-fall and K-winter), and then there are long periods of times where there are virtually no failures at all
b) the FDIC along with other changes to the FED were beneficial in that even in the season of bank failures we were at lot better of in the 80s and 90s than in the twenties and thirties
O-Joe
--
So 2008 is when we would expect to see more of these small and mid-sized institutions start to fail, but the number of failures will probably be small as compared to the '80s.
That is because there are lot fewer small and mid-sized institutions. No? Some here have already pointed that out.
Banking and Finance Crooks made use of the too big to fail clause of the American System and started to get bigger and bigger. They also know that American People are politically impotent to act against them, so they face no challenge to their abuses. Their iron grip on the Federal Reserve and the Federal govt was an essential element.
The repeal of the Glass-Steagall Act by Weill-Rubin-Greenspan gang was the last nail in the coffin of checks on the Banking and Finance Crooks. Era of the American Financial Nazis had begun. They are unchecked and unchallengeable. They own all the candidates who have a chance at the nomination of either party for the 2008 election.
Jas
All TAF did was to create liabilites which banks are masquerading as cash temporary to dress up there balance sheets. We saw a spike in TAF interest at YE 2007 and we'll see more spikes at quarter ends as the banks have to report financials.
Unfortunately these borrowings aren't creating the same level of NIM because of the decreased prime rates everytime the Fed cuts. This is affecting all Variable rate loans and all new volume which is being booked. You can also bet that this new volume is dramatically underpriced for the risk being assumed.
Banks need capital derived from profitable operations which is tough when you are getting squeezed by lower income, higher cost of funds, and higher deliquencies / decreasing asset prices all at the same time.
Those with ample capital and sound risk management and credit policies will survive....the others need to go under. Plain and simple.
Even before Homeland Security there always was a reporting requirement for cash transactions over 10K, and not only at banks.
Don't remember the exact details but everyone always avoided them so as not to stand out.
Are there any data series showing the actual deposit amounts that were at these failed institutions over time.
I have no idea, but I'd guess there were a lot of itty bitty banks in the '20s. My intuitive (be that what it is) understanding of our financial system is that the numbers of banks, over time, have gradually been approaching 1.
(That's just my cheesy way of saying that the banking system in the U.S. has been gradually consolidating over time.)
If I could get me hands on the actual deposit amounts, then I could graph it out as a percentage of GDP, and even as multiple of currency outstanding. That would be illustrative.. possibly.
Oh.. I forgot to apologize for not trudging through the posts first to see if that had not already been discussed. I'll do that now.
ha.. glad this isn't the newest thread, and I'm not wasting people's time by re-posing the most obvious question that was asked in the first few comments..
anyhoo..
We saw a spike in TAF interest at YE 2007 and we'll see more spikes at quarter ends as the banks have to report financials.
It's not so much the banks, but the money market funds that are causing the spike in TAF interest at quarter end.
The money market funds are dumping anything that may look fishy before they have to report holdings at the end of the quarter. That means banks with conduits and SIVs have to move more of the paper on their books and more demand for deposits.
There have been only 42 Bank & Thrift failures in the last 10 years (as of 4/2007) In the 10 years prior to 1997, there were 2,179 Bank & Thrift failures.
The DICMCA's effect of allowing CBs to compete with S&Ls, MSBs, CUs, MMFs and other financial intermediaries was to reduce the size of the financial intermediaries, reduce the supply of loan-funds (available savings), increases the proportion, and the total costs of Commercial bank time deposits.
The commercial banks suffered no disintermediation but the financial intermediares went through an S&L crisis. Why? CBs don't loan out savings. CBs create new money when they make loans. In contrast the financial intermediaries loan out savings by borrowing short & lending long.
But the nail in the coffin was allowing S&Ls to engage in any type of lending, deregulation without legal safety nets.
Interest rate risks transformed into credit rate risks.
In retrospect, the banks as well as the thrifts should have been subject to more intense, not less, regulation. In re-organizing our financial institutions the first requirement is to recognize that the competitive freedoms of the mercantile marketplace cannot be applied to the institutions that create our money, or protect our savings. More that 75 years ago this wisdom was recognized by the inauguration of the FDIC (Banking Act of 1933), the FSLIC (National Housing Act of 1934) and many other changes in our banking structure.
Deregulating financial institutions to the extent that the thrifts have been deregulated, combined with the governments guarantee of the liabilities of these institutions, was an invitation to financial disaster.
There were a high number of bank failures in the 20's and 30's due to the fact that there was a "bank on every corner". Less so in the 80's and far less now in 2008. The number of bank prone to failure is considerably less now. Most banks these days are diversified in their holdings and can absorb losses. It's the lenders and small institutions (of which there are few) that are in serious trouble).