1. Banks hold onto your deposits
3. Then lend out at 3% by buying T-bills
4. The difference is the profit
5. When Fed raises rates the value of the T-bills goes down (who wants a 3% T-bill when they can get a 4% T-bill?)
6. So even though the T-Bills are "safe" (they will pay back), the banks are short-term losing money on paper
7. They only have to take that loss if there is a run on the banks (depositors want their money)
8. Then the banks have to sell at a loss.
9. Then the bank goes bankrupt.
10. The solution is the Fed can loan the banks money for what they paid for the T-bills (since the money will all be paid back with interest).
11. The solution should include consequences (perhaps the Fed takes some equity in the banks.)
12. TLDR: The banking system is safe. But the Fed raising rates (similar to other times the Fed has raised rates) causes banks to have problems managing risk.
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