The basic question about this year’s US regional banking crisis is “why weren’t the banks prepared for the very predictable problems that they faced when interest rates went up,” and the basic answer is “because they thought rates going up would be good for them.”
We have talked about this a few times around here, and I have described two theories of banking. In Theory 1, banks have short-term deposits and invest them in long-term assets, so when interest rates go up, their costs go up (they have to pay more on their deposits) while the value of their assets goes down (those assets continue to pay fixed rates, and now are worth less). Rising rates are bad. In Theory 2, bank deposits are actually long-term, because the banks have enduring relationships with their customers and their customers are unlikely to leave, or demand higher rates, as interest rates go up. And so banks can use those long-term-ish deposits to fund long-term assets, and as interest rates go up, the banks can earn higher rates, don’t have to pay higher rates, and so make more money. Rising rates are good. Theory 2 is the traditional theory of banking, and it is why many banks were not adequately prepared for rising rates.
At the Wall Street Journal today, Jonathan Weil and Peter Rudegeair report on Theory 2:

The recent spate of bank failures is upending a long-held theory among banking executives and regulators—that the value of a lender’s deposit business goes up when interest rates move higher.
The theory rests on an assumption: That banks don’t have to pay depositors much to keep their money around, even as rates rise. The deposits would be a stable source of low-cost funding while the bank earned more money lending at higher rates.
The more rates rose, the bigger the franchise value of those deposits would become—a natural hedge against the declining market values of a portfolio of fixed-rate loans and bonds.
But if rising rates or plunging asset values cause a bank’s depositors to flee en masse, the franchise value is zero—and, worse, it could beget other bank runs. That is what happened with Silicon Valley Bank. …
The Federal Reserve, which both regulates banks and sets interest-rate policy, in a November report pointed to large unrealized losses on banks’ bondholdings due to rising rates. Things weren’t so bad, the Fed said, because “the value of banks’ deposit franchise increases and provides a buffer against these unrealized losses.”

Not really! And yet Theory 2 has some truth to it, just not so much for regional banks:

JPMorgan Chase lifted its outlook for how much it expects to earn this year from its lending business following the recent purchase of First Republic, bucking a broader trend among US banks of shrinking profits owing to deposit withdrawals.
In a presentation for its investor day on Monday, JPMorgan lifted its 2023 target for net interest income (NII), excluding its trading division, to about $84bn from $81bn previously, because of its deal for First Republic. NII is the difference between what banks pay on deposits and what they earn from loans and other assets. …
Large lenders such as JPMorgan have benefited from the US Federal Reserve lifting interest rates last year, which enabled them to charge borrowers more for loans without passing on significantly higher rates to savers.
The bank said its deposits, which totalled $2.3tn at the end of March, were “down slightly” year on year. Chief financial officer Jeremy Barnum said the expectation was that system-wide deposits at US banks would continue to decline as the Fed tightened monetary policy and customers chased better yields on their cash.
“We will fight to keep primary banking relationships but we are not going to chase every dollar of deposit balances,” Barnum added.
JPMorgan is paying 1.21 per cent on average to depositors, lower than the 1.75 per cent average of its peers, according to data from industry tracker BankReg.

See, that’s a deposit franchise. Having a valuable deposit franchise means that you don’t have to chase every dollar of deposits, because they don’t go anywhere.

Pimco already has a lineup of multisector OEF & CEF funds. Now comes its active multisector ETF.
https://twitter.com/ETFhearsay/status/1661115242468745263?t=-vAgfbXrbhcW-UXl6z2YiQ&s=19

Vanguard is testing out two different cash programs. One is a bank sweep option for brokerage settlement accounts (Vanguard Cash Deposit). The other (Vanguard Cash Plus Account) provides enables bill payment but only via ACH pull (no checkwriting, no bill pay, no debit/ATM card).
https://investor.vanguard.com/investment-products/cash-investments
These programs are more or less by invitation:

You must be an existing Vanguard client to be considered. Not all Vanguard clients will be eligible to open a Cash Plus Account.
You must be an existing Vanguard client to be considered. Not all Vanguard clients will be eligible for Vanguard Cash Deposit.

Every time I've tried, I've received the message:

Enrollment is closed for now, but we’ll be in touch
We’re sorry you weren’t included in the pilot phase of Vanguard Cash Deposit. We’re in the process of adding clients and will let you know as soon as it’s ready for you.
We're sorry you weren't included in the pilot phase of the Vanguard Cash Plus Account. We're in the process of adding clients and will let you know as soon as it's ready for you.

