Are The USA Banks / Banking System Solvent?

[envuks]

Originally Posted by enjoythemusic

From Bloomberg about an hour ago. Would be great to see a full list of all those with exposure. Anyone here have a Bloomberg terminal that can screen capture for us?

Attachment 1354348

So this is a mark to market accounting practice that’s required when a bank holds a structured debt investment. MBS is the most common for banks, but any debt can be packaged and sold. Banks, and much of the large financial companies commonly hold structured debt investments, which pay monthly installments on the initial investment thus repaying it over time. With interest.

If a bank held the same security, not for sale, it would not have to “mark to market” on balance sheet. Meaning the face value, rather than the current market sale value is represented on balance sheet.

Because of this practice, which is a GAAP and regulatory requirement, and the speed of the shifting rate environment, these investments have lost a ton of value on paper. Banks have to post a book loss to equity. Mark the investments to market value. Market value is way lower because rates are higher on similar investments you can buy today.

Meanwhile, most (almost all) of these investments are still paying their monthly installments. As originally planned and structured. So as long as households and businesses continue paying their loans, the investments will run off and the book losses on mark-to-market losses will evaporate from balance sheets.

If people keep paying their loans the US banking system is fine. If people cannot pay their loans, en mass, it will not be fine. Which is what happened in 2008. The monthly cash flow from these investments and the portfolios they were in dissolved.

Some banks will feel pressure through the mark to market balance sheet impact, which could lead to cash flow insolvency. These mark to market security losses run through the equity portion of a bank’s balance sheet. That means they reduce capital ratio, which can impact the cost and ability for short-term borrowings. Which are critical to cash flow.

Banks that are low capitalization could be pinched. Just based on ability to borrow for cash flow. You can see this in the financials, since they often hold this type of investment for sale, and have to mark to market the value on balance sheet as a loss. This is what the image represents. The “ratio” is capital ratio. The FDIC considers adequately capitalized as 8% tier 1 capital ratio.

I’ll say it again, so long as people continue to pay their loans the US banking system is sound. If that is severely impacted, like it was in 2008, it’s a much larger issue. Then the problem becomes the same securities held on balance sheet not for sale, which are not mark to market valued stop paying.

That’s another story. Anyway.

The collapse of SVB seems more cash flow related and was kind of a run on a bank by the wealthy, who seemed to hear there was trouble. The cash flow pinch created by the volume of withdrawals seems like the culprit. I read 98% of their deposits were above the FDIC insurance limit which is $250k per individual. So big money flowing out in fear may have evaporated liquidity in the short term. It’s still pretty amazing to see a bank fail that way. Time will tell. They definitely knew there were problems.

This is still a bail out. It’s just a different type of bail out where the FDIC decided to insure all of the deposits in full. Essentially protecting depositors (individuals and businesses) instead of bailing out the bank. I suspect this move was more about public confidence than the need for an actual bailout. The biggest impact would have been to the businesses in Silicon Valley and their employees and that alone probably would have had a big ripple effect. Even if just due to what Silicon Valley represents to the US and how much news noise the ripples would cause.

SVB was big. They’re the second largest bank to ever fail.


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[Blansky]

Originally Posted by Chewbacca

We should have known this was coming a while back when this bank went under but we were distracted with Basel, Anna’s hips and Jocke’s photoshopping.

Thanks Chewie for being our man in the street…..

That Cramer clown is just another grifter that TV loves.

[enjoythemusic]

Thx, great post envuks.

At the end of 2022, the FDIC reported that its Deposit Insurance Fund had a balance of $128 billion, about 1.27% of the total insured deposits. So they just burned through ?????

[envuks]

Originally Posted by enjoythemusic

Thx, great post envuks.

At the end of 2022, the FDIC reported that its Deposit Insurance Fund had a balance of $128 billion, about 1.27% of the total insured deposits. So they just burned through ?????

Cheers.

