Wouldn't this advice be helpful every Friday?

Sign up to receive Tom Brown's Exclusive Banking Weekly in your Inbox each Friday.

–Copyrighted Material; Do Not Forward, Photocopy, or Redistribute In Any Way–

Vol. VIII, No. 12


Financial Services Insights and Intelligence

FIRST WORD: My thoughts on the current banking crisis. Like you, I have read so many opinions about what caused the failures of SVB Financial and Signature Bank and the bank stock meltdown that followed, as well as opinions about what should have been done to prevent it all. The best summary, in my opinion, was Fortune’s Shawn Tully’s discussion of his conversation with Douglas Diamond, a University of Chicago  economics professor who won a Nobel Prize for his work on bank runs. Diamond talked about the need for sound bank regulation and for prudent management which results in a broad diversification of a bank’s asset mix (loans and securities) and its funding (deposits and other). But his central point is:

[B]anks are inherently fragile and vulnerable to “runs,” because if customers exit en masse, the lenders may need to sell their bonds or loans, which would have fully paid off on maturity, at fire-sale prices. Hence, a panic can unnecessarily ruin an otherwise healthy bank.

You can have sound regulation and prudent management, but the most important element is depositor confidence in the soundness of the institution. The depositors at SVB and Signature lost confidence in those institutions and, with more than 90% of the banks’ deposits above the $250,000 insurance limit, depositors withdrew their funds en masse. SVB lost an incredible $42 billion in deposits in one day.

What is needed now is a rebuilding of confidence in banks and the U.S. banking system. The current administration and regulators are not doing an acceptable job. I thought the analysts at Bespoke Investment Group summarized the situation well yesterday. They made the point that “strategic ambiguity” may be appropriate in foreign affairs such as with U.S. policy in dealing with China and Taiwan, but it is not in this case.

One area where a policy of strategic ambiguity may not be as effective is in the handling of a banking crisis. Within the span of under 30 minutes yesterday, we saw the heads of the Federal Reserve and the U.S. Treasury give somewhat conflicting signals regarding the U.S. banking sector. At 3:00 p.m. Eastern, Treasury Secretary Janet Yellen told a Senate Committee that she is not considering a broad increase in deposit insurance at U.S. banks. Besides the fact that she made somewhat contradictory remarks just a day earlier, her statement seemed to be the complete opposite of FOMC Chair Powell, who said just a few minutes later in his post-meeting press conference that the Fed has the tools to protect depositors and is prepared to use them in order to safeguard deposits. Given the conflicting signals, most rational investors would not stay put, thinking that there is a good chance their deposits are safe, they would step on the gas and get out of Dodge.

Some regional banks are experiencing a run on their deposits because of fear. The deposit withdrawals are the worst at those banks with the highest percentage of their deposits over the FDIC insurance limit and at those banks with the most such deposits from startup companies. I heard of one small company which raised $12 million in a Series B financing in early 2022 who received calls from all seven of the VC investors first thing on Thursday morning two weeks ago urging the company to withdraw the funds it had at SVB and First Republic, which it did. We need to take steps to build confidence in our regional banks, otherwise we will lose our uniquely attractive banking system, which has a mix of large global banks, regional banks, and community banks. The 4,700 banks not among the 25 largest are responsible for 38% of the lending by all U.S. banks.

How did we get here? The quantitative easing that began in 2008, whereby the Fed flooded the market with liquidity, led to an explosion in bank deposits, particularly in the operating accounts of businesses with balances above the $250,000 FDIC insurance limit. The deposit influx was enhanced by all the fiscal stimulus from government programs related to the pandemic.

The banks didn’t have sufficient lending opportunities to deploy the deposit surge, so they bought investment securities. The securities were generally low-risk Treasuries or mortgage-backed securities and could be classified as held for sale (HFS), which for accounting purposes were marked to market every quarter, or classified as held to maturity (HTM) which were carried at cost.

