Too Much Money Can Be Bad for Banks
Also bond-trading robots, prediction-market fraud and 3 a.m. emails.
Banks are so strange. You might think that the way a bank would work would be that, the more money it has, the more money it can use to make loans and trade securities. If people flock to a bank to give it deposits, then it will have more money to lend. Or if a bank makes savvy interest-rate derivatives bets, and those bets pay off, then it will have more money that it can use to buy stocks and bonds. That is how businesses tend to work: If they do stuff that brings in money then they can use the money to do more stuff.
This March, financial markets seized up in a whole variety of ways, and when financial markets seize up there is usually some component of “banks couldn’t do stuff” involved. At the Wall Street Journal, Justin Baer has a terrific account of “The Day Coronavirus Nearly Broke the Financial Markets,” examining some of the ways that financial markets seized up on March 16. Here is a mind-boggling one featuring Vikram Rao, head of debt trading at Capital Group Cos.: