Jim Grant on SVB's $73 billion loan portfolio

What zero percent interest rates do is bring on the phenomenon of zero gravity finance.  Imagination displaces analysis.  And if you are in the business of projecting technology out into the wonderful 10 or 20 year realm, there's nothing like zero percent rates to facilitate that exercise of imagination.  And that's what Silicon Valley Bank had going for it.  So this portfolio - $73 billion loan portfolio - I think might also have been problematic.

~ Jim Grant, CNBC interview, 1:25 mark, March 16, 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.)

Larry McDonald on the rolling credit crisis

We had the LDI [liability-driven investment strategy] scandal, or the stress in London in October.  Then it's rolled over to regional banks.  Then it's rolled over into Credit Suisse.  Deutsche Bank CDS (credit default swaps) is now elevated.  You've got MetLife.  Lincoln Financial CDS is now blowing out.  And then you've got commercial real estate loans that are impaired.  And then you're talking about Capital One CDS, which is the consumer; that's at multi-month wide.  So this is clearly a rolling credit crisis.

Larry McDonald, CNBC interview, 2:00 mark, March 28, 2023

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

Tim Price on central banking

Central bank monetary planning is the glaring hole at the centre of modern economics.  We accept (or should do) that the modern economic world is highly complex, with practically infinite interactions between countries, governments, exchange rates, interest rates, stock markets, corporations, households, entrepreneurs, and consumers.  In most areas we also accept that free markets are perfectly capable of driving Adam Smith’s invisible hand to ensure that enlightened self-interest benefits the many as opposed to the few.  Despite this, the idea that one institution – the central bank- is even capable of mastering such complexity and fine-tuning the workings of a highly complex economy through the brute mechanism of dictating the price of money has rarely been brought into question.

~ Tim Price, "Regime Change is Coming," Price Value Partners, April 3, 2023

Kevin Duffy on the Trump rollback of Dodd-Frank in 2018

As fate would have it, Silicon Valley Bank CEO Greg Becker lobbied in 2018 to raise the asset bar on the annual Dodd-Frank stress tests from $50 billion to $250 billion.  On May 24, 2018, when President Donald Trump signed “the biggest rollback of bank rules since the financial crisis,” SVB’s assets footed to $54 billion.  By the end of last year, they had mushroomed to $212 billion. 

Never mind that the rollback bill was signed by 33 Democrats in the House and 17 in the Senate.  The Left had its perfect scapegoat.  “Back-to-back collapses came after deregulatory push,” claimed The New York Times, shortly after the FDIC took control of SVB and Signature Bank, the second and third largest U.S. bank failures in history. 

Would it have made any difference?  The architects of the 2010 Dodd-Frank Act put in place a set of rules to prevent another mortgage crisis, never imagining that the next crisis would change its spots.  Truth be told, subjecting SVB to a rash of annual stress tests would not have saved the day.  Bank regulators have been looking for trouble in all the wrong places. 

~ Kevin Duffy, "Would Stress Tests Have Prevented the Failure of SVB? Probably Not," Mises.org, April 3, 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