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Midsize Banks Request Full FDIC Pledge. White House Talks To Buffett
Evidently, America's small- and midsize banks are still very concerned about deposit flight.
In a letter to regulators, the Mid-Size Bank Coalition of America asked the FDIC to consider insuring all deposits for two years in order to stanch the bleeding and otherwise restore confidence after another brutal week for the nation's regional lenders.
Universal deposit insurance would "immediately halt the exodus of deposits from smaller banks, stabilize the banking sector and greatly reduce [the] c
Well I guess the Fed needs to go 50 next meeting(sarcasm) to “help” with the disintermediation. After all there is separation between of a last resort lender function and monetary policy (sarcasm again). The so -called experts amaze me in their lack of wisdom.
Knock-on to CRE and construction financing (regionals are big here, and will be pulling back, anecdotally already so in my area and presumably soon to be confirmed with industry data), building materials, REITs (maybe mix of positive and negative there), construction employment.
I was looking at the history of bank failures. In the last episode, the biggest dollar failures were early in the downcycle (2008) but the largest number of failures were in the ensuing few years.
https://www.fdic.gov/bank/historical/bank/
I was surprised by this data, but I admit I was no longer paying any attention to bank failures after 2008. By end 2008 we were looking for things to buy and by 3/2009 we had shifted to full-on offense mode, and didn’t care how many little banks were going away.
Thus I don’t know why banks kept failing for years after 2008.
The wave of residential mortgages gone bad that felled banks in 2008-on never recovered their lost value, except as REO. Perhaps that contributed to the long tail of bank failures in 2009-2012?
Today, the duration-hit securities that are stressing banks in 2023 will recover (some of) their value when rates fall, which might well happen rather quickly as the recession develops – unless we’re in for a 1970s-80s like experience.
However, if there is a wave of CRE loans to go bad, they may not recover their lost value for a long time or ever, given office occupancy trends and retail closures. Regionals are heavily exposed to CRE and construction.
So maybe there will be a long tail of smaller bank failures in 2024-2026, again, as there was in 2009-2012? And maybe we won’t much care, again?
Anyone who knows the history of banks better, I’d be interested.
What is really wrong with banking or at least the deposits side of banking. Is the current problem strictly because of a very rapid rise in Fed rates attributable to dramatic pandemic induced inflation that exposed some small and mid-size banks failure in asset risk management. Is a fix just a matter of reinstating the rules that Trump relaxed. Or does the FDIC need to increase coverage levels for the twenty-first century.
In simple terms it seems obvious that depositors don’t take their money out of banks to bury it in the backyard these days. If they take deposits from one institution they are going to electronically move them to another. Our modern digital financial system requires it. How many people use cash anymore or even go to a physical bank to deposit a check. Modern stable economies need to provide a safe system for checking, savings and money markets. I don’t see how that system can be anything other than being backstopped by the government. It’s doubtful the ‘fix’ will be anything other than keeping the existing tiered risk management system and tweaking it by increasing FDIC coverage and enforcing better bank funds (AFS and HTM) risk management.
Where does the risk creep back into the system. Is it because banks compete for investments by offering higher rates that, in turn, push more risk taking.
In the last 9 months, I helped my parents close every single CD they owned (all were at small banks), pay the early termination penalty and transfer funds to an online brokerage account- where they purchased US Treasuries/bills.
As an aside, paying the early termination penalty on a CD with 1-2 years left that was earning 0.5% was a no brainer given the rates available on USTs.
I believe that was money leaving the US banking system- not just money being transferred between banks, as someone mentioned above.
With respect to commercial real estate loans- this is my concern:
We have not yet even asked the banks what they plan to do with their commercial office property loans. Office property vacancy rates were about 8.9% in 2018 and are now north of 16% (I have read 16.6%).
“Extend and pretend”- the modus operandi for banks with a commercial office property loan portfolio no longer works at higher interest rates. How much will that backstop cost?
Not much progress in reversing WFH.
https://www.kastle.com/safety-wellness/getting-america-back-to-work/
Office vacancy continuing to move up, with vacancy rate generally between 14% and 19% in most metros. Tech layoffs and cost cutting will be growing headwinds in the West coast region.
https://www.commercialedge.com/blog/national-office-report/
Office RE loans are maturing with rates high, occupany low, sales volume very low. Ill-timed new supply will be sizeable in some metros.