Yes and no. Conceptually, the FDIC burned through their reserves with this one. And then some. At least on paper. But that isn’t likely to be realized.

SVB has assets (loans and investments that are paying cash flow). These assets will be transferred (sold) to recoup a large portion, likely a high 90s percent, of the “bail out” deposit insurance funds provided to depositors. So conceptually the FDIC insurance fund will be replenished. More likely it will just take a nominal dip depending on how quickly the FDIC liquidates assets and at what price. They tend to move quick.


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[Krash]

Originally Posted by enjoythemusic

From Bloomberg about an hour ago. Would be great to see a full list of all those with exposure. Anyone here have a Bloomberg terminal that can screen capture for us?

Attachment 1354348

Bank of America has $3 trillion in assets and has $115 billion in annual revenue. I know this because I'm heavily invested in them. They don't have to sell T-Bills at a loss like SVB did. But alas, people are going to panic anyway...

[enjoythemusic]

Agreed some might panic, and it is moving the market at the moment. Seems they're waiting for the response over the next few days / week.

Look, am sure many of us here know it's just Dollars, and with enough confidence all is well. Just wish the funds would have gone to help the USA's homeless, or VETs, the public school system... something more productive for society.

Posted on CNBC today...

Untitled-1.jpg

[SWS65SM]

Originally Posted by Krash

Bank of America has $3 trillion in assets and has $115 billion in annual revenue. I know this because I'm heavily invested in them. They don't have to sell T-Bills at a loss like SVB did. But alas, people are going to panic anyway...

I get the point you're making, but still couldnt help but to clarify that it wasn't selling t bills that blew up SVB's balance sheet, the mark to mkt losses primarily came from long dated MBS in their HTM side of the portfolio; there was simply too much duration risk there with what SVB decided to do with the influx of deposits

Regardless whether SVB is one of the small groups of regional banks with poor diversity in the deposit base that landed it in this predicament, if nobody has faith in the system and panic redeem, no banks in the world would be solvent. Where would we all stash our cash, underneath our mattress?

[Krash]

Originally Posted by SWS65SM

I get the point you're making, but still couldnt help but to clarify that it wasn't selling t bills that blew up SVB's balance sheet, the mark to mkt losses primarily came from long dated MBS in their HTM side of the portfolio; there was simply too much duration risk there with what SVB decided to do with the influx of deposits

Regardless whether SVB is one of the small groups of regional banks with poor diversity in the deposit base that landed it in this predicament, if nobody has faith in the system and panic redeem, no banks in the world would be solvent. Where would we all stash our cash, underneath our mattress?

Well, they also relied heavily on securities instead of loans. Traditionally, banks loan money and charge interest (assets) to cover deposits (liabilities). That’s how banking typically works. SVB operated differently. This is illustrated above in that chart from CNBC.

They sold $21 billion worth of securities to cover deposits at a $1.8 billion loss. They then wanted to raise $2.25 billion in capital to cover that loss. They planned to do this by issuing more common stock. That’s what got all the headlines, but it was the poor mix of assets and liabilities that was at the root of the problem.

Ironically, it wasn’t really a big problem until people panicked. Raising capital by selling common stock would have solved their accounting problem.

In 2008, it was very common for banks to issue stock to cover capital losses on the balance sheet. Nobody panicked back then. There wasn’t any run on the banks and the situation was significantly worse back then. Of course, social media wasn’t a big factor back then either.


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[GB-man]

[m j b]

Originally Posted by enjoythemusic

When do you think Quantitative Easing will begin?

Me personally, knowing nothing about anything, think it will be quite a while.

Originally Posted by envuks

So this is a mark to market accounting practice that’s required when a bank holds a structured debt investment....

Great post. Hard to believe you typed all of that in (with no errors apparent) on your phone.

IMHO, the bank didn't really "fail". They had a run that they couldn't meet short-term, and so to maintain faith in the system, the FDIC took it over. Or the Federal Reserve. Someone in the federal government did.

