Englund

  Sometime soon, it’ll probably have to subject its stress tests to public scrutiny, highlighting serious flaws in what has become its primary tool for ensuring the resilience of the banking system. Hopefully, it’ll take this as an opportunity for improvement. Failing that, it should reconsider its reliance on the exercise. Stress tests can be immensely valuable:  In 2009, they helped pull the global financial system back from collapse, shedding much-needed light on banks’ balance sheets and restoring the confidence needed to recover.  Less so, though, is the annual process that has followed, in which the Fed tries to assess whether banks can survive hypothetical worst-case scenarios. Bloomberg Editorial 17 January 2025 https://www.bloomberg.com/opinion/articles/2025-01-17/fed-risks-making-stress-tests-on-banking-system-weaker    “Bank stress tests are fun. They are interesting. So is a game of Monopoly. Do not mistake either for reality,” https://englundmacro.b...

US remained vulnerable to the same combination of problems that caused major recent crises,  including the 1980s savings and loan collapse,  https://englundmacro.blogspot.com/2021/10/before-1986-act-s-were-primary-source.html https://englundmacro.blogspot.com/2021/04/financial-crises-get-triggered-about.html S&L Savings and Loans Banking Crisis Rolf Englund the 2008 financial crisis  https://englundmacro.blogspot.com/2024/09/us-counts-its-bank-bailout-billions.html and the 2023 regional bank runs.  FDIC Says It Should Have Done More to Supervise First Republic Bank https://englundmacro.blogspot.com/2024/09/worst-performance-for-stocks-since-2023.html The Silicon Valley Bank Rescue Changed Capitalism https://englundmacro.blogspot.com/2023/03/the-silicon-valley-bank-rescue-changed.html In each case, deregulation and looser supervision enabled the rapid growth of new products and nonbank financial companies that later proved to be riskier than anticipated. Financial...

 Switzerland might have averted the collapse of Credit Suisse, its second largest bank, if the country’s financial regulator took a harder line overseeing it and enforcing capital rules, a parliamentary report found Friday.  One of the key recommendations: possibly more capital at the country’s remaining big bank, UBS. The conclusions came in a sweeping report meant to be Switzerland’s ultimate lessons-learned look at an event that threatened the core of the country’s identity as a well-run, financial safe haven. Wall Street Journal 20 December 2024 https://www.wsj.com/finance/banking/what-switzerland-should-have-done-to-save-credit-suisse-5d96ef3c Credit Suisse gold https://englundmacro.blogspot.com/2023/03/credit-suiss-gold.html

  https://www.bloomberg.com/news/articles/2024-11-15/credit-suisse-survived-a-bank-run-only-to-succumb-to-scandal Credit Suisse gold https://englundmacro.blogspot.com/2023/03/credit-suiss-gold.html Gamla Mor Anna och bankernas affärsmodell https://englundmacro.blogspot.com/2023/03/gamla-mor-anna-och-bankernas.html   The Bank Run of 2023 Could Easily Happen Again - Bill Dudley https://englundmacro.blogspot.com/2024/04/the-bank-run-of-2023-could-easily.html Tillbaka till Rolfs länktips 18 November 2024 https://englundmacro.blogspot.com/2024/11/rolfs-lanktips-18-november-2024.html

  Financial Stability Board says life insurers and REITs also at risk from the combination of funding vulnerabilities and unrealized losses In a new report released Wednesday, FDIC Quarterly 2024 Vol 18 No 3   the Financial Stability Board, an international body of global regulators, delved into the issues that brought about the collapse of Credit Suisse, the failure of SVB, Signature and First Republic, and the liquidation of Silvergate. Steve Goldstein MarketWatch 23 October 2024 https://www.marketwatch.com/story/theres-still-a-weak-tail-of-banks-prone-to-the-runs-that-brought-down-svb-and-credit-suisse-regulators-warn-4c1dec58 Shadow Banks; Global supervisors at the Financial Stability Board call these non-bank financial intermediaries https://englundmacro.blogspot.com/2022/11/banks-need-to-worry-about-shadow-banks.html JPMorgan to take over First Republic  https://englundmacro.blogspot.com/2023/05/jpmorgan-to-take-over-first-republic.html Tillbaka till Wall Street och...

Finansinspektionen, FI, det osäkert om alla nischbanker klarar kravet för stabil finansiering, enligt Di:s beräkningar. I måndags förra veckan publicerade FI ett ”rättsligt ställningstagande” där det framgår hur banker ska beräkna det som heter stabil nettofinansieringskvot, NFSR, vilket är ett krav på tillräckligt stabil finansiering Fi förklarade då att bankerna vid beräkningen av NSFR endast får inkludera 50 procent av den obundna inlåning som kommer via inlåningsplattformar (se faktaruta).  Detta eftersom sådan inlåning är en mer flyktig finansieringskälla än exempelvis traditionell inlåning, av vilken bankerna får inkludera 95 procent i NSFR. Bankanalytiker som Di har talat med är samtidigt av uppfattningen att merparten av nischbankerna fram till nu har räknat in 90 procent av plattformsinlåningen i sitt NSFR-mått. FI bekräftar också att ”många av instituten i dag tillämpar en mindre strikt faktor” än den korrekta på 50 procent.  Martin Rex DI 7 oktober 2024 https://www....

