Sep

16

have not idea really about health of US regional banks and to what extent some use creative accounting to say it that way.

What makes me wonder is only that European banks (and Japanese) are quite good with their gimmicks and I have seen this pattern before. Many US analysts slacking off foreign banks and they are prob right here. and then we had those 2 US banks earlier this year …oh, no they were only a special case (allegedly). and what happens if the econ surprises to the downside? remember we live in times when people are low re irony, and highly suggestible and lack imagination.

Henry Gifford comments:

I think those two banks were a special case because they made loans on rent-regulated New York City apartment buildings, and held those loans in their portfolios.

New rent regulations passed in 2019 severely limit rent increases, require most increases to be rolled back after thirty years, eliminate all paths to deregulate an apartment, etc., thus the buildings are worth less than owed on them, and as the five-year loans come up for renewal they go into foreclosure. Few banks were stupid enough to make loans on those buildings. I think definitely a special case.

Humbert H. is skeptical:

Seems like a stretch to attribute SVB to just those loans give the well-documented run on the bank and the treasuries they were forced to sell and recognize their market value vs. book, the possibility of the latter being the commonly attributed trigger for the run, along with the slower liquidity crunch at the client startups causing high withdrawals.

Henry Gifford elaborates:

Word in New York real estate circles is that the run on the bank was caused by depositors hearing about the bad loans and rushing to get their money out. Selling treasuries and etc. were all after the run. Here in NYC, nobody is surprised to hear about craziness when it comes to regulations and the effects later. The stories here don’t mention liquidity crunches at startups. Maybe the banks made two types of risky loans?

The printed articles stuck to good journalistic standards by avoiding saying just what % of loans in the portfolio were on rent-regulated buildings. It might have been a minor %, but still caused a panic, or it might have been a large % - presumably rent-regulated buildings paid higher interest than other buildings, thus an incentive to make more loans.

If a bank already has enough loans to force them under if the political pendulum in NY swung hard in favor of tenants, there would be no reason to not make more of them, thus they might have had a large % of them. But, nobody seems to be saying. I think the only real word would come from the depositors – maybe the ones who got their money out first.

Humbert H. replies:

There were pictures of lines both in Silicon Valley and NYC. Peter Thiel's recommendation to the portfolio companies of his fund supposedly played a role. It's hard to do a thorough analysis on the anatomy of a run, too chaotic and not well documented in terms of why anyone did anything in particular. To this day there's contradictory information on the collapse of the tulip craze.

Steve Ellison writes:

Jim Bianco has been saying that the banking issues this cycle are more likely to occur in slow motion, as depositors individually decide to take low-yielding money out of banks in favor of T-bills and other higher yield instruments. As deposits shrink, banks are cutting back on credit, and there was an upsurge in bankruptcies in August.

Humbert H. responds:

This is true, but there is a contrary trend of low-yielding treasuries maturing as well as getting sold, and new money invested in higher-yielding treasuries thus making the balance sheets less of a work of fiction and improving that side of the cash flow equation.

Humbert X. adds:

Bank loan to deposit ratio is actually at very low levels, historically speaking. The problem is demand.

Humbert H. disagrees:

Can't be just demand. There are zillions of articles out there about banks significantly tightening their lending standards. Some of these came out almost a year ago, but right after the spring banking crisis, around 50% were reporting that they had tightened their standards and through the summer the trend continued and/or was reported expected to continue.

Humbert X. processes:

Excellent. You just identified consensus. Now, do you want to bet against it, based on fact based observations of data? Or go with the crowd. Always the ultimate question in investing.

Stefan Jovanovich offers:

We now have the same financial system that Ulysses Grant forced Congress to accept by unconditional surrender during his two terms as President. The savings of bank depositors were going to be guaranteed by the promises to pay of the U.S. Treasury.
The SVB collapse established a basic rule that all deposits by people and their entities are utterly safe. There can be no bank runs by depositors because the FDIC and the other financial satraps created by Congress are not allowed to default. If you want a comparison from more recent political history, the old people chasing Dan Rostenkowski in the parking lot is an appropriate one. The rest of the government's promises might be at risk; but Social Security was never going to default.

