Are banks uninvestable?

Today in congressional testimony

“That morning, the bank let us know that they expected the outflow to be vastly larger based on client requests,” Barr said. “A total of $100 billion was scheduled to go out the door that day.”

This is a day after $42 B was withdrawn. If bank runs are going to be this fast, no bank is ever immune to bank run. hmmmm I have to rethink my overallocation to banks.


The fact that SVB had large accounts and not so many account holders makes them a unique situation. Their assets were overly concentrated in both deposits and investments. Not your typical bank.

Maybe new regs will address that problem. Feds seem ready to step in when theres a problem.

All banks have considerable deposits, and with the technology, folks can move money by a click, these deposits can fly in no time. Bank runs are not new, but technology has accelerated the velocity of that run. I don’t see how regulation can stop the deposit flight. FED stepping in may save depositors but it will wipe shareholders and to some extent bond holders.

Now, banking is a fractional reserve system, if banks have to keep higher reserves, to deal with the flight of deposits, then they will earn far less. Financials are becoming a dangerous place to invest.

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The fine print on your cd used to say issuer could require 30 day notice. Demand deposits are a different animal.

Banks everywhere are reviewing their portfolios trying to avoid big exposures. That could mean selling some of those bonds taking a loss to reposition assets.

They say SVB had assets but lacked liquidity. Feds can probably devise faster liquidity. But with reserves requirements.

SVB probably had potential to sell shares to rebuild reserves, but did not have secrecy agreements in place to allow discussions. Another detail that could have been anticipated with better planning and awareness.

First of all SVB should have sold shares first and then made changes to their bond portfolio. They did in reverse order, which means they have to declare those losses in equity offering document. But it is all moot now.

I am looking at FRC. This is the battleground. On one hand big banks (on behalf of FDIC, treasury secretary) stepped in and pumped $30 B deposit, yet their stock price has not yet recovered. How this resolves, whether fresh capital raise, or the bank gets sold, or shrinks, whether equity holders wiped or take haircut, what happens to bond holders need to be seen. FRC cold very well become a template.

Until FRC is resolved and market gets clarity how bank equity holders are going to be treated, banks stocks are going to be selling at discount.

Shopping for buyers for the shares is what set off the bank run. They needed to prepare in advance. Once bank run started, they had to sell the bonds to fund it.

Selling shares probably required disclosure that Moody’s was threatening to cut their bond rating.

I am not so sure either. It is not a singular event or action.

See my post here

The deposit flight has started much earlier. Many folks have recognized bank deposits are paying way below market rate and started moving their money. The deposit flight from banks into money market, treasuries started when the rates crossed 4% and it seems regulators have spotted the issue with SVB, but not intervened strongly earlier.

Separately, Raghuram Rajan, former Central banker of India, Chicago booth school professor, had a paper out on this asset-liability mismatch and potential issues, looks like FED didn’t read that paper or didn’t take it seriously!!!

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Fed claims they sent notices to the failing banks, but bank managers ignored them. Feds recommendations have no teeth and are not enforceable.

Its the warning from Moody’s bond rating agency that got their attention. They threatened a two step drop in ratings to junk territory. That would raise their interest rates, force major bond holders to sell, and greatly impact bank profits.

You buy the best in class gained a completely new meaning for me today. The deal seems to be completely a win-win for JPM. I think not owning JPM is a big mistake.

Except that we know banking is a boring very routine business. Surprising upside news is rare; surprising downside news is not rare enough.

The only reason to own bank stock is diversification. Otherwise its insanity.

Much better to put your money elsewhere.

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