The points made in several posts above about "faith in the system" are, to me, the crux of the matter. As long as we all go about our business with fingers crossed and just pretend that everything is OK, it will remain OK.

[Krash]

Great buying opportunity for bank stocks.

[beshannon]

Originally Posted by Krash

Great buying opportunity for bank stocks.

Absolutely

[superdog]

@envucks

That’s a really great post. I learned quite a bit. Thank you.

[GB-man]

From my understanding which could be incorrect this is simply a case of play stupid games win stupid prizes by the decision makers at SVB. They elected not to hedge their inflation risk, probably to hit some bonuses, and got steamrolled by a bank run when they had to sell at a loss and raise capital.

[BroncoOne]

Originally Posted by enjoythemusic

Understood and agreed.



When do you think Quantitative Easing will begin?

The new QE began on Sunday with the Fed’s new short term lending program where it will value a bank’s assets that are underwater with unrealized losses (e.g. those treasuries yielding 1%) at full par instead of marking them to market.

Poof. Liquidity issue solved if the bank gets a run on deposits. It won’t need to liquidate this positions at a loss like SVB did.

The large banks (over 250 billion in assets) are just fine. I bought Schwab, Goldman and JPM yesterday. They were caught in the wash with the small regional banks that became less regulated in 2018. The big guys still need to meet the post Great Recession Regs

[enjoythemusic]

Thanks Bronco and yes Dollar liquidity is very easy to resolve. Once the Fed pivots and sustains that direction the market will go skyward again reaching new highs imho.

The 'Dow 10,000' hats celebration seems like it was only yesterday. It's ~32,250 today.

[SDGT3]

If corporations that put their money in banks to make payroll and other everyday expenses have to worry about solvency, then they will only bank with the 2-4 largest banks in America and exclude every regional bank and CU. Think about all the cash stockpiled in companies like Apple or Berkshire to name a couple. Although they're big enough to be their own banks, they have to put their cash somewhere. Buffett does like to use treasuries but not all their cash is tied up in US Tresuries and certainly they're way over the $250k limit.

If it's true that only FDIC insurance fees will be used to bailout the uninsured depositors at SVB, then the FDIC reserves will be virtually tapped out. If any other banks get taken over it will make the argument to bailout insured depositors at the other yet to be taken over bank(s) rather than uninsured depositors at SVB. Let's not forget however that SVB still has assets and cash flow from their MBS and other long term bonds. That cash will always come in unless people stop paying their mortgages and bond payments.

Again, looking forward several months, the stalemate with the budget and debt ceiling fight becomes a much more dangerous game of chicken. IF there is a US default and bonds are not paid on time by the US govt, it will trigger a financial crisis we have never seen in our lifetimes.

As an aside I've been looking to purchase a position in JPM since mid 2022. I got spooked by their disappointing earnings for Q3 2022 and the Jamie Dimond "Financial Hurricane" in 2023 he projected. The measures he's taken to make sure the bank had built up good reserves if such an event would occur seem to be well thought out and given everything that's going on, their stock price has been rather stable considering everything.

[Ballzzz]

Bank execs are buying hand over fist today!!!

Originally Posted by SDGT3

If corporations that put their money in banks to make payroll and other everyday expenses have to worry about solvency, then they will only bank with the 2-4 largest banks in America and exclude every regional bank and CU. Think about all the cash stockpiled in companies like Apple or Berkshire to name a couple. Although they're big enough to be their own banks, they have to put their cash somewhere. Buffett does like to use treasuries but not all their cash is tied up in US Tresuries and certainly they're way over the $250k limit.

If it's true that only FDIC insurance fees will be used to bailout the uninsured depositors at SVB, then the FDIC reserves will be virtually tapped out. If any other banks get taken over it will make the argument to bailout insured depositors at the other yet to be taken over bank(s) rather than uninsured depositors at SVB. Let's not forget however that SVB still has assets and cash flow from their MBS and other long term bonds. That cash will always come in unless people stop paying their mortgages and bond payments.

