Michael Milken on the expanding role of private credit

This country has been primarily financed since the 1970s by public and private markets.  Banks in America only hold 20% of the loans.  80% are owned by others.  So I think we're just going to see a decrease in the percentage of loans that are owned by the banking system and we will be stronger as they move into the hands of people like pension funds that have long-term liabilities.

~ Michael Milken, CNBC interview, 7:05 mark, May 2, 2023

Kevin Duffy on the banking crisis

In the annals of government boondoggles, the global policy of interest rate obliteration from 2008 to 2022 stands in a class by itself.  A distant second is the Covid-panicked stimulus orgy of 2020-21.  Together they created a tinderbox for fractional reserve banks, which are nothing more than poorly-run hedge funds levered to government policy.  Regulators not only failed to put out any brush fires, they provided a false sense of security while the self-proclaimed firemen (central banks) doused the economic forest with gasoline.

~ Kevin Duffy, "Regional Bank Failures: Containable or combustible?," The Coffee Can Portfolio, June 9, 2023

Rob Nichols: "the overall banking sector is safe, sound, resilient and healthy" (2023)

These midsized banks, these small regional banks are incredibly important for the U.S. economy.  They serve incredibly important communities and businesses and individuals.  So despite the failures of three institutions that we saw - and that's of course unfortunate when any bank fails, and we that that incredibly seriously - the overall sector is safe, sound, resilient and healthy, from community banks all the way up to our money center banks...  A lot of what we've seen with regard to those couple of those [failed] institutions was really idiosyncratic and local to those institutions, not representative of the entire U.S. banking sector which is on solid footing.

~ Rob Nichols, American Bankers Association CEO, Yahoo Finance interview, 0:55 mark, May 8, 2023

Tobias Adrian: "financial stability risks have been contained so far"

Financial stability risks have been contained so far and hopefully that will remain the case.  As a result, monetary policy can focus on fighting inflation and that's a desirable outcome.

[...]

I think that systemic risk has been contained to date and I'm confident in the crisis management toolkit that we have.  But I would not be surprised if there were other episodes of turmoil both in banks and nonbank financial intermediaries.

~ Tobias Adrian, IMF's director of the monetary and capital markets department, "IMF calls risks from bank crisis 'contained,' urges central banks focus on inflation," Yahoo Finance, April 13, 2023

Pierre-Oliviere Gourinchas on the health of the banking system (2023)

The good news is that the banking sector in particular is in much better overall health now than at the time, say, of the Global Financial Crisis.  There's a lot more capital, the banks are better regulated, there are all kinds of liquidity requirements, etc., especially for large banks.  And so overall the health of the banking sector is much stronger, but it doesn't mean that there couldn't be pockets of illiquidity, pockets of vulnerabilities and financial authorities need to be quite careful and monitor this because things could spread pretty quickly.

~ Pierre-Oliviere Gourinchas, International Monetary Fund chief economist, "IMF calls risks from bank crisis 'contained,' urges central banks focus on inflation," Yahoo Finance, 2:45 mark, 

Joseph Wang: "It looks like the banking panic is largely over"

It looks like the banking panic is largely over.  The two data points that I follow, the Fed balance sheet and my money market flow data, are showing encouraging signs.  So when a bank is in trouble, they borrow from the Fed as lender of last resort.  Weekly Fed data shows that borrowing is declining.  And we also show that money is going back into prime money market funds.  Prime money market funds lend to banks and during the panic people were pulling money away...  That's all coming back.  That tells me that the banking panic is over.

[...]

I suspect, based on the aggregate data and based on what I see in the banking system, that the large banks are going to be fine.  They're going to be in good shape.  There might be some small banks that are struggling, but we have to remember that America is a very big place.  We have 4,000 banks, most of them small, and it seems like what happened over the past month is largely regional.  So I'm optimistic.

~ Joseph Wang, Fed Guy blogger, Yahoo Finance interview, April 11, 2023

Jerome Powell warns about not varying the annual stress tests on banks

As financial institutions and the financial system evolve, stress testing will need to keep up. When the next episode of financial instability presents itself, it may do so in a messy and unexpected way. Banks will need to be ready not just for expected risks, but for unexpected ones. Thus, the tests will need to vary from year to year, and to explore even quite unlikely scenarios. 

If the stress tests do not evolve, they risk becoming a compliance exercise, breeding complacency from both supervisors and banks. We might also, inadvertently, encourage the development of a banking system where, over time, all banks would look much alike rather than the banking system we want and need, one with diverse institutions with different business models. We simply can't let these things happen. 

