I think CRE was going to implode if they continued to raise rates. If the rates go down in near term, CRE may still survive
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Another small bank failure, FRBK was already trading a $0.01, now seized and shut down.
https://www.cnn.com/2024/04/26/business/regulators-seize-republic-first-bancorp/index.html
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Interesting take on the regulators letting the FDIC head slide on his harassment culture.
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Yeah he should be sacked for propagating this culture at the FDIC. He was Chairman from 2012-2018, Vice-Chairman for 6 years before that. Now back since 2023, why did he not do a thing about this rampant toxic culture until it blew up publically? Now we got to trust that he’ll fix it? Maybe if it can save his job but after only getting a minor slap on the wrist for inaction on a well-known problem for years, we’re entitled to be slightly skeptical.
Shows that for Dems too, it’s business as usual in politics: gotta protect your friends even if it means compromising on your principles. Clearly Warren’s higher moral ground act is just that when push comes to shove.
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This today…
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Good to see that some politicians (Sherrod Brown here) still have enough integrity to want to clean up their own ranks when somebody is proven incompetent. Let’s hope Gruenberg’s replacement is both competent enough to manage FDIC and clean up its culture.
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FDIC cautions on all those large unrealized losses in the bank interest rate sensitive assets.
Unrealized losses on available-for-sale and held-to-maturity securities increased by $39 billion to $517 billion in the first quarter. Higher unrealized losses on residential mortgage-backed securities, resulting from higher mortgage rates in the first quarter, drove the overall increase. This is the ninth straight quarter of unusually high unrealized losses since the Federal Reserve began to raise interest rates in first quarter 2022.
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According to Wikipedia, the deposit insurance fund held $128 billion at the end of 2023
Federal Deposit Insurance Corporation - Wikipedia.
As of December 2023, the FDIC provided deposit insurance at 4,587 institutions.[1] As of Q4 2023, the Deposit Insurance Fund stood at $121.8 billion.[1]
The link is to data from the FDIC
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The first number is unrealized losses. The second number is what would be required if a bunch of banks became insolvent. Unrealized losses don’t necessarily make the banks insolvent, it just means they have fewer assets. That’s my understanding anyway.
If you look at Chart 7 you’ll notice that the number has been fluctuating between ~$500 and $675 B for 2 years. Where’s the “cautions” part?
Charts 9 and 13 tho suggest distressed assets and concerns about default are rising more than they were a few years ago. It’s obviously not good to have all those underwater assets, even tho as you say the shareholders take the first loss, since there’s less equity backing the banking system broadly than there was before those losses were incurred.
If I thought rates were a shoe-in to drop back to 2%, I’d be way less worried than if I thought (think) they will stay “higher for longer” and hence these asset values won’t make a miraculous recovery in the near term.
Then again, another banking crisis will probably be a good opportunity for active, observant investors so I’m fine either way.
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Unrealized losses certainly indicate financial problems at the banks. They have many other problems, such as underwater commercial real estate loans. The low coverage ratio of the FDIC fund for just this one kind of loss means that if there’s a bank run, the topic of this thread, the FDIC will not be able to cover it, and will require an act of Congress to allocate taxpayer funds to cover depositors’ accounts. That may or may happen. There is no “full faith and credit” provision for Banks, such as there is for treasury bonds.
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As long as banks have income which seems to be the case at the moment according to Chart 1 at least, these unrealized losses are a concern but not an immediate one at least. Should they need to sell these HTM and AFS securities to generate income though, that could be pretty dire in terms of liquidity considering the FDIC coverage ratio. And that’s not even taking into account the potential liquidity issues at non-lenders like Quicken Loans that are not under the FDIC insurance.
One more reason for me to keep most of my liquid assets in short-term treasuries at the moment.
Btw, I hope Congress would not act to bail failed banks or non-lenders that go under because of too high exposure to interest rate risk. Let better capitalized banks acquire them cheap but we need to stop privatizing gains and socializing defaults.