SVB failed, in my opinion, primarily because of bad asset/liability management. The company had $175 billion in deposits that it deployed in $74 billion of loans, $26 billion in held-for-sale securities, and $91 billion in held-to-maturity securities. This created two problems when the Fed began raising interest rates last year. First, the yield on SVB’s assets did not rise nearly as fast as its cost of liabilities. When the bank failed, there was a negative spread between the two, which was draining capital. Second, and more important, because the bank either did not hedge its interest rate exposure or hedged it inadequately, when depositors withdrew funds, it could not sell its securities without taking huge losses, further draining capital. SVB was not a credit problem, it was an ALCO problem.

How do we stop the run on regional banks? If you agree that the run is being led by companies with deposits above the current FDIC insurance limit, then my suggestion is to raise the FDIC insurance limit such that it covers the operating balances of most companies. My recommendation is somewhere between $5 and $10 million. Back in 1988, Lowell Bryan, head of the banking practice at McKinsey, wrote a book, Breaking up the Bank, which recognized the bank run problem and recommended that insured deposits should be used just to buy low-risk securities to fund residential mortgage loans. That theory didn’t survive the housing collapse in 2007 and it wouldn’t have solved SVB’s ALCO problems of this year. Strong bank regulation and asset restrictions are not sufficient; the banking system depends on investor confidence, so whatever the change in the system, it needs to build depositor confidence. The current approach being taken by Fed chairman Powell and Treasury Secretary Yellen of strategic ambiguity is woefully inadequate.

NOT TO BE: Oh well. Those of us of a certain age were kind of looking forward to the return of First Boston.

UNLOVED: I take this as a not-insignificant positive for the financials. On the sell side, they are analysts’ third-least-favorite industry group.

STAYING AWAY: Over on the buy side, meanwhile, portfolio managers (at least, managers surveyed by Bank of America) seem to be meaningfully underweight banks.


SWAG RUSH: What fun banking-industry ghouls have been having lately! After gorging on Silicon Valley Bank-branded merchandise last week, now they’re loading up on Credit Suisse stuff, as well:


Within hours of its state-backed takeover by UBS Group being announced, memorabilia bearing lender Credit Suisse’s name and logo was being put up for sale in Switzerland, marking the end of an era.

Dozens of bars of gold, stamped with the name of the issuer—the 167-year-old Credit Suisse—were uploaded to the country’s most popular online marketplaces, Ricardo.ch and tutti.ch.

Blue and red ski hats bearing the ‘CS’ letters, which were the height of fashion in the 1970s, were getting bids of close to 200 Swiss francs ($216). [Emphasis added.]

Hold on. Two hundred and sixteen dollars for a 50-year-old ski hat? This is starting to get out of hand.


DO YOU USE CHATGPT?: A survey of 11,000 people on Fishbowl, a social network for professionals, found that 43% said they have used tools like ChatGPT, while 70% of users are doing so without their boss’  knowledge. Some banks, including Bank of America, Citigroup, and Wells Fargo have banned the use of AI-chatbots. Seems to me it’s a genie-out-of-the-bottle type of thing.

YOU CAN THANK THE FIXED-RATE MORTGAGE: Central banks around the globe have been raising interest rates for over a year, and this has had an impact on housing affordability, according to a report from the OECD. The decline in home values has been most pronounced in New Zealand and Sweden, two countries which saw home prices spike higher at the beginning of the pandemic, and where mortgage rates float with short-term rates. The OECD believes the supply of homes for sale in these two countries has been inflated by forced sales due to affordability.

FLOODING IN: Hang on. People are running around screaming that the banking system is in the midst of a crisis, and the stock market is seeing record inflows?

I have to say, as financial panics go, this one hasn’t been very impressive so far.

STILL FLAT: Along that same line, the Secured Overnight Financing Rate, which is supposed to be the reality-based replacement for now-disgraced Libor, has barely budged since all the bank-related yelling began.

I mean, one would think that banks would be charging each other at least a little more for overnight money these days, right? Heaven help me, I’m starting to feel like a conspiracy theorist.

NOT AGAIN: Oh, brother. Leave it to accounting-rule fusspots to take a tricky situation and try to make it worse.


U.S. accounting rulemakers are being urged to rethink how banks should value their assets in financial statements, in the wake of the run on Silicon Valley Bank and pressure across the regional banking sector.