~ Federal Reserve chairman Jerome Powell, prepared remarks for stress-testing conference at the Federal Reserve Bank of Boston, July 9, 2019

(As quoted in "Fed’s Powell Says Stress Tests Must Evolve to Avoid Bank Complacency: Annual exam must explore unexpected scenarios or it might fail to prepare financial system for next downturn," The Wall Street Journal, July 9, 2019.)

Nouriel Roubini: rising interest rates wiped out over 80% of bank capital

Bank managers, regulators and investors forgot duration risk and market risk.  When yields are higher, the price of the bonds is lower.  Investors lost 20% last year on 10-year Treasuries...  For the overall banks, you have about $620 billion of unrealized losses on the securities out of a capital of $2.2 trillion.  And for some of the regional banks the numbers are much higher.  

But it's not just the securities that have lower value.  Many of the banks had issued loans, like mortgages at fixed rates at 30 years when interest rates were 1% while right now they're at 3 1/2% for 10-year Treasuries.  So the market value of those assets is also down.  People have estimated, therefore, the overall losses for the U.S. banking system from the rise in interest rates, both on securities and loans, are equivalent to $1.8 trillion out of a capital of $2.2 trillion.  Hundreds of the smaller banks are literally insolvent.

So that's a fundamental problem: When interest rates go higher, the value of securities and loans is lower and then we have mass liquidity and solvency problems.

~ Nouriel Roubini, Bloomberg TV interview, 0:30 mark, March 31, 2023

Cheryl Mickel: "banks are in much stronger position"

What we are facing right now is more of a test of market confidence.  You are seeing a market that doesn’t want to believe that there is still some resilience to the economy and to the banking sector. 

There are some things different in this particular “crisis” than past crises in everybody’s memories.  The economy is much stronger than it was during the [2008-09] global financial crisis.  And there has been so much regulation to build resilience that, in aggregate, banks are in much stronger position.  Also, government support is earlier, practiced, better targeted, and not dealing with the capitalization issues of the past.

~ Cheryl Mickel, head of T. Rowe Price's U.S. Taxable Low Duration Group, "A Fixed-Income Pro on Where to Park Your Cash During the Banking Tumult," Barron's, April 1, 2023

Steve Schwarzman: "the banking system is not in any type of conventional crisis"

The banking system is not in any type of conventional crisis.  We have just an interim issue with interest rates being up and we have a deposit issue caused by technology.  And these are both solvable problems for the vast number of banks. 

[...]

This crisis was caused by people on iPhones and other devices, hearing on social media that some bank might be in trouble.  They responded with huge withdrawals in a very short period of time, collapsing the bank.

[...]

[While rising interest rates have decreased the value of bonds held by banks, most of them] are government securities so if you wait long enough, they will be repaid.  [Loans are] in good shape [and lenders have much bigger capital buffers than 15 years ago]. 

[...]

We’ve seen some shift from overnight deposits into time deposits, but we’ve not seen a general deposit outflow of the banks.  For now the banking sector looks rather resilient.

~ Steve Schwarzman, "Blackstone's Schwarzman Says US Banking System is 'Solvable'," WealthManagement.com, March 30, 2023

John Adams on banking

Our whole system of banks is a violation of every honest principle of banks.  There is no honest bank but a bank of deposit. A bank that issues paper at interest is a pickpocket or a robber.  But the delusion will have its course...  An aristocracy is growing out of them that will be as fatal as the feudal barons if unchecked in time.

~ John Adams

Robert Aro on the fragility of the banking system

We’ve seen this before: A bank becomes insolvent, whether by ignorance or error.  The Fed saves the financial system by giving the same failed bank more money; this is socialism, it is not capitalism. 

Any system which works great until it collapses, then requires a government/central bank bailout is neither sensical nor sustainable.  Anyone holding a position in academia should not support this; but many do because it works so well for those on top.  So here we are.

~ Robert Aro, "More Supervision and Regulation to Prevent Bank Runs?," Mises.org, March 24, 2023

Janet Yellen: "our banking system remains sound"

I can reassure the members of the Committee that our banking system remains sound, and that Americans can feel confident that their deposits will be there when they need them.  This week's actions demonstrate our resolute commitment to ensure that depositors' savings remain safe.

Importantly, no taxpayer money is being used or put at risk with this action.  Deposit protection is provided by the Deposit Insurance Fund, which is funded by fees on banks.

~ Treasury Secretary Janet Yellen, appearing before Senate Finance Committee, March 16, 2023