Paxter

Not quite true - Tasmania is still governed by the Libs. And now McGowan has surprisingly resigned in WA.

Regionals rallying hard today. Plenty of industry insiders are blaming the volatility on short-sellers’ vulture like behaviour (especially shorting ETFs). I am less scathing of the shorting - at the end of the day it’s fair game to make a bet on the future viability of banks with questionable business models. Ultimately we are likely to see significant consolidation as more of these regionals reach attractive valuations. In the meantime, margins and profits are going to be squeezed for the foreseeable future. At least no resolutions this weekend!

Yeah the prudential framework is generally pretty good. It’s not quite a level playing field as the large banks are permitted to implement their own capital rules via internal models, while the smaller banks have to use a completely standardized approach (much to their dismay). That tiered system has slowly been watered down over the years as APRA has followed new Basel rules that effectively restrict the use of models. The major banks also get a two-notch upgrade on their credit ratings because Moody’s and S+P both believe they are implicitly guaranteed by the government. This gives them an edge in funding markets. But overall it’s a quite conservatively and I think fairly regulated system. There’s a bias towards the safety of the big players, but that’s arguably a feature more than a bug. ETA: On deposit rates, I think it was the speed of increases (or lack thereof) rather than the level of rates that was the concern. But it’s good that TINA is now over, at least for a while. I hate the idea of negative interest rates and wish we had never taken that path globally.

I guess I'm hoping that if the RBA manages to get inflation back under control, that will end up being a boon for most renters and probably worth the interest rate hikes. And let's not forget what got ourselves into this inflation mess: Global lockdowns that froze supply chains and caused shortages of goods Massive and overly prolonged fiscal and monetary stimulus both at home and abroad A sharp rebound in demand for services like travel, dining out etc. Labour shortages in key services industries (the biggest chunk of the Australian economy) War in Europe causing a global commodity-price shock The RBA is trying to fix this mess with the only tool in their toolkit: interest rates. And as others in this thread have pointed out (Anti-Targ chief amongst them), it's actually a pretty shitty tool.

The current inquiry into deposit rates might indicate otherwise! And we are going to lose Suncorp at some stage, which is kind of a shame. With the demise of Bankwest and St George years ago, there really isn’t much choice at the regional level. Having said that, it would be unusual for a country of our size to have many more banks than we do. And it’s not as if the US is a great exemplar right now with its ultra-diffuse market for financial services.

Oh they are loving the profit boost. Bank stocks are paying good dividends again. It’s just not as big as analysts were expecting, because the expectation was that they could throw their oligopoly power around. Instead they are competing hard to get deposits and loans. Insurance was never a money spinner for them but the loss of wealth management does narrow their business models.

That may be true of SVB or Signature, but not all of these regional banks are being grossly mismanaged. We have just seen the sharpest interest rate hiking cycle in 40 years. Small, less diversified banks (like, PacWest or Western Alliance) are always going to find it hard to maintain profitability and retain deposits in these circumstances. That’s business model risk rather than a criminal act. Ideally, banks would be holding some extra capital for this interest rate risk (known as IRRBB in regulation speak). But in reality, the capital that banks are required to hold is based more on other types of risks. You can expect much hand-wringing and finger-pointing over IRRBB in the next few years. ETA: Oh and I wouldn’t be surprised if some criminal charges are eventually laid over some of these failures. I don’t think this is a repeat of 2008 in that sense.

This is the moral hazard argument. Of course, if you simply let them fail, a lot of uninsured depositors are going to get hurt. Plus it risks causing more contagion to solvent entities.

My view is that the systemic guarantee of deposits is already in place and making it explicit won't change much. No way would Yellen protect SVB depositors and not PacWest. It's unthinkable. The reason for the "pick offs" is that the business model of these banks is essentially fried now that the cost of deposits has skyrocketed. I think M&A is really the only way to go here, just as it was in the S&L crisis. The other option is something like TARP that could be used to effectively recapitalize the regional banks...which takes us back to full-scale bail-outs.

The market still seems to be hopeful that Australia will avoid recession. But certainly the banks got slammed yesterday after the NAB miss on Net Interest Margin. Basically, the cost of capital is increasing more for the banks (they are very reliant on offshore wholesale funding) than their ability to extract higher income from their lending books.

This line from NAB's earnings call made me raise an eyebrow: Makes me wonder whether the borrowers are OK or if they simply didn't want to talk to their bloody banker :P.

ETA: Wrong thread.

I would still compare this situation more to the S&L crisis than to 2008. That is, we probably won't see bailouts of systemic institutions in the vein of TARP. But we may see a lot of deposit payouts, which nowadays are funded by the banks themselves (although it's true that the costs are passed on to bank customers). The exception so far has been Credit Suisse, which was resolved by a mixture of bail out, bail in (AT1 creditors written off, much to Isk's disgust) and UBS' balance sheet. That failure is straight out of 2008. ETA: Of course, this is still Phase 1. I think we definitely could see bailouts if we get to a full-blown credit crisis.

I'm still slogging through TGAT Part 1. Sigh.

So to @ThinkerX's point above...PacWest is under some serious pressure with the stock price tanking in the after hours. The positive is that this is a much smaller bank than First Republic. The negative is the continued contagion across regional banks and the worry that the next phase of failures is already upon us.