Deposits & Liabilities
These stable, reliable deposits form the foundation of a bank's funding base and are the opposite of interest sensitive "hot money."
Core Deposits
Banks hold zero of these two asset types common in retail and manufacturing firms
Inventory and accounts receivable
Banks shift toward these zero-credit-risk securities when economic conditions deteriorate.
US Treasury bonds.
Fannie Mae, Ginnie Mae, and Freddie Mac are all examples of this type of entity.
Government-Sponsored Enterprises (GSEs)
Write the formula for bank net income starting from net interest income
NII minus burden minus provision for loan losses plus realized securities gains minus taxes.
What regulation banned interest on demand deposits, and what did banks create in the 1970s to stop losing funding to London?
Regulation Q; banks created NOW accounts to pay interest while keeping funds in the US.
The two main types of a bank's earning assets are these.
Loans and Securities
SVB held over 75% of its securities in this accounting category, which hides unrealized losses from the balance sheet.
Held-to-maturity (HTM)
In a pass-through MBS, mortgages are pooled inside this legal structure before cash flows go to investors.
A Special Purpose Entity (SPE)
What are charge-offs, and what reserve is meant to absorb them before they hit current income?
Accounting losses on specific bad loans, ideally absorbed by the allowance for loan losses set aside in advance.
What are brokered deposits and why did FIRREA 1989 restrict weak banks from using them?
Interest-sensitive funds spread across banks in sub-$250K chunks; troubled S&Ls used them to mask failing balance sheets.
Why are banks considered highly leveraged relative to non-financial firms, and what does that imply about their sensitivity to losses
Banks fund the vast majority of assets with liabilities rather than equity, so even small asset losses can wipe out their thin capital cushion.
Why are municipal bonds attractive to banks despite offering lower stated yields than taxable securities?
Their interest is often federally tax exempt, so the true after tax return is higher than the coupon suggests
What is a g-fee, what risk does it cover, and how does the GSE guarantee affect mortgage rates?
A fee banks pay GSEs for guaranteeing MBS against default; the guarantee lets GSEs borrow cheaply and pass lower rates back to banks and borrowers.
What single flawed assumption made the entire CMO analytical framework collapse, and why did analysts miss it?
That national home prices couldn't fall simultaneously; analysts stopped reasoning through contingencies too early to catch it.
How did East Asian banks' reliance on short-term BIS dollar deposits create a "double whammy" in 1997-98?
BIS banks pulled deposits while currencies collapsed, making dollar debts costlier; banks sold local currency to repay them, driving currencies down further.
Define maturity transformation and name the three risk categories it creates for banks.
Converting short-term deposits into long-term loans, creating credit risk, illiquidity risk, and interest-rate risk.
When the Fed cuts short-term rates to near zero, what are banks forced to do to earn any yield, and what risk does that create?
Extend into longer-duration bonds, which lose significant market value when rates eventually rise.
Why did AAA CMO ratings prove dangerously misleading during the GFC?
They assumed home prices could never fall nationwide simultaneously, which they did.
How did SVB's collapse trigger deposit flight at super regional banks, and where did those deposits go?
Uninsured depositors elsewhere realized accounts over $250K were at risk and moved funds to Too-Big-To-Fail banks where implicit government backing felt safer.
How did fixed exchange rates paradoxically encourage the risk buildup behind the Asian Financial Crisis?
Fixed rates masked currency mismatch risk entirely, so when the peg broke, the local cost of repaying dollar deposits doubled overnight.
With ~11.5x leverage, explain why a bank is far more vulnerable to asset quality shocks than a non-financial firm with the same ROA
Because equity is so thin, even modest loan losses flow almost entirely into capital, while a non-financial firm at 1.5x leverage needs proportionally far larger losses to threaten solvency.
Why did SVB's use of HTM (held to maturity) accounting accelerate its bank run rather than protect it?
When forced to disclose losses elsewhere, investors realized the hidden HTM losses too and fled immediately.
Name the two core conflicts of interest from GSE privatization, and explain the political dynamic that blocked regulation through 2008.
Profit vs. mission and profit vs. stability; hundreds of GSE lobbyists and massive political donations blocked capital regulation in Congress for nearly two decades.
What three forces drove the 27% deposit surge in 2020-21, and why couldn't banks lend those funds out
Household savings rose, the government distributed cash broadly, and the Fed's QE injected reserves; few borrowers wanted credit during a pandemic so deposits went into securities instead.