Banks on the Brink: 2023 Mini-Crisis

[Jeor]

8 hours ago, Paxter said:

Trying to figure out what the playbook would be from now for First Republic and its regulators.

At the moment, the bank is avoiding default thanks to a $30bn deposit from its larger competitors and access to central bank liquidity facilities (SVB never enjoyed these luxuries). The size of the bank's deposit outflows since the start of the crisis is not known precisely but is probably in excess of 40%.

In theory, the bank could survive from here if deposit outflows stabilize further. The problem is that the bank's net interest margin going forward is completely shot, which turns the bank into a zombie. It will have to pay a market rate on the new funding that has come in (compared to the cheap funding that ran) while the asset side of the business is made up of underwater bonds and mortgages. Earnings in the future are likely to be terrible, meaning that this bank lacks a profitable future, unless it can somehow re-attract that cheap funding. 

Unless a white knight sees some sort of franchise value in the bank and is willing to recapitalize the bank and absorb losses, I don't really see a happy ending here. Things could drag out for quite a long time thanks to the liquidity on offer, but eventually the bank will book losses and breach its capital requirements. I guess the only other saviour could be a return of cheap funding / massive cut in interest rates. 

The $30bn bank consortium deposits were only in there for 120 days. That period coincides quite nicely with other challenges like the US debt ceiling fight that doesn't bode well for financial markets in the next few months.

[Paxter]

6 hours ago, Jeor said:

The $30bn bank consortium deposits were only in there for 120 days. That period coincides quite nicely with other challenges like the US debt ceiling fight that doesn't bode well for financial markets in the next few months.

I imagine FR will just replace those deposits with Fed funding, assuming they don't roll over. 

Deutsche's CDS spreads have blown out in the past day. No sign that the bank is experiencing the kind of customer outflows we saw with CS. Based on the share price action, I would guess no. What we are seeing is probably more of a repricing of the bank's fortunes based on the ECB tightening and future earnings projections. 

Edited March 24 by Paxter

[Madame deVenoge]

15 hours ago, ants said:

Not outside the USA its not. It's the Global Financial Crisis. 

Bah. I’m in the USA, so I’ve always heard Great Financial Crisis 

Not a place to which we wish to return. I came through 2008 making more money than I had before, but damn was it ever stressful af.

I'm currently stressed af….waking up consistently at 3:30 am and unable to get back to sleep.

[Paxter]

@Chataya de Fleury: Hope your stress levels fall soon. I'm still hopeful of avoiding a 2008-like situation. There are probably a few more roaches under the mattress, but at least as far as I can see, it's not an infestation :P.

On a different note, this is pretty interesting (Source: FT):

Quote

More than three quarters of Swiss voters want the combined mega bank created by UBS’s emergency takeover last weekend of rival Credit Suisse to be split up by new legislation.

A poll released on Friday afternoon by Switzerland’s biggest pollster, GFS Bern, adds significant momentum to calls in Switzerland for an urgent review of the deal, its possible reversal, and even laws to claw back bonuses from Credit Suisse employees for the benefit of taxpayers.

Edited March 24 by Paxter

[Iskaral Pust]

Deutsche Bank have received a dreaded public statement of confidence by Olaf Scholz.  I have no non-public information about them or any weaknesses but after their many years of deeply shady practices, I’d be quite happy to see them disappear.

But the European politicians won’t want to lose too much top-end global banking market share to the Americans, so I expect DB will be backed to the hilt. 

[Clueless Northman]

28 minutes ago, Iskaral Pust said:

Deutsche Bank have received a dreaded public statement of confidence by Olaf Scholz.

I suppose he is fully aware that he's quoting the Swiss govt just before Credit Suisse crashed and burned. Is he actually signalling to clever people it's time to sell and get out of DB?

[Iskaral Pust]

2 minutes ago, Clueless Northman said:

I suppose he is fully aware that he's quoting the Swiss govt just before Credit Suisse crashed and burned. Is he actually signalling to clever people it's time to sell and get out of DB?

That’s the beautiful irony.  It’s like when the board of a soccer club makes a statement that they have full confidence in their manager/coach: you know he’s a dead man walking unless there’s a miraculous improvement.  

