Gerard Cassidy on the Moody's downgrade of U.S. banks

I'm not saying it's wrong. The timing seems very odd.  It's kind of late to the game...  If we really are going to see the Fed reach its terminal rate for fed funds, let's say in September, and there is no hard landing in the economy next year, then the banks are in really good shape.

~ Gerard Cassidy, RBC Capital Markets, CNBC interview, 0:55 mark, August 9, 2023

Wall Street Journal on the intense competition for deposits

Montana-based Glacier Bancorp (GBCI) benefited from the glut of money that flooded the economy during the pandemic, as well as the acquisition of a small Utah bank.  Its deposits nearly doubled over the course of 2020 and 2021. 

When more customers started to pull deposits at the end of last year, Glacier had to pivot quickly to try to hold on to them.  In the first quarter, Glacier paid $46 million in interest, up from $5 million a year earlier. Total deposits still fell 7%. 

“We went through a decade of zero to low rates, and so there was a little muscle memory that had to be developed in terms of competing for deposits,” CEO Randy Chesler said on a call with analysts in April. 

Businesses and wealthy customers were the first ones to start looking for higher rates last year.  Now, every type of customer with extra cash is looking for more interest, said Chip Reeves, CEO of MidWestOne Financial Group (MOFG), which is based in Iowa City, Iowa. 

“It’s probably the greatest deposit competition that I’ve seen in my banking career,” said Reeves, who has worked in the industry for three decades. 

Houston-based Prosperity Bancshares (PB) found that even public-sector clients such as counties, cities and school districts were pulling deposits and moving them to higher-yielding investment vehicles.  “I don’t really see those coming back,” CEO David Zalman said on an earnings call in April.

~ Rachel Ensign and Gina Heeb, "Everyone Wants Interest on Their Deposits. That's Bad for Main Street Banks.," The Wall Street Journal, July 6, 2023

Lawrence White on banks runs, the FDIC and latest round of bank failures

If the uninsured depositors in Bank A can't access their funds, that's going to make the depositors in Bank B nervous, we have contagion and then we're back to 1933.

I think on the one hand, FDR [Franklin Delano Roosevelt] would be wincing and saying, "ah, man, I thought we wouldn't have screwups like this."  On the other hand, I think he would smile and say, "ah, it didn't spread, we haven't had contagion.  We haven't had widespread runs.  That was my goal in creating the FDIC."

~ Lawrence White, NYU Stern economics professor, "Everyone Wants Interest on Their Deposits. That's Bad for Main Street Banks.," The Wall Street Journal, July 6, 2023

Kevin Duffy on via negativa and why most banks are uninvestable

“Via negativa” is the study of what not to do.  In life, it means avoiding addictions, distractions, bad habits, toxic relationships, jealousy, boredom, sugar, processed foods and lawyers.  In investing, it usually comes down to steering clear of crowds, leverage and businesses that are hard-to-grasp or overly dependent on government.

Coffee Can rule #18: Due to high leverage, fickle capital and exposure to bubbles, most banks are uninvestable.

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

Torsten Sløk on the unfolding banking crisis

I started my career at the IMF.  The first thing you learn is that banking crises normally happen in a bad economy because the banks start losing money on loans to consumers, corporates, and commercial real estate.  What is unusual today is that with the collapse of the 14th-largest and 16th-largest banks [First Republic Bank and Silicon Valley Bank], we have what I describe as a banking crisis in a good economy - and we are about to enter a bad economy.

~ Torsten Sløk, "A Recession Is Brewing. It Will Be Lengthy.," Barron's, May 29, 2023

(Actual interview took place on May 10.)

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

Michael Milken on what landed banks in trouble

You shouldn't have borrowed short and lent long.  Finance 101.  How many times, how many decades are we going to learn this lesson of borrowing overnight and lending long?  Whether it was 1970s, the 1980s, the '90s and again here.  The banks have enough credit.  They had enough equity.  The had enough ability to absorb credit losses that are coming.  

However, what they did was doubled, tripled, quadrupled their size by borrowing overnight at artificially low rates and buying intermediate securities.  There's $30 trillion of them out there and let's say they're worth 85 cents on the dollar.  Who has an unrealized loss of  three trillion dollars?  What we know, number one, is the Fed has the largest share of that loss, $800 billion or $900 billion, but they can print money so that isn't an issue...  What we saw here is organizations - great companies - like Silicon Valley Bank, like First Republic, what they turned themselves into was adding to income by borrowing short and lending long.  In the case of Silicon Valley, really government agencies, municipals, in the case of First Republic, fixed-rate mortgages with floating rate liabilities.

So this is Finance 101.  People are so focused on credit risk, etc., but one of the great risks is interest rate risk. 

~ Michael Milken, CNBC interview, 1:15 mark, May 2, 2023

Jamie on the regional banks: "they're quite strong"

The regional banks, who I've been speaking to every day for the last week, they're quite strong.  They're quite worried about the run on deposits, but their financial results are good, their financial results are going to be ok next quarter, they're earning money, they've got a very good clientele, very diversified.  And they're quite strong.

~ Jamie Dimon, Bloomberg Television interview, 1:00 mark, May 11, 2023

Howard Marks on lending

The worst loans are made in the best of times.