Again, looking forward several months, the stalemate with the budget and debt ceiling fight becomes a much more dangerous game of chicken. IF there is a US default and bonds are not paid on time by the US govt, it will trigger a financial crisis we have never seen in our lifetimes.

As an aside I've been looking to purchase a position in JPM since mid 2022. I got spooked by their disappointing earnings for Q3 2022 and the Jamie Dimond "Financial Hurricane" in 2023 he projected. The measures he's taken to make sure the bank had built up good reserves if such an event would occur seem to be well thought out and given everything that's going on, their stock price has been rather stable considering everything.

[EEpro]

Originally Posted by Ballzzz

Bank execs are buying hand over fist today!!!

Yeah but they make bad bets.

[envuks]

Originally Posted by EEpro

Yeah but they make bad bets.

We only see the bad bets. Their good bets don’t make the news :-)


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[envuks]

Originally Posted by superdog

@envucks

That’s a really great post. I learned quite a bit. Thank you.

Cheers! Happy that folks were able to take something from my comment


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[brandrea]

Originally Posted by envuks

So this is a mark to market accounting practice that’s required when a bank holds a structured debt investment. MBS is the most common for banks, but any debt can be packaged and sold. Banks, and much of the large financial companies commonly hold structured debt investments, which pay monthly installments on the initial investment thus repaying it over time. With interest.

If a bank held the same security, not for sale, it would not have to “mark to market” on balance sheet. Meaning the face value, rather than the current market sale value is represented on balance sheet.

Because of this practice, which is a GAAP and regulatory requirement, and the speed of the shifting rate environment, these investments have lost a ton of value on paper. Banks have to post a book loss to equity. Mark the investments to market value. Market value is way lower because rates are higher on similar investments you can buy today.

Meanwhile, most (almost all) of these investments are still paying their monthly installments. As originally planned and structured. So as long as households and businesses continue paying their loans, the investments will run off and the book losses on mark-to-market losses will evaporate from balance sheets.

If people keep paying their loans the US banking system is fine. If people cannot pay their loans, en mass, it will not be fine. Which is what happened in 2008. The monthly cash flow from these investments and the portfolios they were in dissolved.

Some banks will feel pressure through the mark to market balance sheet impact, which could lead to cash flow insolvency. These mark to market security losses run through the equity portion of a bank’s balance sheet. That means they reduce capital ratio, which can impact the cost and ability for short-term borrowings. Which are critical to cash flow.

Banks that are low capitalization could be pinched. Just based on ability to borrow for cash flow. You can see this in the financials, since they often hold this type of investment for sale, and have to mark to market the value on balance sheet as a loss. This is what the image represents. The “ratio” is capital ratio. The FDIC considers adequately capitalized as 8% tier 1 capital ratio.

I’ll say it again, so long as people continue to pay their loans the US banking system is sound. If that is severely impacted, like it was in 2008, it’s a much larger issue. Then the problem becomes the same securities held on balance sheet not for sale, which are not mark to market valued stop paying.

That’s another story. Anyway.

The collapse of SVB seems more cash flow related and was kind of a run on a bank by the wealthy, who seemed to hear there was trouble. The cash flow pinch created by the volume of withdrawals seems like the culprit. I read 98% of their deposits were above the FDIC insurance limit which is $250k per individual. So big money flowing out in fear may have evaporated liquidity in the short term. It’s still pretty amazing to see a bank fail that way. Time will tell. They definitely knew there were problems.

This is still a bail out. It’s just a different type of bail out where the FDIC decided to insure all of the deposits in full. Essentially protecting depositors (individuals and businesses) instead of bailing out the bank. I suspect this move was more about public confidence than the need for an actual bailout. The biggest impact would have been to the businesses in Silicon Valley and their employees and that alone probably would have had a big ripple effect. Even if just due to what Silicon Valley represents to the US and how much news noise the ripples would cause.

