Yes and no, they don’t matter until you need liquidity. Which as you correctly point out is what happened to SVB.
Banks do not have a lot of cash on hand (virtual or real), in fact they optimized for as little as possible.
Banks also do not exist in a vacuum, they are part of the real economy, and in fact without that they would be pointless.
Banks generally use every trick in the book to lever up as much as possible, far far beyond what a cursory reading would lead you to believe. The basic trick is to take on risk and then offset that risk, that way you don’t have to provision any capital for the risk (lots of ways to do that).
Here come the problems:
The way risk is offset is not independent from the risk, they are correlated in such a way, that when systemic things start to happen, the risk offset becomes worthless and the risk taken becomes real.
Banks also suffer real losses that cant be hidden, and eventually those will start to mount, so far the real economy is ok, but eventually recession will hit (central bank are hell bent on fighting inflation, so rates will continue to go up).
That will put a strain on liquidity. Banks can handle that, they can always get cash for their assets in the form of a loan (repro, 3 party repro, discount window etc).
However the book value on a lot of their assets is way higher than market value, so that means pledging more book value than they get back in cash (a lot).
The assets they hold (bonds) return LESS than what the cost of funding is, that is already a reality and will only get worse (so negative cash flow).
This spiral will continue, and all the while the real economy, the one that provides a lot of liquidity to the banks is going to slow down more and more, so velocity of money slows down, that is also a big drain on liquidity.
Eventually something will blowup, and with how everything is connected, that can very well lead to a banking system Kessler syndrome moment.
So yeah sure you can ignore the issues of solvency, that is until lack of liquidity smacks you over the head and tells you that you are bankrupt.
And at any time the Fed can just lower interest rates or basically (I don’t claim to understand the how) spawn more money. (Something something interest rates and fractional reserve ratios and open market operations) Since while we have all these fancy rules isn’t a US dollar just kinda a crypto coin or share backed by the US government? Which means buybacks or new issues are both allowed, and as a sovereign the US government doesn’t really have to obey any rule in doing so. (It has kinda a gentleman’s agreement to keep it reasonable)
So they can essentially declare they have infinite money in an account, and send money to whichever bank has a liquidity issue in 1B increments if they want to.
Letting a bank fail or the system fail is a CHOICE. I thought it was in order to punish wealthy depositors who choose risky banks.
They can’t lower interest rates, they are trying to bring inflation down.
You can’t just keep spawning money, eventually that just leads to inflation. We have been spawning money like crazy the last 14-15 years, and this is the price.
Sure they can declare infinite money in a account and then go nuts, but that just leads to inflation.
Anyway, go read my prediction, which is essentially what you propose to some degree, and the entire cost will be pawned of onto everyday people (lots and lots of inflation).
I was just figuring they would “spot” banks with liquidity issues and get the money back later.
For example crediting a bank with 10B in treasuries with 10B liquid cash now, with a term sheet that when the 10B treasuries vest the government gets back the money.
This doesn’t inject much new money or cause more than negligible inflation.
Or yeah I guess allow the bank to exchange treasuries for cash at book price. But only for banks on the edge of solvency. (Creating an incentive to be riskier next time but what can you do)
crediting a bank with 10B in treasuries with 10B liquid cash now
I have no idea what you think happens here, but that is literally 10B in new money.
It’s removing the current market value of the 10B Treasury note.
Would you like to change your answer?
Where did the 10B in cash come from?
10B was given to the bank, and in exchange the bank encumbered 10B in treasuries and promised to give 10B back when they mature.
So where did the 10B come from? The treasuries are still there.
Before: 10B in treasuries
After: 10B in treasuries and 10B in cash (and 10B in the form of a promissory note).
So again, where did that 10B in cash come from?
The feds. Note the basis for my statement is that Treasury note you can think of as an exchangable paper you can barter for its face value of 7B or so.
So by the Fed giving 10 billion to the bank and taking the paper they are adding (10-7) 3B in new cash.
I may be totally wrong because I don’t understand all the mechanics, derivatives, and so on that this operation actually involves.
That’s not how it works.
The 10B are new money, unless they came from someone not the FED (notes are not money).
See the barter argument. Also yeah the Fed will probably issue a new note for 10B which removes exactly that from the economy.