Index Investing News
Thursday, May 29, 2025
No Result
View All Result
  • Login
  • Home
  • World
  • Investing
  • Financial
  • Economy
  • Markets
  • Stocks
  • Crypto
  • Property
  • Sport
  • Entertainment
  • Opinion
  • Home
  • World
  • Investing
  • Financial
  • Economy
  • Markets
  • Stocks
  • Crypto
  • Property
  • Sport
  • Entertainment
  • Opinion
No Result
View All Result
Index Investing News
No Result
View All Result

A tale of two banks

by Index Investing News
March 24, 2023
in Economy
Reading Time: 3 mins read
A A
0
Home Economy
Share on FacebookShare on Twitter


What does it mean to say something is risky? How would we know? Would a failure confirm the view that a particular activity was risky?

Consider two people gambling at roulette. Joe puts $100 on each number from 1 to 35. Jane puts $3500 on number 36. Both have bet $3500, and both bets have negative expected values (assuming a 36-1 payoff on the winning number, and 38 total numbers.)

To me, Joe’s bet looks less risky. There’s more than a 90% chance he’ll win $100, although the expected value of the bet is still negative due to the fact that he loses $3500 if number 36, 0 or 00 comes up. Jane has more than a 90% chance of losing all $3500, but will win very big if number 36 comes up. That seems riskier.

Now let’s assume that both people make their bets, and the little ball lands on number 36.  Does that improbable outcome mean that Jane’s bet was actually less risky than Joe’s.  I’d say no; she just got lucky.

When I speak with people, I often get the impression that they conflate “risky” with “failure”.  That’s not how I interpret the term.  Consider two banks:

1. Silicon Valley Bank (SVB) takes deposits and invests them in Treasury bonds.  It is a fast growing bank.

2. Bank OZK (formerly Ozark) rapidly grows from a small Arkansas bank to a major lender for real estate projects in America’s largest cities.

Which bank’s assets seem risker?  Based on this evidence, I would say that Bank OZK was far riskier.

Now assume that SVB goes bankrupt, while Bank OZK is doing great.  Does that impact your view as to which bank engaged in a riskier strategy?  Should that fact influence your view as to which bank engaged in a riskier strategy? 

If failure is evidence of riskiness, what does that imply about the roulette example discussed above.

In 2018, I did a post on Bank OZK, citing it as an example of the sort of risk-taking bank encouraged by the moral hazard in our banking regime.  In retrospect, it looks like SVB would have been a better example.  But is that true?  Was SVB actually a riskier bank?  Or did number 36 come up on the roulette wheel?

My failure to spot the bank that actually failed illustrates a problem faced by regulators.  In 2018, I was presumably looking back at the banking crises of the 1980s and 2007-10, and noticing that real estate lending often led to banking distress.  At that time, Treasuries had been in a bull market from almost 4 decades.  We tend to estimate risk based on past performance, especially the recent past.  Regulators are unlikely to spot risk that comes from an area that was not previously a major problem.  (Recall that in 2006, MBS investors were lulled by the fact that the US had never experienced a large nationwide decline in house prices.)

In recent years, real estate has done surprising well, as inflation tends to boost the value of hard assets like land and buildings.  On the other hand, inflation reduces the value of T-bonds.  It’s quite possible that, ex ante, SVB’s approach was less risky (perhaps even profit-maximizing!), but these unpredictable macro trends hurt SVB and helped Bank OZK.  (To be clear, I suspect that there were other differences as well, perhaps Bank OZK has superior management.)

I don’t believe we’ll ever be able to fix the banking system through regulation.  Regulators will always be like generals fighting the pervious war.  Instead, we need to remove the underlying problems—moral hazard and a lack of diversification.  Trump likes to talk about “Making America Great Again”.  How about “Make America’s banking system more Canada’s”?

PS.  David Beckworth has an excellent piece in Barron’s discussing how the rise in interest rates has helped long-term borrowers (including the Treasury) while hurting bondholders.