[Paxter]

The big difference with DB is that it’s decently profitable and even now is trading considerably above its market lows of a few years ago. CS was not, even before this tightening cycle.

But who knows…could be the kiss of death as you say.

Edited March 24 by Paxter

[Pecan]

A bank stock I've been tepidly interested in for a while, before the SVB news, is KeyCorp (KEY). But then I saw this article a few days ago pointing out that they have delayed their Q1 earnings report twice, which is highly unusual for them.

Here is the relevant passage:

Quote

KeyCorp: Late Earnings Date Confirmation

One name that we are growing more concerned about is KeyCorp (NYSE:KEY). We will leave it to our clients to make their own decisions on where the stock could go, but this name is a red flag. Here’s why: KEY typically confirms its Q1 earnings date around February 7 with a standard deviation of about 20 days. As of March 20, the firm has yet to confirm its reporting date, making the delay about two standard deviations later than normal.

Our research shows that firms with abnormally late earnings confirmation dates tend to report bad news, then underperform when they finally issue quarterly numbers. Will that be the case for KeyCorp? Hard to say, but with regional banking worries left and right, this is not a bullish look for the Cleveland-based $11 billion market cap Financials sector firm.

At the end of the article it says that April 20th is the new earnings reporting date.

My understanding of the issue with the banks right now is that, given a decade or so of extremely low interest rates, virtually every bank has some level of exposure to these very low-yield assets. That has to be the case, doesn't it? Isn't this the water that all the banks had to drink from 2009 through 2021? At this point, how many 30-year mortgages even exist that aren't rock bottom? Mine is one because I inherited it , but there can't be too many out there at this point. And treasuries paid almost nothing for a decade. So, sure, if you're a bank it's better to do good risk management than bad risk management, but you've got to do something with your deposits. The money has to go somewhere.

The thesis with SVB and I guess FRC as well is that they've been bad with managing risk, and while I don't really doubt that, I'm wondering what the math problem looks like for all of these banks that aren't necessarily bad at managing risk, but maybe are just sort of average. Keybank is supposed to be this good, solid bank run by sober Midwesterners from Cleveland - salt of the earth types no doubt. But it's really just math isn't it? It seems to me that you can be a good banker, or at least not a bad one, and you can still have a problem. 

So I think April 20th might be a day to pay attention to. 

[Jeor]

12 hours ago, Paxter said:

The big difference with DB is that it’s decently profitable and even now is trading considerably above its market lows of a few years ago. CS was not, even before this tightening cycle.

But who knows…could be the kiss of death as you say.

There have been reports of mismanagement at Deutsche for a while and in a similar-ish vein to Credit Suisse, the difference between them is that DB is further along their reforms and has actual progress to show for it. The Chancellor wasn't wrong in what he said - it's a profitable enterprise and management has made a lot of changes to transform the business.

DB is not in any real trouble but I'm sure there are hedge funds out there stalking the next wildebeest and the time is ripe for them to start picking off banks. DB is a big one to try and take down and I think it will hold, but I expect there will be quite a few of these types of attacks and some will find their mark.

[DMC]

On 3/21/2023 at 8:48 AM, Paxter said:

I always thought GFC was Global Financial Crisis? At least at work that’s what I am referring to.

Great Recession is sometimes used to refer to what came after; a term that was used as a callback to the Depression. It’s nowhere near as widely used as GFC.

Yeah, the "G" in GFC has always been Global - not Great - in my experience between news articles and lit.  Even in the US.  The "Great" Recession it resulted in was to emphasize it was the most severe economic downturn since the Great Depression.  The Great Depression was called "Great" to distinguish between previous depressions - often called "Panics" in the 19th and early 20th century.  Including the Depression of 1920-21 which was, obviously, pretty recent at the time.

Anyway, I don't have much to comment on this.  I hung out with a lot of economists when I was at Pitt and would always make fun of them because in actuality they had less of an idea of what they were supposed to be experts on than us poly sci people.  That's still the case.  It's quite amusing watching people pose as if they have any idea what's going to happen or even what to do.  Only thing I can say with any confidence is Warren is definitely right about the 2018 deregulation, or rise from $50 billion to $250 billion.

