Re: Banking Beta issues
Posted: Sun Jan 26, 2020 9:44 pm
My issue with the banking so far is I don't see any scenario after the early game where you are better off having a loan mix that is anything other than 100% in the lowest quality loans. No matter what happens to default rate they always appear to be more profitable on a Net Interest Income - Defaults basis. They should be on average more profitable, but with significant volatility in relative profitability. I.e., if you are 100% in CCC loans and you have a 10% equity capital ratio, your equity should get wiped in certain scenarios or taken down very far.
On the other hand, I find you get into these death spiral scenarios where when you have excess cash on the bank balance sheet but a capital ratio below the 10% mark you get stuck with a severely negative bank profitability because you have to pay the depositors but you can't generate interest income. That doesn't really make any sense and is not realistic. Real life banks get into trouble when depositors or more likely wholesale financing won't fund the bank. They do that when they are worried about losses on lending, trading, or maturity mismatch.
On the other hand, I find you get into these death spiral scenarios where when you have excess cash on the bank balance sheet but a capital ratio below the 10% mark you get stuck with a severely negative bank profitability because you have to pay the depositors but you can't generate interest income. That doesn't really make any sense and is not realistic. Real life banks get into trouble when depositors or more likely wholesale financing won't fund the bank. They do that when they are worried about losses on lending, trading, or maturity mismatch.