I agree. Which is why I predict the Fed will overshoot with their increases - wherever rates peak, they wont stay long before they’ll need to start reversing course.
Powell and the fed say otherwise
https://finance.yahoo.com/news/wall-street-expects-fed-cut-201757416.html
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- First Citizens BancShares is acquiring $72 billion in Silicon Valley Bank assets at a discount of $16.5 billion, or 23%, according to a Sunday release from the Federal Deposit Insurance Corp.
- But even after the deal closes, the FDIC remains on the hook to dispose of the majority of SVB’s assets, about $90 billion, which are being kept in receivership.
- “The deal was getting stale,” said former Federal Reserve examiner Mark Williams. “I think the FDIC realized that the longer this took, the more they’d have to discount it to entice someone.”
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All told, the SVB failure will cost the FDIC’s Deposit Insurance Fund about $20 billion, the agency said. That cost will be borne by higher fees on American banks that enjoy FDIC protection.
How much would the cost be to the FDIC be if they had not agreed to cover all deposits including those above the 250k limit?
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Roughly $20B in losses estimated by the FDIC, which included anticipated markdowns on these assets that were supposedly marked at $210B as of EOY, so a 10% loss on assets and 100% loss on equity. Could be worse if I misunderstood how bad the write downs were,
They had $150B in uninsured deposits, so clearly the Feds wouldn’t have paid very much via FDIC except they wanted to bail out everyone. Maybe a quarter of that $20B instead since I think the depositors all get the same recovery rate, say 90% or whatever, but then the FDIC pays the rest up to 100% for the first $250k worth of deposits.
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Wonder if the Fed has heard of Statistical Process Control (SPC).
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Comment from someone on the old days of the S&Ls when your CDs got taken over by the new bank after a failure.
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Seeing I was a deposit broker in the S&L days and placed deposits in thousands of banks I buy ‘most’ insured CDS without thought. Last week Saw CDs from Signature Bank at 6% for six months. I did NOT buy them! But they were under par (.99) I figured if they go non interest bearing for stretch they diff between 99 and 100 was equivalent to 80 days of interest. In general even inboard cases most FDIC claims are made in less then 2 weeks.
And FRC has been in with some well priced secondary paper. Same story. Rate not as strong but still excellent. Discounted to face. The Q there was do I want my friends to get buyers shock if FRC too goes belly up? Of course we are insured for P & I but how the FDIC handles depositors can vary significantly.
- They transfer it to new bank …no change….
- They transfer it to new bank and bust the rate. (you can then get out no surrender charge)
- They bust all the CDs and test the FDIC insurability of each account. Here it can make a big diff if you are direct w bank, tor if you are in pooled securitized CD, or if you are in any sort of nominee account.
- They transfer some of the deposits to Bank XYZ, some to Bank XXX and threat depositors differently depending on which place your money goes.
When they break a CD the money most often stops accruing interest. AND whoever is handling the affair is overloaded beyond belief. It can take a long time to get monies out of a CD liquidation.
So a primary risk is…you hope to keep a high rate and they send your money back OR rates are up and you hope they break the CD but do not. And hold the money until maturity.
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I think it’s generally understood (or it should be) that insurance covers the principle deposit. It does nothing to preserve interest rates/terms or interest earnings that have not been credited. If you have a $200k CD, all the FDIC guarantees is that you will get your $200k back, period.
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Here’s what the FDIC says
FDIC deposit insurance covers the balance of each depositor’s account, dollar-for-dollar, up to the insurance limit, including principal and any accrued interest through the date of the insured bank’s closing.
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This is not how you contain a crisis that people seem to be getting over
- BIDEN: THE BANKING CRISIS IS NOT OVER YET.
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Does this mean there’s still more banks on their hit list?
Maybe if someone else gets the bright idea of serving the crypto market? SBNY didn’t even fail, they were seized by the NY regulators who “lost confidence in the management”, which sounds pretty squishy to me. If they were broke or insolvent, they would have said so.
Want to bet that the subsequent asset sale included some sort of no-crypto condition?
Well, any bank holding low interest rate bonds or mortgages / loans originated in the last 5 or so years will have to sell those at an immediate loss or endure years of low earnings.
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I don’t think that’s how it works. They don’t have to sell anything. Banks operate on arbitrage between what they earn and what they pay on deposits. Those banks will just pay less – no bank is required to offer high savings rates.
They have to sell if they have to raise capital for any reason. SVB was forced to sell bonds and realize a 1.8 billion loss, that’s what caused the run on the bank.
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So you think they’ll choose to sell and force themselves into receivership, rather than hold and put up with lower margins/earnings for a while? As long as there isnt a bank run that forces them to liquidate assets at the depressed values, low earnings only hurts their stock price not their ongoing viability.
The rapid spike in rates hurt, but portfolios are constantly turning over so the averages will start smoothing out rather quickly (but yes, still over multiple years).
The run on the bank was what forced them into selling the bonds at a loss.
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That is exactly why they will have to endure years of low NIM.
If it were just checking, then cost of deposits could stay close to zero. But…
CDs have higher rates now than a year ago.
Brokered deposits.
Overnight borrowings from the Fed.
BTFP (Aka, the 2023 bailout plan which values high quality bonds at par.)
Borrowings from the FHLB will all be at current rates.
The bank’s cost of capital over the next 5 years will certainly be higher than the earnings from the loans/bonds issued in the past in a low interest regime.
They sold bonds, reported 1.8 billion in losses and said they would raise some capital.
That’s when depositors really took notice and withdrew another 40 billion.
Then they had to really start selling everything indiscriminately and ran out of money.
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Right, first there must be a reason. And the only reason would be that they need to raise capital because of withdrawals.
They could still make money by issuing 1-yr CDs at 4% while investing in 4.5% treasury bills or 6% mortgages. That’s what they do. Also banks are not supposed to have long term low interest debt, they’re supposed to have risk controls. That’s where SVB failed.
Some of them will put up with lower earnings and muddle along for a few years.
Others will fail, for various reasons.
Exactly. The whole point of BTFP was to give these banks another year to shore up their capital ratios so they can wait for their portfolios to turn over.
Portfolio turnover needs borrowers at current interest rates and for that the residential and commercial real estate market has to unfreeze. For that, work from home has to end.
Expect a lot of push this year to get people physically back into offices in an effort to put that genie back into the bottle.
Well, we shall see about that. Low stock prices result in low management bonuses. I fully expect a subset of bank execs to say “let’s sell the bonds now, take a write off this quarter, and show better earnings in future”.
Agreed. Most of the small banks lend and hold to maturity. They call them “Portfolio loans”.
Signature’s Management could not put a number on their assets or their liabilities.
A bank that cannot count its dollars has no business being in business!
But their low interest earnings are offset by the low capital costs at the time (even if the current value of that capital has nosedived). And as that low-cost capital rolls into high-cost capital, the low earning loans also roll into high earning loans. You are only looking at, or at least are only talking about, one half of the equation.