Advocates of “fair value” accounting are urging the Financial Accounting Standards Board to force banks to recognise unrealised losses on securities such as those held by SVB, even when management insists they will never have to be sold.

A fair value approach would have made SVB’s losses on its bond portfolio obvious to more investors earlier, the advocates say, and could have forced the bank to take action to shore up its finances before it was too late. [Emphasis added.]

Sure, why not? I mean, mark-to-market accounting was so helpful in ending the 2008 financial crackup, remember? Oh, wait. I have no problem with banks disclosing the market value of their HTM assets—which they’re already required to do. But actually running the changes in value through the bank’s P&L? That’s a recipe for disaster. You’d think people would have figured that out by now.

REALLY NOT POPULAR: Well here’s some bullish news. Fund managers surveyed by Bank of America say that they’re now overweight cash more than they are anything else, and are most underweight U.S. equities.

Look at that chart long enough, and it’s hard to not get a sense that an industrial-strength buying panic might not be far off.

PROXY VOTING MADE EASY: I handle all the proxy voting for the shares of the investment partnership I manage, and I take it very seriously. I also own two shares in Bank of America and two in Capital One personally, because I have framed the stock certificates as a reminder of the success of these investments, BankAmerica in the 1980s and Capital One in the 1990s. I vote the proxies for these shares, as well, as insignificant as they are relative to the two companies. This year Bank of America’s voting process was different, and by far the easiest I have ever encountered. I was directed to a website, proxyvote.com, and given a 16-digit control number to vote. It couldn’t have been easier. I hope others will consider the system.

EASY DOES IT: This seems right to me. Ed Yardeni makes the point that the Fed can tap the brakes a bit because the banking crackup “might be equivalent to a 100bps hike in the federal funds rate. We are just guessing, but financial conditions have surely tightened a lot as a result of the SVB earthquake and its aftershocks.” Makes sense, no? P.S. Former Western Asset Management chief economist Scott Grannis says the same thing, and believes the Fed should actually be easing.

NEVER A HAPPY ENDING: Oh. How encouraging.

SQUEEZING HARD: Hmm. Monetary conditions seem to be tighter than I bet a lot of people realize: the spread between the 30-year mortgage rate and the ten-year Treasury’s yield has never been higher, . . .

. . . which has had the effect of taking an inordinate chunk out of people’s disposable incomes.

UNPRECEDENTED VOLATILITY IN TWO-YEAR TREASURIES: A streak of six consecutive days during which two-year Treasury yields moved more than 30 basis points in a day just ended. This volatility included last Wednesday, when the intraday range was 70 basis points, which is 10 basis points greater than the record set in the financial collapse in 2008. More than at any point in in my career, the volatility of every financial instrument seems to be in a secular upswing.

DOUBLING DOWN: Well this is kind of notable. The banking-insider buying that began right after SVB blew up has apparently persisted, and seems to be happening all over the place:

Banking company insiders are sending stock investors a message now: Calm down and buy shares of regional banks, because they are not likely to lose all their business to “safer” megabanks. . . .

Since the bank sector meltdown began, insiders at scores of regional banks have purchased company shares. More than a dozen of these buys were worth $500,000 to $1 million or more. That’s big enough to serve as a solid buy signal at smaller companies . . .

In short, insiders are telling us that the reports of the death of their banks are greatly exaggerated. . . . [Emphasis added.]

Reassuring! Let’s just say that if small-bank customers really were yanking their money and putting it with the JPMorgan Chases of the world the way everyone seems to be saying, banking insiders would be the first to know, and wouldn’t likely be scooping their own stock. So, good.

TEAMWORK: Why, they’re a regular Fred Astaire and Ginger Rogers, aren’t they?

YOU CAN THANK TIK TOK: Car thefts in several major cities, including Chicago, Baltimore, and Cleveland, rose sharply from 2019 to 2022, according to data from USAFacts. Car thefts in Chicago doubled from December of 2021 to December of 2022. There were 550 Kias and Hyundais stolen in the first half of 2022, but that rose to 6,250 in the second half. Kias and Hyundais accounted for 55% of all the cars stolen in Chicago in December. Why? A video on Tik Tok shows how to break the driver side window, remove parts of the steering column cover and use a screwdriver to start the car.