Regarding the settlement sweep account, it's a nice option for people who don't feel comfortable using a government MMF (VMFXX) and would prefer a bank sweep. But it comes with a cost. Current 7 day yield on VMFXX is 5.02% (annual yield of 5.15%), while the bank sweep offers an APY of 3.5%.
The bank offering is more competitive. 4.5% though with very limited "banking" capabilities. Note that it is structured as a brokerage account with a bank sweep, as opposed to a pure bank account like a Schwab Bank account.
These two programs are all well and good, but not something I'd go out of my way for. Though 4.5% FDIC-insured is attractive at the moment. As a Vanguard client, I might use it (if Vanguard would deign to let me in).
I've seen at least a couple of the sweep program banks mentioned in articles of banks possibly at risk: Huntington National Bank (part of Huntington Bancshares) and Valley National Bank. There are also very solid banks on the list.

@davidrmoran: preserve us from the 70's and those interest rates!

not 51y ago

@fred495...question if you are comfortable answering...how much of a change meaning your 100% Treasury MMKT and FDIC CD portfolio from your past portfolio...were you very heavy in those investments prior and if so what % of your portfolio?
FWIW...I've been 85-90% for many years in those types of investments....now ~ 95%...."stop playing the game if you feel you've got enough...don't get greedy...get your portfolio where you can sleep well at night" I'm still working and do I guess you would say better than average out there...working for the "fun of the game, camraderie and challenge.."
...who the heck knows though right?
Good Luck to ALL,
Baseball Fan

I am a retired and fairly conservative investor who really doesn't need a lot more money - but I certainly don't want to lose a lot. In the current environment, preserving capital is more important to me than seeking return on capital. I prefer to err on the side of caution. As you said, "who the heck knows"?
I have been 100% in a Treasury only MM fund and in FDIC insured CDs from large national banks since the early spring of last year. Currently, the split between Treasury MM and CDs is approx. 40/60. This percentage will change as CDs mature and the proceeds are reinvested in the future.
Prior to that I was approx. 50% in allocation/options/macro trading funds with fairly low standard deviations, such as FMSDX, JHQAX, BLNDX, PVCMX, etc., and the other 50% in bond funds, such as NVHAX, OSTIX, RCTIX, TSIIX, etc.
Good luck,
Fred

I just spoke to Schwab a few minutes ago about uninvested cash just sitting. I was told that it is swept into Schwab Bank and pays .45%. I would not mention this normally but right now I am concerned about all MONEY market accounts. My adult kid sold off a major position in Swvxx and so far is too lazy to move it to her synch OLS.

@hank,
Japanese Companies = yes
Japanese Economy = not so sure
Buffet's 5 Japanese stocks:
japanese-stocks-that-warren-buffett-just-bought
Japanese Funds/ETFs i have followed:
HJPNX
HJPSX
FJPNX
DXJ - great returns over the last 5 years

***Also posted on Big-Bang
I currently hold FXAIX (FIDO) and PRILX (Parnassus), taxable and ROTH, respectively.
I am looking to compliment each of them with another fund (Mutual or ETF). I currently also have a small position in TDVG (PRDGX-TRP) but not sure if it's the best complimentary LCB option.
I am having a little difficulty narrowing down an ETF or Mutual fund; a consideration is JQUA (JPMorgan Quality Factor). One issue I am coming across is tax efficiency; most of my DD is leading me to higher than desired Tax Cost Ratio Mutual funds and some ETF's with .7 - .8 TCR.
Not that .7 - .8 is terrible, but if I am to invest in an ETF, I would prefer a more tax efficient one, if possible. Maybe it's not viable for this category?
EDIT: Just came across a 1-year old ETF from Capital Group "CGUS" (combining Growth and Income....can serve as a compliment to the S&P 500....). Any thoughts on this?
I'm looking to invest about 10% in this "complimentary" MF and/or ETF
Any suggestions, constructive criticisms, thoughts or idea's are very welcome!
Thank you in advance!
Matt