~ Howard S. Marks

Chris Davis on recent bank failures: "it's not systemic"

The model of making a spread on money is about as old as human history.  So the model is durable.  We own banks that are in their second century, even their third century.  So there's enormous resiliency to the model.  And so when you get a panic, I think you have to look for where are the companies that are vulnerable - you have to avoid those because then you're trying to scoop them off the bottom which is risky.  But if you own the companies that in a sense are beneficiaries?  After all, where are those depositors going?  When they leave these smaller regional banks they are fleeing to the big banks.  That's where I think there is enormous safety and you can look at, for example, the balance sheet of Wells Fargo and you can see just how conservative they were in terms of not taking big interest rate risk and at the same time that they've had enormously resilient deposits.  That's a wonderful combination with higher interest rates widening their profitability.  So I think it's very different [from past banking crises] because it's not systemic.  It's really a flight to quality and the fact the big banks are going down so much I think is creating that opportunity.

~ Chris Davis, Davis Fund Advisors, CNBC interview, 2:05 mark, May 2, 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

Peter Schiff on bank failures: "the entire house of cards was directed by the Fed and U.S. government"

I warned for years that the banks will start collapsing for the precise reason that they're collapsing now: the Fed kept interest rates at zero for so long.  That's what allowed the institutions to load up on overpriced, low-yielding Treasuries, mortgage-backed securities and other loans.  Plus U.S. government auditors from the Fed, FDIC, they encouraged the banks to buy these long-term Treasuries and mortgage-backed securities because they gave favorable accounting treatment.  The banks didn't have to mark them to market as long as they could pretend they would hold them to maturity.  So the entire house of cards was directed by the Fed and the U.S. government, and now it's collapsing and they're acting like they have nothing to do with it and they're tying to figure out how to put out a fire that they lit.  And of course the problem is they're not putting out the fire, they're throwing gasoline on it.

~ Peter Schiff, interview with Fox Business, 4:05 mark, May 4, 2023

David Ellison on fundamental headwinds for banks: "they aren't life-threatening"

We don’t have much credit deterioration so far. We do have rates going up and bond prices falling, and there is duration risk. That makes things even worse for the banks, as they borrow short and lend long. That model is broken, but it isn’t broken forever. 

[...]

Over the next six to nine months, banks will be working through the rate issue. So maybe margins will bottom in the next quarter, and then start to improve as asset yields start to catch up with the rise in deposit rates, or cost of funds.

[...]

I’m not sure if the stocks will go down another 30% or another 3%; maybe they have already bottomed. The banks have fundamental headwinds. However, they aren’t life-threatening headwinds. They are just earnings-threatening, to some degree, and they are valuation-threatening.

~ David Ellison, portfolio manager, Hennessy Funds, "Trouble Ahead For Financials. Where to Hide," Barron's, April 29, 2023

Jason Benowitz on the banking crisis: "signs that things have stabilized"

We do think that there's been some stabilization from the worst throes of this crisis earlier in March.  And so you can see that, for example, there's something called the forward rate agreement overnight index swaps spread.  It's a measure of bank funding costs, or credit costs, and it peaked in early March and it's come down to sort of its 10 year average, actually...  Similarly, when we look at the Fed's balance sheet disclosures weekly, and they disclose how much crisis borrowing there is by banks, and that number peaked about a month ago and it's been coming down weekly ever since.  So these are signs that things have stabilized.

~ Jason Benowitz, "First Republic stock plummets after revealing deposit exodus in March," Yahoo Finance, 3:30 mark, April 25, 2023

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

Joseph Wang on banks: "they create money out of thin air"

Banks create money.  That's their thing.  It's not so much that they take deposits and lend them out, but they create money out of thin air.

~ Joseph Wang, Fed Guy blogger, Monetary Macro CIO, Yahoo Finance interview, 5:25 mark, April 11, 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

Jim Bianco on depositors seeking yield and pulling money from banks

I think the biggest mistake everybody in the traditional world makes is, "Here's a new technology.  Oh, well I can use this - in the case of mobile banking - I can close some branches.  I can reduce my overhead.  I can increase my margin.  What a great thing this mobile banking is!"  But often what new technology does is it changes business plans, it changes business models, it changes behavior.  It does more than just allow you to skimp a couple of margin points off of your costs.  And so they didn't realize that they were opening up a whole new business model by going to mobile banking.  They didn't see it because we were stuck with zero interest rates for many years, but as soon as rates started rising and the public started realizing, "For five minutes of my time on my phone, I can make thousands of dollars by moving to a money market fund or buying a Treasury bill."  And they started doing this.  

And now these bankers are going to have to grapple with what you think you understand about your deposit base no longer applies.  They are not more likely to get divorced than switch the bank.  That has really changed.  And it really changed in the last 90 days...  I don't think we're going to see the outflows stop from the banks.  People are going to continue to say, "I don't want 2 basis points from Chase.  I would rather move to a money market fund and get 4 1/2%.  And we're going to continue to see that until those rates converge on each other.  

~ Jim Bianco, interview with Bankless, 25:40 mark, March 28, 2023

Sam Goldfarb on how bank stock investors are buying the dip

A growing number of investors are betting on a rebound in the banking sector, wagering that regional lenders are in much better condition than many initially feared after the collapse of Silicon Valley Bank.

[...]

One of SVB’s problems was that it faced large unrealized losses on its portfolio of government-backed bonds thanks to last year’s jump in interest rates.  But no other major bank currently faces nearly the same amount of losses relative to its size, these investors point out.  In addition, such bonds are still essentially guaranteed to be paid in full when they mature, and banks can now borrow against them from the Fed at their face value—making them worlds apart from the toxic mortgage assets that sank lenders in the late 2000s.

~ Sam Goldfarb, "To Some Investors, Banks Look Like Bargains; Some see ‘once-in-a-decade’ buying opportunity after recent turmoil," The Wall Street Journal, March 28, 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