Humbert X. replies:

Except that two banks just blew up because of bank runs.

Humbert H. analyzes:

I don’t find bank stocks very interesting at this point regardless of the exact nature of what ails them. Banks aren’t very transparent to begin with. I’ve owned three for a long time, I’ll stick with those, but won’t explore any new ones. Those that are expert bank balance sheet readers can separate the wheat from the chaff, but overall this is mostly a macro bet.

Stefan Jovanovich replies:

"Bank runs by depositors" vs. bank runs by shareholders and bondholders.

Humbert H. asks:

What does that second category even mean? A bank run deprives the bank of cash and can in some instances cause a quick collapse via various mechanisms (like not having the cash to operate or having to redeem underwater securities). Shareholders and bondholders selling their property is in a totally different category, while certainly not welcome by the management or the remaining s/b-holders. You can call it a "run", but it's just a common market reaction to bad news or rumors.

Stefan Jovanovich expands:

United States banks could expand their cash issuances to the full extent of the face value of their holdings of Treasury bonds. That meant that it was impossible in practice for a U. S. bank to be "deprived of cash" as GR puts it. U. S. banks were required to have their required statutory capital invested in Treasuries; in an era where bank's total liabilities rarely exceeded 3 times that capital, banks could draw on the Comptroller of the Currency for notes equal 30%-40% of their total deposits. The result was that there was not a single failure of a United States bank between 1865 and their disappearance in the years after the passage of the Federal Reserve Act. (There were bank failures but those were limited to the state chartered banks, which were not restricted from investing in real estate and were not regulated under such an inflexible standard by the Comptroller of the Currency.) It was this very inflexibility that the Federal Reserve Act was supposed to solve.
The current guarantees of deposits under the FDIC produce the same net result; no one will have to worry about getting "cash" from a bank for their deposits. Shareholders and bondholders, on the other hand, now have to wonder what a bank franchise is worth if the depositors will have to be reassured by the promises of yields comparable to those offered by the Treasury market and the Federal guarantors are looking at a future where politics demands that they make good on all accounts of the banks small enough to fail.

Humbert H. expands:

SVB failed precisely because customers who had more cash on deposit than the FDIC limit started withdrawing that cash, which led to a chain reaction when other customers started worrying even more about THEIR ability to withdraw cash once the first batch initiated the run, which in the age of modern communications became public within hours or even minutes. They called the bank and formed lines outside the branches, but SVB simply didn't have enough cash to give them and actually stopped giving it them. To the contrary of what you're saying, they could not simply issue cash. Many of their customers faced bankruptcy, and I personally knew a couple of them. The bank, in fact, was forced to mark their treasuries to market, was thus insolvent, and would have to declare bankruptcy had the FDIC not stepped in. The VAST MAJORITY of deposits was above the FDIC limit, so "no one" having to worry is pure fiction.

Stefan Jovanovich responds:

You are describing what the rules were before SVB's failure, not what they are now. The FDIC was forced by circumstance to effectively remove all limits to its deposit guarantees. Are you saying that there were depositors of SVB who have not been 100% made good?

Humbert H. explains:

No, I'm not saying that, the last part. The FDIC did not explicitly change the rules, so people have to worry even now. You can interpret their actions as an iron-clad guarantee, but that's just that, an interpretation. They, with rare exceptions, had not let depositors lose money even before SVB, and yet people were still worried. There were billions withdrawn from regional banks after SVB precisely because people were worried about the same thing happening there, and a lot of that money went into the systemically important banks and other safer places/instruments. Now it all kind of died down, arguably because no similar runs requiring FDIC intervention happened.

Stefan Jovanovich is appreciative:

Thx, HH. I am basing my assumption about the de facto extension of the FDIC guarantee to all deposits on the Pew Research data.

As banking industry observers wonder whether more dominoes will fall, about a third of Americans (36%) say they’re very concerned about the stability of banks and financial institutions – considerably smaller than the shares expressing that level of concern about consumer prices and housing costs – according to a recent Pew Research Center survey.


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