[Rippounet]

On 3/20/2023 at 7:55 PM, Chataya de Fleury said:

Sorry that you don’t like all this, but it’s not bullshit. Just like how I don’t like standard social media and choose not to participate in Twitter or Facebook - those things are no less real, as is their impact on society.

Oh, the impact is real all right. Pretty much the entire world is perfectly aware of how human societies end up paying for finance and its mistakes. This very thread exists because there may be yet another financial crisis, and we have yet again to deal with the problem of a handful of over-privileged people playing monopoly with the global economy.

But of course it's bullshit. You try to present some minor forms of economic modernization or centralization that were developed through finance as being attributable to finance. Of course that's perfectly fallacious: as I was clumsily trying to point out initially, such modernization or centralization can exist without finance, or to put it differently, there is no meaningful benefit to human societies that can be attributed to finance itself. Finance has become a gigantic parasite on the real economy ; it does nothing except make money for the people involved in it.

Not that long ago, finance could possibly be credited with helping the real economy, by directing investment to underfunded sectors or making production more efficient. The reality though, is that people involved in the financial sector became obsessed with profit at the expense of actual economic development or, for most of them, with their own bonuses. The immorality of finance and traders is well established by now, with Jeffrey Sachs once stating that "they truly believe they have a divine right to take as much money as possible, by any means, legal or otherwise."
All that's bad enough, but perhaps regulations could help? Not anymore. The environmental crisis means we probably don't even need to make production more efficient anyway, and finance has already failed dismally at directing funds to address the situation, thus proving once and for all how useless it is for humanity. In fact, the fetichism of money that goes with finance may even be argued to be the root problem of the environmental crisis!

Anyway... It's still a bit early for the whole system to collapse - unfortunately it will probably take horrifying devastation for most people to accept the simple fact that our current economic system has become a liability. But I'll be overjoyed the day one crisis too many allows us to get rid of it for good: at this point in time, any suffering coming from the collapse of finance will be considerably preferable to the suffering coming from the collapse of civilization.

 

[DMC]

36 minutes ago, Rippounet said:

Not that long ago, finance could possibly be credited with helping the real economy, by directing investment to underfunded sectors or making production more efficient. The reality though, is that people involved in the financial sector became obsessed with profit at the expense of actual economic development or, for most of them, with their own bonuses. The immorality of finance and traders is well established by now, with Jeffrey Sachs once stating that "they truly believe they have a divine right to take as much money as possible, by any means, legal or otherwise."

So..what you're saying is we all aren't Keynesians now? 

Not sure I'd insert Jeffrey Sachs into the argument, but yeah, this is a point that should be emphasized so much more -- that we used to be able to do this, even in the US.  Teaching undergrads, it's scary how little our youth understands this, or is even educated about it.  I had to remind myself to put McCarty et al. (2007) into my powerpoint yesterday.

[Paxter]

First Citizens all set to buy a decent chunk ($72bn) of SVB, with FDIC sharing in some of the loan losses. 

This is a decent outcome for FDIC, since they would have otherwise been on the hook to pay out all of the uninsured deposits being transferred under the sale. 

But this is still the world of "bail-out", not "bail-in". 

[DireWolfSpirit]

Ive read some articles on the Swiss bank bailout explaining the unusual nature of that action. Amounting to bailing stock stakeholders in front of the bondholders. Which is not the usual order of liability. Bondholders considering sueing over that arrangement.

[Paxter]

2 hours ago, DireWolfSpirit said:

Ive read some articles on the Swiss bank bailout explaining the unusual nature of that action. Amounting to bailing stock stakeholders in front of the bondholders. Which is not the usual order of liability. Bondholders considering sueing over that arrangement.

It's a tricky one. I have read many analyst notes over the years stating that CoCo bonds are impossible to value (or to risk rate) because it's not clear their position in the hierarchy will be respected. The triggers for writing off these instruments are very discretionary on the part of the authorities. 

As an aside, most bondholders of CS will have their position in the liquidation hierarchy respected. It's only the holders of these CoCos (largely big hedge funds, not your Mum and Dad) that will be losing out. 