RECORD LOW INVESTOR SENTIMENT TOWARD BANKS: It is not news to anyone that investor sentiment toward financial stocks in general and banks in particular is decidedly negative, but I don’t remember it being this low even during the 2008 financial collapse.

NEXT: But of course! It was only a matter of time:


A record amount of commercial mortgages expiring in 2023 is set to test the financial health of small and regional banks already under pressure following the recent failures of Silicon Valley Bank and Signature Bank.

Smaller banks hold around $2.3 trillion in commercial real estate debt, including rental-apartment mortgages, according to an analysis from data firm Trepp Inc. that is almost 80% of commercial mortgages held by all banks.

With the banking industry in turmoil, regulators and analysts are growing increasingly concerned about commercial real estate debt, particularly loans backed by office buildings, according to industry participants. Many skyscrapers, business parks and other office properties have lost value during the pandemic era as their business tenants have adopted new remote and hybrid workplace strategies.

High interest rates also have wreaked havoc with commercial property valuations. . . . [Emphasis added.]

Given the length of the typical office lease, this could end up being the slowest slow-motion train wreck on record. But that doesn’t mean it won’t end up being a train wreck, just the same.

OFFICE LEASE RATES FALLING IN SOME MARKETS: But sure enough, office lease rates have begun to decline. The cities most affected seem to be those where people have the longest, most difficult commutes. Boston and Minneapolis have more employers who do life science or biotech research, which have higher return-to-office rates. Most companies have yet to redesign their office space needs to reflect the hybrid work model, so it seems like downward pressure on office rent rates is just getting started.

A COMBINATION OF FEAR AND RETURN: With yields at around 5%, the number of people buying T-bills on the TreasuryDirect website skyrocketed in February. Given what has happened in the banking industry in March, this number most likely spiked higher again.

NOTABLE RELEASES NEXT WEEK: On Tuesday, the Conference Board will release its Consumer Confidence Index for March. The consensus expects 101.5 vs 102.9 in February. Then on Friday, we’ll get the February PCE Price Index. The consensus looks for a monthly change of +0.3% vs +0.6% in January.

THE LAST WORD: For over 30 years, I have regularly been asked to give presentations to industry groups and bank boards and management teams. Typically, the presentations take place during the day and I am able to deliver my comments with the aid of PowerPoint slides. This week I was asked to present to the board and management of MidWestOne Financial Group in Iowa City, Iowa. I was apprehensive about the conditions. First, I was travelling  on the same day I was presenting, which I typically don’t like to do. Second, I was to speak in the dreaded spot between cocktails and dinner. Third, the room did not lend itself to a slide presentation.

Sure enough, my flight from Philadelphia to Chicago was delayed and then the connecting flight to Cedar Rapids was delayed. By the time I got to the dinner location, I was a little frazzled and was 40 minutes late. Surprisingly, the 25 or so people in the room couldn’t have been more engaged, and asked really good and smart questions. It ended up being one of the most pleasant and productive speaking engagements I can recall giving. Thank you to all at the dinner.

LAST WORD II: The next day, I had a flight to Dallas and a connecting flight to Phoenix. Both were delayed and my flight from Cedar Rapids to Dallas was delayed four hours, causing me to be rebooked.  Despite the travel difficulties, I encountered two incredible customer service experiences. I watched the gate agent, Rhonda, in Cedar Rapids handle everyone’s rebooking issue with ease and a pleasant attitude. Then when I got to Dallas, a woman in the Admirals Club, Tina, went way beyond the call of duty to help me. The irony is I tried to email American Airlines about the great service I got from two of their employees, but the website required so much information from me that I am not sure my positive comments were ever received. American, and perhaps other companies, need to make customer feedback easier to deliver.

Edited by Matt Stichnoth.

Copyright notice: This publication is protected by copyright. It is a violation of federal law to reproduce or forward all or part of it to anyone. This includes photocopying, faxing, e-mail forwarding, and Web site posting. The Copyright Act imposes liability of up to $150,000 per issue for infringement.

Copyright © 2023, Second Curve Capital LLC