Get the best daily market and macroeconomic commentary anywhere for less than $7 per month.
Already have an account? log in
Banks Face New Era Of Run Risk In Always-Connected World
Maybe it's a dearth of other bad market news to monetize, maybe it's a genuine effort to keep investors apprised of contagion risk or maybe it's both, but the financial media is obsessed with First Republic this week.
On one hand, the blanket coverage makes sense. First Republic was the domino that didn't fall during last month's regional banking turmoil in the US, but it's still teetering, and the country's largest banks have $30 billion tied up in there thanks to what some observers, includin
Add the potential (likelihood?) of tighter bank regulation and capital requirements to the mix. There’s at least one “super-regional” bank whose capital looks well short of what will be required when it moves to Category 2 and can no longer exclude AOCI from regulatory capital, and I suspect a good number of regionals whose capital will be short if the threshold for Cat 2 is lowered, as some think is possible.
Then add the CRE exposure that will play out this year, and the full-quarter NIM pressure even on deposits that don’t leave, and the universe of investable regionals looks small.
I’ve burned many brain cells on the regional banks since SIVB. Only found two names to buy, one ended up being a one week trade, albeit a profitable one, and the other is looking like dead money. Have concluded that even if you do the work and find a name, the problem is that too many of the small regionals fall into the category of names that investors don’t “need to care about”, and the larger regionals mostly didn’t get clobbered hard enough to have outsized recovery potential.
Until the Barr report comes out, regulatory actions are known, and the CRE/NIM shoes fully drop, I think there’s easier places to find names elsewhere in Financials.
As for FRC, it is a zombie bank now. Like SIVB and SBNY, the ticker still flickers on our screens, but it’s just the twitching of a pithed frog.
At this point buying many regional banks are speculative bets rather than as investments. Regulators need to find a way to slow things down. Maybe an enhanced insurance scheme for corporate accounts that have a 20% cap withdrawal limit per day in exchange for a higher insured cap. This way companies can always meet payroll and expenses within a week at most but it will slow withdrawals. You could make the same type of scheme available for retail also in exchange for a higher deposit threshold.
Nice that we’re helping algorithms find and further accelerate problems. Pretty simple to act on that research and monitize it.
Barr report https://www.federalreserve.gov/publications/files/svb-review-20230428.pdf
Calls out the “tailoring framework” as impeding effective supervision.
Recommends stronger supervisory framework. Requiring capital/liquidity “beyond regulatory requirements” for a bank with inadequate “capital planning, liquidity risk management, governance, or controls. “[L]imits on capital distributions or incentive compensation” in some cases.
Recommends stronger regulatory framework. Revisit the “tailoring framework” including “a range of rules for banks with $100MM or more in assets”. Require “a broader set of firms to take into account unrealized gains or losses on available-for-sale securities”. Change how liquidity risk in uninsured deposits, and interest rate risk, are regulated. “Tougher minimum standards for incentive compensation”.
Notes changes in regulations will not be effective for “several years”. No such note about changes in supervision.
Most banks below Category 2 (<$700BN assets) have chosen to exclude AOCI from regulatory capital ratios (maybe all of them, I haven’t run across an exception yet). Run a screen and you can see which regionals might fall under the capital requirements if AOCI is included, and thus are possibly at risk for capital raise, dividend cut, buyback pause, asset reduction, growth constraint, etc.
Yes, I read it. All of it. And I summarized it in real-time as I read, as painful and laborious as it was. Nobody can say I’m not a dedicated editor: https://heisenbergreport.com/2023/04/28/key-takeaways-from-michael-barrs-unflinching-svb-review/
Good post!
Some banks will tell investors tougher standards are years away, implication being that capital inadequacies will heal without need to raise capital, lower dividends/buybacks, slow growth, or (Heaven Forbid) cut executive comp. One besiged super-regional spent much of its last earnings call making that pitch.
So whether significantly tougher standards will wait until new regulations get through the rule-making and legislative process (the “several years” Barr mentions) OR if the Fed has both the will and the power to impose them now, is important.
Did the full Barr report offer good clues on that point? Trying to decide how fruitful reading all 100+ pages may be.