SVB was big. They’re the second largest bank to ever fail.


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Interesting post, thank you

[knyshcollection]

They will be fine, government doesn't want that mess again!

[Krash]

Originally Posted by knyshcollection

They will be fine, government doesn't want that mess again!

Well, yes, but with the exception of a tiny handful, the banks are fine with or without the government.

It's a huge buying opportunity. I'm moving money into bank stocks now. It was overblown, and the stocks are oversold.

[mountainjogger]

Originally Posted by envuks

Cheers.

Yes and no. Conceptually, the FDIC burned through their reserves with this one. And then some. At least on paper. But that isn’t likely to be realized.

SVB has assets (loans and investments that are paying cash flow). These assets will be transferred (sold) to recoup a large portion, likely a high 90s percent, of the “bail out” deposit insurance funds provided to depositors. So conceptually the FDIC insurance fund will be replenished. More likely it will just take a nominal dip depending on how quickly the FDIC liquidates assets and at what price. They tend to move quick.


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Excellent posts envuks. Thanks for elevating the discussion.

[Chewbacca]

Just walked past a closed SVB and saw the former CEO, offered $6k for his Daydate. He haggled me down to $5

I now see how this all happened.

[77T]

Age of easy money sunset has switched off the lights at two banks.

Yes, there could be more - you and I will pay through higher fees or lower returns from the banks that survive the pending correction. That’s because FDIC fees to remaining banks to cover the deposit liability to customers. The Fed’s loan facility to the Regionals (if used as I expect) could result in defaults and subsequent failures.

If we see a high number of Regionals going for those loans then it’s perhaps an indicator they were not as healthy as they all said on Monday morning.

This is not “transitory” methinks.

Anyone see Frontline tonight?
Interesting history of Fed actions.


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[77T]

Originally Posted by envuks

The collapse of SVB seems more cash flow related and was kind of a run on a bank by the wealthy, who seemed to hear there was trouble. The cash flow pinch created by the volume of withdrawals seems like the culprit. I read 98% of their deposits were above the FDIC insurance limit which is $250k per individual. So big money flowing out in fear may have evaporated liquidity in the short term. It’s still pretty amazing to see a bank fail that way. Time will tell. They definitely knew there were problems.

I agree the outflow shocked SVB - it came out of the reports of big losses.

The high end deposits never would have guessed they would be backstopped by FDIC. When those whales headed for the door, SVB had no choice but to liquidate their highest performing assets for cash. That led to a bleaker forward-looking outlook among those inside the big money folks and a cascade of outflow took them down.

Fundamentals weren’t the problem - it was some short term foolishness plus some bad decisions coming home to roost. When this gets unwrapped by forensic accountants I expect a lot of SVB expects to write personal checks to return bonuses and insider sales proceeds.

Now Signature is whole different story and may be the worse one by comparison despite being smaller than SVB. Regulators sent a clear shot over the crypto bow in the bigger fool category.

Maybe stiff regs waiting in the wings for exchanges and stakers in that space. Not sure but would seem inevitable.


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[HHIslander]

If you’re a depositor, the US banking system has never been safer than it is since Sunday.

If you’re a stock or bond holder in any bank that’s not systemically important, different story.

[Krash]

Swiss bank Credit Suisse is now said to be at risk. This is a European bank, not American. Credit Suisse shares tumbled 24% on European markets over night because of this, and trading was halted several times. Dow futures are down 500 pts because of this.

The chairman denies they’re on the brink. He claims they have strong capital ratios and a strong balance sheet. Ironically, the Chairman’s last name is Lehmann.

Problem is some guy went on CNBC yesterday and said Credit Suisse is going to collapse next. That might not have been true, but now it created panic. So here we are.

I’m wondering how liable this guy is if he was wrong, but then triggered this event by blabbing his mouth on TV. Obviously, he’s allowed to say what he wants, but he might not have been right, and look what happened.


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