Patrick McKenzie (patio11) reads his 2023 essay "Deposit Franchises as Natural Hedges," written seven weeks into that year's banking crisis, making the case that deposit franchises are a natural hedge against interest rate risk (one regional banks were quietly encouraged to sell off by loading up on agency MBS). He walks through why "sweat and smiles" deposits were assumed to be sticky enough to fund long-duration assets, why that assumption broke down for retail and sophisticated depositors alike once rates rose, and how the resulting losses moved through bank balance sheets. Patrick closes with two years of hindsight: what the essay got right and wrong about how bad it would get.

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Full transcript available here: https://www.complexsystemspodcast.com/deposit-franchises/

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Links:

• Deposit franchises as natural hedges: https://www.bitsaboutmoney.com/archive/deposit-franchises-as-natural-hedges/ 

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Timestamps:

(00:00) Intro
(03:48) Natural hedges
(07:38) Deposit franchises as an asset
(10:53) The value of a deposit franchise increases with interest rates
(11:30) A brief aside about deposit beta
(14:58) Sponsors: Mercury | MongoDB
(17:30) A brief aside about deposit beta
(18:05) The deposit franchise as a hedge
(21:52) Regional banks were instructed to load up on agency MBS
(25:09) Why did the hedge bust?
(29:42) Sponsor: Chainguard
(31:03) Further bad news: the problem is bigger than MBS
(34:01) It is no longer February
(34:51) “Why didn’t the hedger hedge?!”
(35:37) So what do we do now?
(37:59) Postscript
(39:45) Wrap