I am starting this thread because I have more questions than answer when it comes to money creation. Econ 101 explains that "money creation" is what banks do with excess reserves and how banks can create $9 of debt (loaned money...known as a liability) from a single $1 of revenue (known as an asset or as a bank deposit).
From Econ 101:
The Banking System and Money Creation
From this reading, I then found data on US income tax payments (deposits (taxes) made to the IRS).
Federal_tax_revenue_by_state
Let's consider the Federal Reserve and the IRS as one big bank. In 2019, the IRS collected $3.56 Trillion dollars in tax revenue. This was collected from earned and unearned income (taxes owed by US citizens). On the liability side of this bank, US citizens are running a debt (issued by the US government) of 31.8 Trillion dollars.
https://usdebtclock.org/
In the banking world (fraction reserve system),
Assets + Liabilities = Total Deposits
So,
US Tax revenue ($3.56T) + US Debt ($31.8T) = $35.36T
Using the same numbers we can determine that 10% reserves equals $3.536T which is slightly less than the $3.56T collected in tax revenue (IRS assets). This would make a bank's accountant department happy. ;)
If this Fractional Reserve system is how banks operate (10% bank deposits & 90% bank loans), it appears the US government (Bank of USA) operates in a similar manner, collecting about 10% in revenues (taxes) and loaning out 90% in debt (liabilities).
Now, if we all can agree that the US national debt is "loaned out" and that it will create new tax revenues for years to come and so long as we are collecting at least 10% of "total deposits" in tax revenue each year we should be as solvent as the banking system...
O.K., now I see the problem! :(

#5 @Sven did you happen to see 60 Minutes last night ? Over charging for tools that the armed forces use !! All at tax payer expense ! Armed services hurt to : 100 tanks ordered , can only buy 90 with their allotted dollars.

Good interview overall with many historical perspectives. He is quite bearish and the economy is entering a recession now.
1. He likes things that you need, i.e. consumer staples (food), utilities, and healthcare, not so much things you want.
2. Long and short tern treasury bonds as in a barbell
3. Gold, but they are near all time high
4. Farmland (impractical for most investors)
5. Defense industries as the budget goes up every year
6. His equity allocation is at all time low (recession)

@dtconroe what makes a banking account (checking and savings) more liquid than a money market fund at the likes of Schwab?

Hi Mona, I have a brick and mortar branch of my bank 10 minutes away. I literally can get whatever cash I need out of that bank within just a few minutes. If the bank is closed, I have a drive through ATM 5 minutes away where I can get cash. I can move money between my checking account and savings accout online, instantly. I have FDIC protections and I have tremendous trust in my bank as a result of many years of membership. I also have a large number of bills linked to my bank account online, for monthly drafting to pay the expenses. I also have a large number of ongoing deposits from social security, spouse pensions, etc. and if any of those are disrupted by Default problems, then I have other cash available in my bank savings account that I can quickly shift to my checking account for bill drafting coverage.
With my Schwab brokerage MM account, I have to put in a trade to sell a certain amount of the MM fund, and it goes to brokerage cash the next day. Then I have to transfer the brokerage cash electronically to my bank, and it takes a couple of days for the trade to settle and the transfer to be completed. Sometimes the weekend delays the process for a few more days. When the money finally arrives at my bank, then I can go through the withdrawal, bill paying process, that I already described.
From my perspective, everything is faster and more dependable by have adequate assets in my banking account, and quite frankly I trust my bank more than my Schwab brokerage to protect my cash.

I sold all of my bond funds in March of 2022. I have not bought any new bond funds since then, preferring Brokerage noncallable CDs and MMs. I have no plans on buying any new bond funds in the near future. For now, I prefer to reinvest CDs that are maturing, into new CDs at higher interest rates. I continue to hold a large number of watchlists of bond oefs, to see if there is an emerging performance pattern that interests me, but nothing I trust has emerged in 2023 so far. I continue to have interest in Bank Loans, Municipal Funds, and some HY, Multisector and Nontraditional funds, so I watch those most closely. With MMs and CDs paying aroung 5% or more, I have no sense of urgency to rush back into bond oefs.

At this time, and for lack of any better alternatives that meet my comfort level, I am keeping 100% of my portfolio in a Treasury Only MM fund and in FDIC insured CDs issued by the largest national banks until the proverbial dust settles.
Good luck,
Fred

Hi Fred, I am not sure what kind of portfolio you have. I have both a traditional taxable account, along with an IRA account. I am keeping my Brokerage IRA portion in MMs and CDs, but I am transferring "part" of my traditional brokerage taxable account to my Banking Account (checking and Savings) for liquidity reasons. Do you count your Banking Account as part of your portfolio?