Sixteen years after Lehman’s collapse Unlike in the US, where public funds were repaid years ago, European governments continue to nurse losses on stakes in some of their largest banks. Even with Commerzbank stock at a 10-year high, the government is still sitting on a €2.1 billion loss. Under Treasury Secretary Henry Paulson, the federal government forced the biggest US banks to accept state funds as part of its Troubled Asset Relief Program (TARP) in October 2008.  Some banks went back for more but within two years the government had been largely repaid, in many cases even making a profit.  When it sold its final shares in Citigroup Inc. in December 2010, the Treasury Department trumpeted a $12 billion realized gain --- “So long as the music is playing, you’ve got to keep dancing. We’re still dancing.”  Chuck Prince, former chairman and chief executive of Citigroup, interviewed only a month before the music stopped 2007.  Citigroup chairman Chuck Prince and ABBA: D...

  For those on Wall Street clinging to the bull case on the economy, life is getting harder. Bond investors — historically dubbed the smart money, rightly or wrongly, for their propensity to foresee a shift in the economic direction — priced in faster interest-rate cuts. Bloomberg 6 September 2024 https://www.bloomberg.com/news/articles/2024-09-06/wall-street-traders-suddenly-converge-on-economic-hazards-ahead Silicon Valley Bank  https://englundmacro.blogspot.com/2023/03/silicon-valley-bank-is-just-tip-of.html First Republic Joins List of Biggest-Ever Bank Failures Collapse is second-largest, behind Washington Mutual Washington Mutual  When the subprime bubble burst, the bank’s fortunes quickly turned.    It still stands as the largest bank failure in U.S. history. https://englundmacro.blogspot.com/2023/05/jpmorgan-to-take-over-first-republic.html

  Banks are sitting on around $517 billion in unrealized losses on their balance sheets, according to data from the Federal Deposit Insurance Corp.  The bank regulator said in May the amount has been “unusually high” for nearly 2½ years. Most of that is because banks bought government bonds such as Treasurys and mortgage-backed securities when interest rates were low and banks were flush with customers’ deposits during the pandemic.  When the Federal Reserve started to raise rates in 2022, the carrying value of these bonds declined. (Bonds sell at a discount when rates go up to offer investors higher yields.)  Wall Street Journal 10 July 2024 https://www.wsj.com/finance/banking/bank-earnings-season-charts-4fa221cc ‘Silicon Valley Bank is just the tip of the iceberg’   https://englundmacro.blogspot.com/2023/03/silicon-valley-bank-is-just-tip-of.html Hans Wallenstam uppmanar Riksbanken att fortsätta att sänka räntan https://englundmacro.blogspot.com/2024/07/hans-w...

  Bank stress tests are essentially worthless exercises after the Federal Reserve gave passing grades to all 31 institutions it tested. The Fed’s stress tests released late Wednesday showed U.S. banks passing after absorbing $685 billion in hypothetical losses, in a severe global recession scenario with a 40% decline in commercial real estate prices and a 36% decline in house prices. A separate test where five large hedge funds collapse, found losses of between $70 billion and $85 billion. “Sadly… the reality remains: a) regulators plan to address the next financial crisis by understanding and planning to fight the last one, b) financial crises keep repeating, but no two crises are alike, and c) risk is not a constant, it is constantly changing dynamic,” he said. Here’s what he says makes stress tests meaningless: “Consequences – you can set scenarios, but in the real-world unanticipated consequences make it impossible to fully model outcomes,” Steve Goldstein MarketWatch 27 June 2...

Sheila Bair (Chair) Joyce Chang, Charles Goodhart, Lawrence Goodman, Barbara G. Novick, and Richard L. Sandor October 16, 2023 https://www.centerforfinancialstability.org/research/CFSMonPaper101623.pdf

Your Deposits Regulators need to address the growing links between traditional banks and the nonbank financial institutions that are increasingly taking over their business. Banking is an inherently fragile endeavor. By funding long-term investments with money they’ve promised to pay back at short notice, banks expose themselves to the risk that customers will demand their cash back all at once.  Since such runs can cripple the economy, governments provide backstops (such as deposit insurance and central-bank loans) and impose regulations aimed at ensuring resilience. Other financial institutions, however, persistently seek to replicate banking without the regulation.  It’s easy to see how things could go wrong. In a crisis, the shadow banks could place overwhelming cash demands on banks, requiring officials to step in with emergency liquidity — much as happened during the onset of the coronavirus pandemic in 2020, or with UK pension funds in 2022.  If the available colla...

