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.
That would be true at (competently run) firms that did asset liability duration matching. Most of the smaller banks don’t - they borrow short term and lend longer term - either because they are greedy or stupid. So their cost of capital will rollover to higher rates years earlier than the asset side would.
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Ha! There is an article on this today.
“This was NOT a systemic event,” the famed short-seller Jim Chanos, the founder of Chanos & Company, told me. “This was a duration-mismatch problem. It only affects a few really dumb, greedy institutions.” Dumb because they were run by bankers who failed to do the business of banking or manage risk. Greedy because the bankers behaved that way in order to make as much money as they could as fast as they could.
I am no Jim Chanos, but this hits the nail on the head. Dumb and greedy.
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if you owned 10 year treasuries, as might have been typical of SIVB’s holdings, you lost 15-20% of your market value from 2021 to today. Now, you could say
held to maturity, the Feds wont default, no biggie, nobody run on us and we’ll be fine
but this misses the point ArthurDent is making. If you were hedged to interest rates, with swaps or something, you wouldn’t make any money from lending long but you wouldnt have risk to treasuries. This would be very safe, but not very profitable, so most banks who own treasuries do so because medium term or long term has historically paid more than short term and their deposits get paid the (usually lower) short term rates. And they aren’t hedged.
But with the big interest rate move, the same one that caused those older low-coupon treasuries to lose so much of their value, has moved up the short term rates and the costs paid on deposit accounts. So if you weren’t hedged, your deposits used to cost 0% and you could invest at 2% in treasuries. But now you locked in your 2% for 10 years and your floating rate deposit costs just ran up to 4.5%.
That means you’re upside down on your spread and will be losing money on those holdings at the rate of 2.5%/year until 10 years from now or whenever they mature and roll off the books.
So you lose one way or the other. Thinking of the loss as an longer term impact to the bank’s net income is just spreading out the pain over the maturity of the (bad) investment.
In theory, a decline in a bank’s holdings doesn’t have to spell disaster; it could just hang on to the bonds and wait for the price to recover or hold them until the government pays out their full value. Unfortunately for SVB, its own customers in the tech world started pulling their money out and tweeting about it for all to see. SVB didn’t have enough cash to pay out these suddenly freaked-out customers — who obviously had no interest in waiting a decade for SVB’s investments to mature. This mismatch between the illiquid, long-dated bonds and the panicking customers’ demand for immediate cash brought SVB to its knees and shook confidence in the entire banking sector.
That article also pretty clearly pins SVB’s failure on the bank run, customers withdrawing funds and forcing the bank to realize what up to that point had only been a temporary paper loss. Losses from interest rate arbitrage wasnt even mentioned (did SVB even pay interest on a bulk of it’s deposits?).
Also, from what you quoted:
“This was a duration-mismatch problem. It only affects a few really dumb, greedy institutions.”
That’s far from your generalization of it applying to “any bank”. Sure, it could potentially apply to any bank, but it actually applies to only a select few.