@fred495...question if you are comfortable answering...how much of a change meaning your 100% Treasury MMKT and FDIC CD portfolio from your past portfolio...were you very heavy in those investments prior and if so what % of your portfolio?
FWIW...I've been 85-90% for many years in those types of investments....now ~ 95%...."stop playing the game if you feel you've got enough...don't get greedy...get your portfolio where you can sleep well at night" I'm still working and do I guess you would say better than average out there...working for the "fun of the game, camraderie and challenge.."
Have to say, my current thinking is you might be "safer?" in AAPL as due to a better balance sheet than the govt (no printing press though) as it is a utility without the interest rate exposure of a normal utility and has plenty of "fan boys/girls/others" who are addicted to their products...maybe BRK-B too but I saw during the Pandemic ole'Warren kinda froze up a bit, he seemed really rattled for someone who has had many trips around the sun...
I've been adding to FPACX...nice cash buffer in portfolio, thinking Romick and the boys will know what to do AND act at the somewhat correct time...heard on recent podcasts that the "technicals" are looking better, throwing off buy signals...who the heck knows though right?
Good Luck to ALL,
Baseball Fan

The Week in Charts (05/20/23)
A tour of the markets covering the most important charts & themes, including the Nasdaq 100 comeback, the inverse of 2022, US equity valuations, the US Consumer pullback, and more.
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The way brokerages service cash accounts (variously called "transaction accounts", "core accounts", etc.) is confusing by design. Sweeps happen automagically (pay no attention to the man behind the curtain), and investors are not supposed to concern themselves with details.
Those details vary from brokerage to brokerage but are generally similar. A brokerage transaction account is used to pay for investment purchases and to hold proceeds from sales, interest and dividend payments.
Investors typically have a choice of places where this cash may be kept. One option is a bank sweep. Brokerages use one or more banks (called "Program Banks") to hold the cash of investors choosing this option. Even though you get FDIC insurance "passed through" to you from the banks, you don't actually have a bank account at any program bank. Rather, the brokerage aggregates all the cash together and has a single bank account at each program bank for this purpose.
If brokerages own banks, they generally use those banks as their program banks. So Merrill uses BofA. Schwab uses Charles Schwab Bank, Charles Schwab Premier Bank, Charles Schwab Trust Bank, TD Bank, and TD USA Bank. The latter two are not affiliated with Schwab. (Their use might just be legacy from when TD Bank owned TD Ameritrade; just speculating about status.)
For checkwriting services, Schwab encourages you to open (and link) a Schwab bank account. It provides a combined application for a brokerage and a bank account. It provides combined reports (see OJ's image above). But the basic brokerage application (w/o Schwab Bank) also allows you to request checks & debit card (see section 5).
Checkingwriting services are spelled out a little better for Schwab IRA brokerage accounts. Here's the IRA checkwriting disclosure. These checks are processed by BNY Mellon. So it is clear that for IRA checkwriting at least, you don't need to link to a Schwab Bank checking account.
Aside from bank sweeps, the other main option at Schwab is Schwab One® Interest Feature (you're loaning the cash to Schwab; it gets SIPC protection). Some investors (employer plans, advised accounts) may also be able to use sweep shares of a MMF SWGXX.
See also:
https://www.schwab.com/legal/cash-features-disclosure-statement
https://www.schwab.com/legal/schwab-brokerage-account-agreement

Several Matthews Asia funds were mentioned.
I personally would stay away from all Matthews Asia funds in the near-term (possibly long-term).
There has been an exodus of talent at the firm over the past few years.
https://www.mutualfundobserver.com/discuss/discussion/comment/152046
https://www.mutualfundobserver.com/discuss/discussion/comment/156101
https://www.mutualfundobserver.com/discuss/discussion/comment/159415

I agree.
@randynevin. Look at DODWX. It is global, not strictly international. Great track record.
https://www.morningstar.com/funds/xnas/dodwx/quote

Not really- there are two separate entries there:
• The first shows "Cash and Cash Investments Total $54,014.50"
And down in the extreme lower right of the "Balance Details" section:
• "Funds in linked Bank Account $10,046.00"
And that is agreement with the Account Summary as shown above. The only account we have at the Schwab Bank is a checking account. I'm not sure if that's the same on your side, or if that actually makes any difference at all. This whole thing with the apparent differences in our accounts is very puzzling to me.