Complex Systems with Patrick McKenzie (patio11)

The banking crisis, two years later

Jan 23, 2025

The conversation dives into the real dynamics of the recent banking crisis, highlighting that 22 banks faced significant deposit outflows, mostly driven by institutional players. It challenges the traditional narratives around bank runs, emphasizing the often unseen shifts between banks rather than outright withdrawals. The impact of rising interest rates on stability is explored, alongside critiques of government communications and public trust in financial narratives. This insightful analysis sheds light on the complexities of modern banking systems.

01:11:42

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Quick takeaways

The recent banking crisis revealed that 22 banks faced severe deposit outflows, highlighting systemic vulnerabilities often overlooked by regulators.

Modern bank runs are increasingly driven by large depositors reallocating funds rather than traditional retail cash withdrawals, shifting the nature of banking instability.

The traditional deposit insurance model is inadequate for today's rapid capital movements, necessitating regulatory changes to support evolving financial environments.

Deep dives

The Nature of Banking Crises

A banking crisis typically unfolds over time rather than all at once, with systemic issues lingering behind the scenes before exposure forces rapid change. The recent events illustrate that institutions fail not solely due to poor decision-making but also due to unforeseen liquidity demands coinciding with increased interest rates. Interest rate hikes have a far-reaching impact, eroding asset values universally, which can jeopardize even seemingly stable banks when liquidity is strained. Understanding the complexity of these situations helps highlight that many banks faced significant risks well before they made headlines.

Intro

2min

Understanding Bank Runs and Financial Distress

14min

Understanding the Banking Crisis

15min

Navigating Narrow Banks and Financial Stability

39min

Understanding Government Communications in Banking

2min

Patrick McKenzie (@patio11) revisits his March 2023 essay that explained the dynamics of bank runs and system stress during the banking crisis one month prior. With data from a newly released Federal Reserve paper, he analyzes the true scope of the banking stress - including revelations that 22 banks experienced severe deposit outflows, far more than publicly known at the time. While officials blamed social media for bank runs, data shows institutional players, not retail depositors, drove the events.

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Full transcript available here: www.complexsystemspodcast.com/banking-crisis-two-years-later/

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Links:

Bits About Money: https://www.bitsaboutmoney.com/archive/banking-in-very-uncertain-times/
Federal Reserve Report: Tracing Bank Runs in Real Time https://www.newyorkfed.org/research/staff_reports/sr1104.html
Byrne Hobart’s blog The Diff: https://www.thediff.co/
Matt Levine’s blog Money Stuff: https://www.bloomberg.com/account/newsletters/money-stuff

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Twitter:
@patio11

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Timestamps:
(00:00) Revisiting the March 2023 essay
(01:47) The Fed's study
(11:21) Why are banks failing?
(14:41) A useful heuristic from bond math
(18:05) Sponsors: Vanta | Check
(21:00) Maturity transformation
(29:54) Sponsor: GiveWell
(30:42) Liquidity problems are the proximate cause of bank failures
(33:43) Trying to forestall a banking crisis
(40:16) Deposit insurance expansion
(47:12) Deposit insurance has some legacy issues
(52:04) What would happen if my bank were to go into receivership this weekend?
(59:46) What should users of the banking system do?
(01:04:09) Parting thoughts
(01:05:08) Footnote

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