Thread by @LucaProsperi

🧵/ You can choose whether to look at the moon or at the pointing finger instead

With #CreditSuisse #SVBank at al. getting pumped back to life by the State, we should start asking whether the state-bank alliance makes much sense anymore

BANKING IS BROKEN, HALLELUJAH 👇

1/ The fact that #SVBank failure was a shock for markets tells a lot about the quality of markets (and regulators)

Below, an extract from SVB's regulatory disclosures. What was the regulator doing instead of observing the most classic of bank’s maturity mismatches?

2/ I don't want to go all the way to conspiracy theory, but who was extracting the most value from #SVBank, or in other words who had more (short-term) incentives for SVB to keep operating as it was?

Below, another extract. Hint: not only tech benefited from low IR...

3/ Even taking so much interest rate risk, #SVBank wasn't making much money
* 2.73% average gross yield
* 2% average net yield
* 9-10% return on equity, i.e. below cost
* 0.85-0.90x price to tangible book

In other words, management ran a fast-growing value-burning bank

4/ Among the depositors of #SVBank that had the risk of losing a big chunk of their savings was @circle, the minter of $USDC

The risk underpinning $USDC, as well as its absolutely lack of yield for holders, is also not new. The extract below is from DR's 52 release

5/ To me, it is not the story of #SVBank mismanagement that matters, nor the finger-pointing

What matters is the blatant and absolutely unnecessary fragility of banking as we know it that emerged from this and other episodes

Today, we could and should do better

6/ The "OLD" monetary triangle was based on a very tight relationship between Treasury, Central Bank, and Commercial Banks

Commercial Banks distribute money through underwriting, have monopoly of currency storage, and are incentivised (big) buyers of treasuries

7/ The system is showing huge limits:
* DISTRIBUTION: are banks really needed here?
* UNDERWRITING: should banks have monopoly?
* RETURNS: can banks really be self-sustaining?
* RISK: are banks enough low risk for depositors?

My answer is NO to those questions. We can do better

8/ A "NEW" monetary triangle could emerge:
* SPECIALISED UNDERWRITERS distribute money - a combination of banks, funds, and protocols
* DEPOSITORS can access government risk directly rather than being meat for banks
* #CBDC of some sort act as a liquidity stabiliser only

9/ The current monetary framework has reached a point of no return. We need a new paradigm

“The competition between paradigms is not the sort of battle that can be resolved by proofs.” - The Structure of Scientific Revolutions, Thomas Kuhn

dirtroads.substack.com/p/53-banking-i…