Small Banks, Big Problems

Published on: May 30th, 2023

Regional banks are short of capital. Caught out by rising rates, assets (especially long duration fixed income) fell. Shareholder dilution beckons but equity valuations are low. As banks are forced to compete for deposits with money market funds, Net Interest Margins are declining. Bank runs are a rising risk, in a social media-induced frenzy. The Fed’s focus remains inflation. R** is on our doorstep.

Comments

  • JM
    John M.
    30 May 2023 @ 20:51
    0 0
    "muddling through until the Fed pivots and cuts rates back to an economically viable level (sub 2%?)" - question here on whether the fed lowering short term rates would help (where I believe banks are holing >10yr+ matruity?). From observing the market it seems like fed rate tightening is actually keeping long-term rates somewhat anchored, if the fed paused/cut it seems the risk could actually be a steepening with long rates going higher? With CCPI at 4.7 QE will continue?, so seems like there is actually substantial risk of the fed "losing control of the bond market" as Julian remarked in the talk?
    • JM
      John M.
      3 June 2023 @ 23:58
      0 0
      I guess I was thinking that YCC = "loose control of the bond market"? Anyway, thanks that way of thinking about it makes sense. This is one frustrating market.
    • HM
      Harry M. | Real Vision
      2 June 2023 @ 12:33
      1 0
      It will definitely help. 10s might not benefit as much as the short end in a rally, but they will rally. And right now they are offside on their funding too. So bringing short rates down will help reduce the size of the CRE and legacy fixed income position hole in the balance sheets. Can the Fed lose control of the bond market. Yes and no. I mean they can lose control in the sense that they are forced to do deeply distasteful things like YCC. But ultimately, if they think its worth it they could buy every UST in the world. So in that sense they can always bring the big guns out if push comes to shove. The problem is the damage to the economic system, credibility, and ultimately the dollar
  • AK
    Alexander K.
    1 June 2023 @ 15:19
    1 0
    Thanks Jules — think you’re spot on here.
  • MG
    Miguel G.
    1 June 2023 @ 17:00
    0 0
    Julian, if the catalyst to save equity value and NIM in banks is a fed funds rate < 2%, what are the odds the financial sector gets that with inflation staying so sticky for remainder of year. Everyone seems to want to live in a fantasy world of skipping the pain part, but I just dont see how we can reignite the next bull market/econ. expansion without the real pain thats needed to fix some of the current issues. Every scenario I look at just seems to keep the fed at best, in a pause stance and at worst a hiking stance. What am Im missing here, seems to me like a heads I lose tails I lose risk/reward. In order to believe the bull case in risk assets is to believe that the fed will be proactive. That would then put their inflation fight at risk of becoming embedded and hence another hiking cycle would have to start. The adage "dont fight the fed" that perma bulls like to use is comical in this instance because they are doing just that. Every fed official is doubling down on their rhetoric to squeeze inflation out of the economy, why should we believe them?
    • HM
      Harry M. | Real Vision
      2 June 2023 @ 12:39
      0 0
      I should ask JB what he thinks. I can tell you what I think Miguel. I think ultimately its fiscal policy which dominates, and Fed policy primarily just affecting the relative position of creditors and debtors, rate sensitive and insensitive positions. I think if the Fed keeps hiking but resolves banks without allowing bank failures to cause a net monetary contraction then we can easily be surprised by how strong big cap equities get relative to small business. So the pressure will increase until something the Fed does care about goes pop. Or until Congress reins in spending...
    • MG
      Miguel G.
      1 June 2023 @ 17:02
      0 0
      *Why shouldnt we believe them?