Something for the weekend, sir?: Difference between revisions

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 {{a|devil|{{catbox|newsletter draft}}}}Newsletter cribnotes
+===Bowie, bonds and the bloodbath of banking===
+Dilemma of banking matching long term liability to short term risks. Making a spread which is the same thing as maintaining a capital buffer comma when your assets cannot go up in value and your liabilities cannot go down. Well evidence in silicon valley bank which locked itself into long-term assets at low interest rates, meaning it had absolutely no upside and significant Downside on them even without credit loss, while it's liabilities were deposits comma being extremely short term, were very sensitive to interest rates and could be withdrawn at the moment's notice. The trick to making the business work is to manage that gap semicolon this as we have seen it's partly a function of treasury competence and partly a function of market confidence petards and black ducks flap around.
+This is of course hardly new to silicon valley bank and has been the perennial problem with which banks must wrestle. The classic bank lending activity is a mortgage colon collateralized, secured over real estate, but long dated and something the bank must commit to for a long period of time stop banks generally fund these mortgages with short dated instruments such as deposits.
+How to manage that risk? Largely, by diversity on both sides of the ledger. Banks would lend at scale to thousands or hundreds of thousands of homeowners and take deposits, x-scale from thousands hundreds of thousands or millions of depositors. The basic play was that such diversity would give the depositors confidence not to all withdrawal their money at once comma and on the asset side would give the bank confidence that not all homeowners would default on them mortgages at once. It became a matter of actual aerial management; Banks new that some part of its deposit base was liable to withdrawal bracket and deposit); and new that some part of its asset base was liable to default. It didn't need to know which part; it could manage actuarily on the assumption that, say, 5% of a mortgage portfolio might default over a given period.
+Bank regulators would manage for that risk by requiring banks to hold a level of capital against its mortgage book that more than covered that default rate.
+Banks crewmour sophisticated comma as did bank regulation, and different capital ratio's might be applied to different trading and banking books based on this actuarial assessment of the embedded risk.
 ==Rokos short primer==
 ... Punting on interest rates