Banking Crisis 2023

[Kaitzilla]

Fed raised interest rates again +0.25%.

Which regional bank is next?
People are eyeing PacWest Bancorp and Western Alliance Bancorp.

https://www.thestreet.com/banking/which-u-s-bank-will-collapse-next

People also continue to slowly withdraw bank deposits that pay nothing to get that sweet money market fund money.

Money-Market Funds Are Hot Again After Years of Fee Discounts

Money-market funds — those humdrum cash-equivalents that plodded along for years in the low-interest rate era – have suddenly turned lucrative.

www.bloomberg.com

 

[Kaitzilla]

Jeez, it has been a few hours.

Pacwest falling fast!

PacWest tumbles more than 35% as bank says it's considering 'all options'

PacWest shares are down about 72% this year as regional banks come under more strain.

www.cnbc.com

Down 72% for the year?
More like in 2 days.

 

[Hygro]

I bought a share of VFH a few weeks ago when FRC was really tanking, just to have something to watch. So far the sector as a whole is holding up pretty decently although today felt like a harbinger.

 

[Kaitzilla]

Billionaire investor Bill Ackman shares a thought tonight.

Bill Ackman - Wikipedia

en.wikipedia.org

https://twitter.com/x/status/1653904840282570754

Spoiler :

The regional banking system is at risk. SVB's depositors' bad weekend woke up uninsured depositors everywhere.
The rapid rise in rates impaired assets and drained deposits.
Zeroing out shareholders and bondholders massively increased the banks’ cost of capital.
CRE losses loom.
Meanwhile, higher-yield, more user- friendly alternatives beckon. @Apple

The @FDICgov failure to update and expand its insurance regime has hammered more nails in the coffin.
FRB would not have failed if the FDIC temporarily guaranteed deposits while a new guarantee regime were created.
Instead, we watch the dominoes fall at great systemic and economic cost.
Banking is a confidence game.
At this rate, no regional bank can survive bad news or bad data as a stock price plunge inevitably follows, insured and uninsured deposits are withdrawn and 'pursuing strategic alternatives' means an FDIC shutdown over the coming weekend.
And there is no incentive to bid until Sunday after the failure.
The GSIBs have an unfair competitive advantage as too big to fail means only their uninsured depositors can sleep soundly.
Until the playing field is leveled, the regional banks are at grave risk.
Confidence in a financial institution is built over decades and destroyed in days.
As each domino falls, the next weakest bank begins to wobble.
Until investors are rewarded for betting on a wobbling bank, there will be no bid, and the best sale is the last price.
We are running out of time to fix this problem.
How many more unnecessary bank failures do we need to watch before the FDIC, @USTreasury and our government wake up?
We need a systemwide deposit guarantee regime now.

6:30 PM · May 3, 2023 · 92.4K Views

SVB is Silicon Valley bank.
CRT is commercial real estate.
GSIB is globally systemically important bank of which there are 30.

2022 List of Global Systemically Important Banks (G-SIBs)

Thirty banks identified as G-SIBs through the annual identification process.

www.fsb.org

Time to wait and see I guess.

 

[EvaDK]

In essence, these banks are/were so badly leveraged, that an interest rate hike and a falling stock price collapses their fundamental raison d'être?

Wasn't the cleanup after the financial sector crisis in 2008, supposed to weed out these kinds of banks?

 

[Akka]

Well, maybe the Fed IS doing the cleanup now by raising interests.
Kinda "now we're doing the actual test live".

 

[Harv]

Canadian checking in. Do the Canadians simply have a better banking system?

Banking in Canada - Wikipedia

en.wikipedia.org

In Canada, only two small regional banks have failed since 1923 when the Home Bank of Canada failed. This was both Canadian Commercial Bank and Northland Bank in September 1985.[17] To put this into perspective there were no bank failures in Canada during the Great Depression, World War II, the 1979 Energy Crisis, the Dot-com Bubble, the Sept 11th Attacks or the Subprime Mortgage Crisis.

On June 4, 1996, the Calgary-based Security Home Mortgage Corporation closed its doors for good. About 2,600 Canadians discovered that their savings were not immediately available from their financial institution, in which they had entrusted a total of $42 million in deposits.[18]

1. Bank failures in Canada: A history, 20 March 2022

 

[Lexicus]

In essence, these banks are/were so badly leveraged, that an interest rate hike and a falling stock price collapses their fundamental raison d'être?

Wasn't the cleanup after the financial sector crisis in 2008, supposed to weed out these kinds of banks?

Absolutely not; in the US the legislation passed after the financial crisis excluded banks with below a certain amount of total assets (IIRC it's $200 billion, an absurdly high number) from its regulatory provisions; in any case the regulatory provisions are pathetically inadequate. For example, the vaunted "stress test" considers a shareholder run but ignores the possibility of a depositor run.