Edited March 27 by Paxter

[Aemon Stark]

On 3/20/2023 at 2:23 PM, Chataya de Fleury said:

What you and other people who like to bemoan “accounting pirates” and such do not realize is that if we did not have things like modern financial instruments, such as securitizations, it would be the 1970s all over again when buying something like a house.

In my musings, below, I’m going to give you an example based on “you” applying for a plain vanilla Agency-eligible Mortgage.

If there were no RMBS market, rather than doing a literal two-minute application for pre-approval on Rocket Mortgage, you would have to schlep loads of financial documents down to your local bank for a financial colonoscopy performed by a loan officer. This would take weeks. Just to get a pre-approval. You might even get questioned on some of your income and expenditures in excruciating detail.

Your mortgage rate would also be much higher than it is now, because that mortgage would not be sold by the bank to generate liquidity.

We just went through a mortgage pre-approval. Aside from tax returns, we provided statements of investment accounts, details of various liabilities past and present, access to credit, and there were multiple emails and phone calls back and forth with the mortgage specialist at the bank. Of course this is in Canada where we haven't had a major banking failure in a century. Our existing fixed rate is 1.9% until 2025. 

[dog-days]

5 hours ago, Aemon Stark said:

We just went through a mortgage pre-approval. Aside from tax returns, we provided statements of investment accounts, details of various liabilities past and present, access to credit, and there were multiple emails and phone calls back and forth with the mortgage specialist at the bank. Of course this is in Canada where we haven't had a major banking failure in a century. Our existing fixed rate is 1.9% until 2025. 

4.5% to 5% is what I'm typically seeing in the UK. Note to self: look for jobs in Canada. 

[Zorral]

Mismangement not possible! All of us who work in the financial industry, top-to-bottom, including the porters, are true blue straight honest regulation observing and untempted by corruption and greed. Which, you know, is why there is no need for regulations oversight or enforcement of either, and why we should be always be bailed out at taxpayer expense (when they lose their shirts by our 'mismangement) and made whole. Besides we are the smartest people in the room about money everywhere all the time.

SVB collapse caused by ‘textbook case of mismanagement,’ Fed official says
Congressional hearings this week will examine the collapse of Silicon Valley Bank and Signature Bank, as well as the government’s response

https://www.washingtonpost.com/business/2023/03/28/svb-congress-hearing-fed-fdic/

Fed Vice Chair Calls Silicon Valley Bank a ‘Textbook Case of Mismanagement’
The Federal Reserve’s top bank cop blamed Silicon Valley Bank’s leaders, while previewing the cental bank’s review of its faulty oversight

https://www.nytimes.com/2023/03/27/business/economy/fed-silicon-valley-bank-mismanagement.html

Quote

 

.... “SVB’s failure is a textbook case of mismanagement,” he said, while adding that the “failure demands a thorough review of what happened, including the Federal Reserve’s oversight of the bank.”

He noted that Fed supervisors spotted a range of problems in late 2021 and throughout 2022, even rating the bank’s management as deficient, which barred it from growing by acquiring other companies. And he said that supervisors told board officials in mid-February that they were actively engaged with SVB on its interest rate risk.

“As it turned out, the full extent of the bank’s vulnerability was not apparent until the unexpected bank run on March 9,” Mr. Barr added. “In our review, we are focusing on whether the Federal Reserve’s supervision was appropriate for the rapid growth and vulnerabilities of the bank.”

Yet Mr. Barr was also likely to face questions — especially from Democrats — about whether changes to Fed regulation and supervision in recent years could have paved the way for the implosion. Congress passed a law that made midsize bank oversight less onerous in 2018, and Mr. Barr’s predecessor, Randal K. Quarles, an appointee of President Donald J. Trump, had carried out and in some cases built upon those changes in 2019. ....

 

 

[Madame deVenoge]

18 hours ago, Aemon Stark said:

We just went through a mortgage pre-approval. Aside from tax returns, we provided statements of investment accounts, details of various liabilities past and present, access to credit, and there were multiple emails and phone calls back and forth with the mortgage specialist at the bank. Of course this is in Canada where we haven't had a major banking failure in a century. Our existing fixed rate is 1.9% until 2025. 

I know nothing of the Canadian financial system…but I do love Canada. It’s a great place. A bit chilly in winter, sometimes.