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It’s all fine
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There can’t be a run on this bank because everything is locked down. May present “challenges” indeed. The last update is from July 3. It looks like they took the Independence Day holiday off although they did keep their call center open from 8am to 5 pm
A California-based credit union with over 450,000 members said it suffered a ransomware attack that is disrupting account services and could take weeks to recover from.
“The next few days—and coming weeks—may present challenges for our members, as we continue to navigate around the limited functionality we are experiencing due to this incident,” Patelco Credit Union CEO Erin Mendez told members in a July 1 message that said the security problem was caused by a ransomware attack. Online banking and several other services are unavailable, while several other services and types of transactions have limited functionality.
Patelco Credit Union was hit by the attack on June 29 and has been posting updates on this page, which says the credit union “proactively shut down some of our day-to-day banking systems to contain and remediate the issue… As a result of our proactive measures, transactions, transfers, payments, and deposits are unavailable at this time. Debit and credit cards are working with limited functionality.”
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Smaller hedge fund manager who specializes in banks, commenting on recent troubles and policy.
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With the ease of using their banking apps on smartphones, depositors can move money faster than ever before. You don’t have to go into a branch to withdraw funds or send a wire. It is simple to move money to your linked accounts with a few clicks. Regulators haven’t addressed this issue. Instead, they want banks to hold more capital. But, more capital doesn’t mean more liquidity. What we need is for banks to report to regulators about customer concentration and account types. We need regulators to require liquidity based on more drastic customer flows. Silicon Valley had 60% of its deposit base withdraw within 48 hours.
Depositors would be less likely to flee if there were modern deposit insurance limits that considered the faster moving modern world. We should have unlimited deposit insurance for non-interest-bearing checking accounts. We can’t stop the flow of business because consumers and companies are worried about losing their operating funds. Everyone needs comfort that the money for their next mortgage payment or next payroll is safe. Then, we should raise the deposit insurance limit for consumer interest-bearing deposits. We can’t expect consumers to evaluate the health of their bank. There has never been a bank management who has changed their risk tolerance because a consumer asked them to. Even as a significant, long-term shareholder, I have a hard time getting bankers to change their risk appetite. Plus, the task of predicting when a bank may fail is almost impossible for a consumer. Silicon Valley Bank had a market capitalization of $16 billion only 48 hours before it failed.
I think the bank failures in 2023 were the result of idiosyncratic issues within those banks, rather than a systemic problem. In general, the industry has become more conservative since the Great Financial Crisis as the passage of Dodd-Frank has forced some of the riskiest lending away from the banks and into the growing private credit segment. I believe the reduction in leverage and the amount of lending that was pushed out of the banking system will make another debacle like 2008 unlikely. Regulators continue to scrutinize banks’ loan portfolios during exams and credit quality has been exceptionally strong over the last several years.
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How could this possibly make sense? I suppose if banks were not allowed to “use” the money from those checking accounts and actually keep the full amount in reserves, it sounds like a good idea. But then if customers thought the bank was about to fail, they’d move all their interest-bearing savings money that the banks are allowed to “use” (fractional reserve lending?) into this unlimited insurance checking account before withdrawing it completely, it’d still be a run on the bank, but now the FDIC would be on the hook for the entire amount.
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Maybe the idea would be that depositors would move their money into the unlimited FDIC insurance non-interest-bearing checking accounts and leave it there. But then if the bank is not allowed to “use” the money in these checking accounts, it would still not prevent them from failing. Like you said, all it’d do is effectively remove the deposit insurance limit without preventing bank runs.
Personally, I think the banks should setup tiered FDIC insurance. For example, up to $250K/person, same premium as currently. For people holding more than $250K at the bank, extra FDIC premium (possibly passed on to them as account maintenance fees) proportional to how much money above $250K they hold at the bank. And separate FDIC insurance (premiums and limits) for business accounts from non-business accounts as well.