 



Source link

Tags: banksTale
ShareTweetShareShare
Previous Post

Tom Brady buys ownership stake in WNBA team

Next Post

Bank profits at risk from potential CBDC transformation of global economy: Moody’s By Cointelegraph

Related Posts

US commerce court docket says Donald Trump’s world tariffs are unlawful

US commerce court docket says Donald Trump’s world tariffs are unlawful

by Index Investing News
May 29, 2025
0

Unlock the White Home Watch publication free of chargeYour information to what Trump’s second time period means for Washington, enterprise...

Donald Trump orders US chip software program suppliers to cease promoting to China

Donald Trump orders US chip software program suppliers to cease promoting to China

by Index Investing News
May 29, 2025
0

Unlock the White Home Watch publication free of chargeYour information to what Trump’s second time period means for Washington, enterprise...

Nvidia quarterly income surges almost 70% regardless of China curbs

Nvidia quarterly income surges almost 70% regardless of China curbs

by Index Investing News
May 28, 2025
0

Unlock the Editor’s Digest without costRoula Khalaf, Editor of the FT, selects her favorite tales on this weekly publication.Nvidia reported...

Fewer Guidelines, Higher Folks: The place Lam Falls Brief

Fewer Guidelines, Higher Folks: The place Lam Falls Brief

by Index Investing News
May 28, 2025
0

I had many good issues to say about Barry Lam’s e-book Fewer Guidelines, Higher Folks: The Case for Discretion. Nevertheless, no...

European owners face rising mortgage prices till 2030

European owners face rising mortgage prices till 2030

by Index Investing News
May 28, 2025
0

Keep knowledgeable with free updatesMerely signal as much as the European economic system myFT Digest -- delivered on to your...

Next Post
Bank profits at risk from potential CBDC transformation of global economy: Moody’s By Cointelegraph

Bank profits at risk from potential CBDC transformation of global economy: Moody’s By Cointelegraph

Bitcoin Regains Momentum as Investors Shrug Off Banking, Fed Concerns

Bitcoin Regains Momentum as Investors Shrug Off Banking, Fed Concerns

Leave a Reply Cancel reply

Your email address will not be published. Required fields are marked *

RECOMMENDED

Is It Potential We Have Too Many New Houses for Sale?

Is It Potential We Have Too Many New Houses for Sale?

March 29, 2022
How to “Quiet Quit” Your 9-5 Job and Become a Full-Time Boss

How to “Quiet Quit” Your 9-5 Job and Become a Full-Time Boss

May 15, 2023
Tower groups with Adani on b Indian chip plant

Tower groups with Adani on $10b Indian chip plant

September 7, 2024
US dangers lacking the practice to a shared international future –
Las Vegas Solar Information

US dangers lacking the practice to a shared international future – Las Vegas Solar Information

April 7, 2025
Egyptians to ‘mummify’ man-eating shark – media — RT World News

Egyptians to ‘mummify’ man-eating shark – media — RT World News

June 13, 2023
A query for anti-utilitarians – Econlib

A query for anti-utilitarians – Econlib

September 2, 2024
Elon Musk’s SpaceX and Italy’s Unipol join forces to help Italians hit by flooding By Reuters

Elon Musk’s SpaceX and Italy’s Unipol join forces to help Italians hit by flooding By Reuters

May 21, 2023
Governor failed survivors of gun violence, must be held accountable

Governor failed survivors of gun violence, must be held accountable

June 25, 2023
Index Investing News

Get the latest news and follow the coverage of Investing, World News, Stocks, Market Analysis, Business & Financial News, and more from the top trusted sources.

  • 1717575246.7
  • Browse the latest news about investing and more
  • Contact us
  • Cookie Privacy Policy
  • Disclaimer
  • DMCA
  • Privacy Policy
  • Terms and Conditions
  • xtw18387b488

Copyright © 2022 - Index Investing News.
Index Investing News is not responsible for the content of external sites.

No Result
View All Result
  • Home
  • World
  • Investing
  • Financial
  • Economy
  • Markets
  • Stocks
  • Crypto
  • Property
  • Sport
  • Entertainment
  • Opinion

Copyright © 2022 - Index Investing News.
Index Investing News is not responsible for the content of external sites.

Welcome Back!

Login to your account below

Forgotten Password?

Retrieve your password

Please enter your username or email address to reset your password.

Log In