The underlying causes of the financial crisis were not addressed and now with these smaller banks failing and being bought up by the biggest banks the next big financial crisis is set to be even worse than the last one.

The one good thing about this consolidation is that when there are only one or two megabanks in the US it'll be easier to nationalize it.

 

[Samson]

the vaunted "stress test" considers a shareholder run but ignores the possibility of a depositor run.

How would selling shares in the bank affect the day to day functioning of a bank? Ie, why should the FDIC or whoever care about a shareholder run?

 

[EnglishEdward]

If the shareholder run results in the share price halving, then the
leverage ratio of liabilities to current value share capital doubles.

 

[Samson]

If the shareholder run results in the share price halving, then the
leverage ratio of liabilities to current value share capital doubles.

But the share value should have nothing to do with depositors money. If they are investing the deposits in their own shares ands calling that leverage then there is something wrong.

 

[EnglishEdward]

It is not just ordinary depositors, but also about inter-bank lending.
Remember banks lend money to other banks. If the loan looks in
doubt, the lending bank may seek to convert it into share capital,
but that doesn't work very well if the share price is plummetting.
Once one lending bank decides to pull out, the rest may do so too;
and the demand for repayment of inter-bank loans and the inability
of the bank to get more inter-bank loans collapses the house of cards.

 

[Lexicus]

How would selling shares in the bank affect the day to day functioning of a bank? Ie, why should the FDIC or whoever care about a shareholder run?

I couldn't answer that. I expect the ultimate is that it doesn't really and that's why the banks lobbied to have it in the stress test rather than the thing that actually does matter.

I can say the share price affects how much the CEOs get paid.

 

[Farm Boy]

Absolutely not; in the US the legislation passed after the financial crisis excluded banks with below a certain amount of total assets (IIRC it's $200 billion, an absurdly high number) from its regulatory provisions; in any case the regulatory provisions are pathetically inadequate. For example, the vaunted "stress test" considers a shareholder run but ignores the possibility of a depositor run.

The underlying causes of the financial crisis were not addressed and now with these smaller banks failing and being bought up by the biggest banks the next big financial crisis is set to be even worse than the last one.

The one good thing about this consolidation is that when there are only one or two megabanks in the US it'll be easier to nationalize it.

Yeah, and nationalizing it won't fix it. It will just consolidate it entirely, so one point of discussion can be dropped.

Andrew Jackson had at least two policy positions dead right.

 

[Lexicus]

Yeah, and nationalizing it won't fix it.

Not in and of itself, but the only way to run it at the cost of operation is to make it a public service.

 

[Farm Boy]

If it's centralized, it's going to work like it's centralized. Which is what you're complaining about when it's "too big to fail" and ****ing everyone.

 

[Lexicus]

The problem isn't "centralization", the problem is the financial system sucks quite massive rents from the rest of the economy instead of being economically efficient and costing what it costs to run the banks.

 

[Samson]

This was the UK go at nationalised consumer banking. It was a success in my view:

National Girobank was a British public sector financial institution run by the General Post Office that opened for business in October 1968. It started life as National Giro then National Girobank and finally Girobank plc before being absorbed into Alliance & Leicester plc in 2003.

The organisation chalked up notable firsts. It was the first bank designed with computerised operations in mind; the first bank in Europe to adopt OCR (optical character recognition) technology; the first bank to offer interest-bearing current accounts, and the first bank in Europe to offer telephone banking, operating several years prior to the start of Midland Bank's First Direct service. It is widely credited for shaking up the UK banking market, forcing competitors to innovate and respond to the needs of the mass market.​

 

[Farm Boy]

The problem isn't "centralization", the problem is the financial system sucks quite massive rents from the rest of the economy instead of being economically efficient and costing what it costs to run the banks.

Symptoms follow problems.

People are people.

 

[innonimatu]

Symptoms follow problems.

People are people.

Speaking from somewhere that had wholly public-owned banks for a couple of decades, it massively cut down on the rent-extraction by that sector.
Then my country got infected with the neoliberal virus via EU and "privatized" (literally offered to new-same old local oligarchs) its banking sector. Private debt ballooned since, foreign accounts never balanced again, and financial crisis have happened one after another.

You can argue that in this case political control preceded control of the financial sector, for the oligarchs. But what happened was they got a "get out of exile free" card from the prevailing political ideology of the early 1990s - the "end of history and triumph of liberalism" thing. They got lucky, thought political accidents abroad, and again got in control of the economy here. Since then they have been using their wealth to control the media and the political discourse, same as always.

Breaking that control requires interventions in the media and in finance - taking both away from the oligarchs. Their control over and use of these sectors Is is not a symptom of a political setup where the rituals of democracy serves as a fig leaf for oligarchic control. It is essential for that setup. End this control and you get rid of most of their pernicious effect, of their ability to amass excessive economic power and convert that power to political power.
And the one alternative - which I saw work - is public ownership. It may have some flaws but it was much better than the current setup.