The clamour for public financing and regulatory fast-track for “office-to-housing” conversions reflects the industry giving up on office.
Large, high profile CRE defaults have started (Brookfield, Blackstone, etc).
Unlike with REO houses in the GFC, there are no big PE funds looking to build fleets of vacant class B office.
Alternatively, dismantle GSIB’s.
The permanent state of exception is leaking from the FOMC to the FDIC. Perhaps it’s not too early to be sharpening your bartering skills.
What’s wrong with banks is the business model. And unfortunately, banks are the model.
Look at the trends. Back in the 60s banks held more than 50% of all personal savings in the form of CDs, savings accounts, and the most precious source of funds, demand deposits. Demand deposits were largely free funds for banks and allowed nice margins to be earned when used to make loans, especially personal loans at high rates. Only banks could take demand deposits, creating a big advantage over their second tier competitors, savings and loans. S&Ls had two huge disadvantages, they could only do home loans within 30 miles of the home office and only utilize interest (and toaster)-bearing savings accounts.
The problem with this state of play was that it was killing S&Ls, and fairly quickly. Banks, in spite of their advantages also began to lose big chunks of the retail market. First credit cards came along. They it really easy to get a personal loan without some nasty loan officer asking you if you really needed a new fishing boat or a trip to Disney World. So a big chunk of bank income started to drift away. They got credit card fees but the actual money went away. Savings shifted to stocks, IRAs, 401(k)s, pension plans, mutual funds like Vanguard and Fidelity, insurance and other non-bank savings vehicles and the banking industry share of total savings declined sharply. Financial markets gained from facilitating easier retail investing, culminating in essentially commission-free transactions. By the 2000s banks had lost over half their share of personal savings, along most of their most profitable loan products to non-bank players, along with the fact that over 20% of the population just doesn’t “do” banks any longer.
So what are banks to do? First, they knocked down the doors of the regulators. S&Ls got demand deposits and the CRA. Turned loose to make money any way they could they went to a weekend bachelor party and created the S&L crisis. Banks, led by the biggies, got Congress to overturn Glass-Stengel and went to the same kind of bachelor party. Big banks got bigger by eating as many small banks as they could (burp) until they got stopped by a national deposit cap (essentially the main driver of Wells Fargo’s retail troubles). Other big banks went global, made money as market traders, underwriters, mega lenders, etc. And then we got Lehman and the Great Unpleasantness of 2008 and the system need a huge bailout to stay in business.
I had a side gig as a strategic planner for smaller banks. I worked with a guy who the feds saw as a sort of bank whisperer who they set up to save bad banks. He was very good at what he did. It didn’t take long to see that trying to be a bank is a crappy way to make a living, as it were. Banks can only survive by finding profitable niches (fewer and fewer are available), setting reasonable objectives and setting a strong capital base (something SVB didn’t do well enough) without having too much capital so that leverage is lowered and profits reduced. Veery tricky.
Actually, the best business banks are in today is so-called wealth management. I studied this business at length when a client wanted to check out a possible acquisition. What I found was that typical profit margins in this business run 50-60%, depending on scale. Many companies out there offer clients the services of fee-paid so-called fiduciaries. Comply with regulations, put your clients in what look like custom portfolios, collect 1.25% of the assets per year and Bob’s your uncle. Banking is precarious, operating on a knife edge, leaving no room to take anything for granted. We can’t leave it totally unregulated, but the regulations we used to have drove many of the system’s problems, as did the lack of ones we got rid of. The industry needs some enlightened, adult, nonpolitical objective guidance. I don’t see anyone for that job.
Thanks for that historical perspective.
Unfortunately, there are many pieces to this. There are moral issues, there are complacency issues, there is political interference, there is rapid and drastic change in many parts of the global economy. There is climate change, there is a visible period in the cold war, a national security counter to the 41 year disinflation, the consequences of covid, the consequences of compensating for covid. I guarantee you some highly visible folks are going to inject anger and disgust into the proceedings, dragging this out. I can think of so many smart traders and investors who will never be surveyed about their experience and their observations. I see banking as an example of technology and innovation moving dramatically farther and faster than the ability to understand and properly regulate what is an essential system for 7 plus billion people…..