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While the average customer may be dumb, I would expect customers who were earning interest to continue to want to earn interest, so they’d move it to another bank.
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I think the point of the guarantees on non-interest accounts is that they’re often business accounts and they’re trying to not have business payroll and such disrupted by the banks issues. And yes, I assume those would still count towards their deposits and ratios.
Not sure if that’s a good idea but I guess it seems ok. Haven’t thought hard about it.
Fintech gone wrong. Levine on the other banking risk - not that they lose you money in bad investments, but they lose the records that they owe you anything and won’t pay…
https://www.bloomberg.com/opinion/articles/2024-11-25/synapse-still-can-t-find-its-money
When you deposit money at a bank, you expect the bank to give it back to you. There are two things you might worry about, two sets of risks that might prevent the bank from giving you back your money. One, which we talk about a lot around here, and which is pretty central to the history and theory of banking and bank regulation, is that the bank might lose the money…
The other risk, which we talk about less, and which is sort of less intellectually interesting, is that the bank might lose track of the money. You might go to the bank and deposit $100, and the bank might write down “$100” next to your name in its notebook, and then it might spill coffee on the notebook and be unable to read the entry and forget that it owes you the $100. And then you might come back to the bank in a week and ask for your $100 back and the bank might say “who are you? what $100?” And the bank might be totally solvent and have invested your $100 in very safe things, but it won’t give it back to you because it doesn’t have a record of you.
The proper amount of losing track of the money is none.
And this risk is harder to fix after the fact. If a bank loses all your money, the FDIC can give you your money back, because the FDIC is the government and can print money. If the bank loses its list of who has the money, what can the FDIC do? You can go to the FDIC and say “that bank owes me $100,” but anyone can say that, whether or not it is true. The definitive list of who the bank owes money is kept by the bank. Unless it isn’t. If the bank doesn’t keep a definitive list, then nobody does.
I have never really understood the Synapse situation, but in my defense Synapse doesn’t understand it either.
The banking-as-a-service middleman to lots of fintech startups put their funds in lots of real banks, moving around funds for optimized yields and so forth. Until the middleman went bust and no longer provided the list of whose money went where at the customer level. Oops.
That is, if you used a fintech to save money, that fintech put your money in real banks, but it didn’t know which ones: Synapse routed the money to the banks, moved it around between them, and kept track of whose money was where. The only one keeping the ledger was Synapse, and when it went chaotically bankrupt nobody knew where the money was.
The most recent bankruptcy trustee’s report notes that Synapse has “made available to all Partner Banks on a confidential basis all Synapse ledger data and records,” which they have used to reconcile their ledgers and distribute most (not all) of the money to customers. And, “although many end users still have not received the amount of deposits due to them based on the Synapse ledger, the estate does not have the funds to implement an independent reconciliation nor any remaining operations or employees to participate in these efforts.” Synapse, which was in charge of keeping track of where the money is, no longer has anyone around to figure it out.
25% of the money is sitting in the banks and not connected to the depositors like this one.
When she and her husband sold the house last year, they stowed away the proceeds, $282,153.87, in what they thought of as a safe place — an account at the savings startup Yotta held at a real bank.
Morris, like thousands of other customers, was snared in the collapse of a behind-the-scenes fintech firm called Synapse and has been locked out of her account for six months as of November. She held out hope that her money was still secure. Then she learned how much Evolve Bank & Trust, the lender where her funds were supposed to be held, was prepared to return to her.
“We were informed last Monday that Evolve was only going to pay us $500 out of that $280,000,” Morris said during a court hearing last week, her voice wavering. “It’s just devastating.” …
Abandoned by U.S. regulators who have so far declined to act, they are left with few clear options to recoup their money.
In June, the FDIC made it clear that its insurance fund doesn’t cover the failure of nonbanks like Synapse, and that in the event of such a firm’s failure, recovering funds through the courts wasn’t guaranteed.
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