Michael Ohlrogge Ohlrogge, an associate professor at New York University Law School, argues that when banks fail, the F.D.I.C. is not resolving them in the manner that is least costly to its Deposit Insurance Fund. If he’s right, then the F.D.I.C. is going against the explicit instructions of Congress, so this is kind of a big deal.  My impression is that F.D.I.C. staff members believe they are complying with Congress’s instructions, so this is a case of two sides looking at the same facts and drawing very different conclusions. The issue Ohlrogge raises is how the F.D.I.C. handles uninsured deposits. But in a vast majority of bank failures, the F.D.I.C. approves a resolution in which the uninsured depositors don’t lose a penny. They are treated exactly as well as insured depositors.  This is typically done by finding another bank that is willing to buy the entire failed bank, which entails purchasing all of its assets (such as loans) and assuming all of its liabilities, inclu...

The relatively small bank, the first to fail this year Republic First  had about $4 billion in deposits at the end of January.  Founded in 1988, Republic First was smaller than the midsize banks that collapsed last year — including First Republic Bank and Silicon Valley Bank, whose assets each topped $200 billion.  The F.D.I.C. expects the cost to the Deposit Insurance Fund to be $667 million. New York Times 26 April 2024 https://www.nytimes.com/2024/04/26/business/republic-first-bank-failure.html The Bank Run of 2023 Could Easily Happen Again Bill Dudley Bloomberg 1 april 2024 https://englundmacro.blogspot.com/2024/04/the-bank-run-of-2023-could-easily.html

PBB, as it’s known, is heavily exposed to US commercial real estate and struggling to address a problem all too common among banks: Investors are worried that it might not have enough equity to absorb its potential losses.   Equity is the bedrock of the financial system, the capital that shareholders provide to make loans and to take the first hit if things go wrong. Without it, banks are insolvent. They lack the resources to pay depositors and other creditors. Yet PBB insists it’s still well capitalized — and by regulators’ preferred measures, it is. The bank reported a Common Equity Tier 1 Ratio of 15.7% as of Dec. 31, well above the regulatory minimum of 8.4%. How can a bank be so obviously in trouble while officially fine?  The answer is in the way regulators evaluate capital adequacy. Pretty much every failed bank in recent years had an excellent risk-weighted capital ratio right up to the end.  Silicon Valley Bank’s Common Equity Tier 1 ratio was 12% in Decembe...

 Regulators have yet to address the system’s vulnerability to sudden depositor withdrawals. The SVB debacle exposed three weaknesses.  First, depositors pulled their money much faster than assumed by requirements such as the liquidity coverage ratio, intended to ensure that banks have enough cash and easy-to-sell assets to survive 30 days of withdrawals.  Second, the Federal Reserve couldn’t provide sufficient emergency discount-window loans, because banks hadn’t pledged enough collateral to the Fed.  Third, uninsured depositors had ample reason to run, because they couldn’t be sure the government would make them whole: Such bailouts can happen only after a bank fails and regulators judge that the situation is bad enough to invoke the “systemic risk exception.” The Fed can require banks to pre-pledge enough collateral (such as securities and consumer and commercial loans) to cover all their runnable liabilities.  The central bank would be willing to lend against...

Supervisors are looking at what banks are doing to mitigate potential losses, how they are reporting risks to their boards and senior management, and whether they have enough reserves and capital to handle CRE loan losses, said Michael Barr, the Fed’s vice chair for supervision With more office and apartment buildings headed for distress, the central bank issued guidelines on Thursday for its annual stress tests that put extra emphasis on identifying risks in commercial property. Barr is leading efforts to tighten scrutiny after the Fed faced criticism by its inspector general after the failure of Silicon Valley Bank a year ago.  Supervisors’ mid-size bank examination approach as applied to SVB “did not evolve with SVB’s growth and increased complexity,” and did not effectively transition the firm to the large bank examination process, according to the inspector general office. Bloomberg 16 February 2024 Regulators Eye Commercial Real Estate Risk, Bank Downgrades, Fed's Barr Says -...

Lenders with a lot of uninsured deposits should be required to have high-quality assets ready at the Fed’s emergency lending facility. Bank runs remain thankfully rare, largely because deposits up to $250,000 are guaranteed by the Federal Deposit Insurance Corp.  Yet customers with larger, uninsured balances are still prone to flee at signs of danger.  Those deposits amounted to almost 45% of the total as of 2022. (In NYCB’s case, the latest figures were $22.9 billion, or 28%.)  Some uninsured deposits are in business accounts used to pay workers and suppliers; it’s the other, nonoperational accounts that tend to be flightiest in a crisis. The Federal Reserve’s traditional tool for this task is the discount window. The problem is that the window has acquired a stigma over the years, making banks reluctant to access it for fear of spooking creditors, depositors and investors.  Instead, they’ve turned to alternative lenders such as the Federal Home Loan Banks, public-p...

Bank of America’s big bond losses likely widened in the current quarter due to a sharp increase in market interest rates. Bank of America was sitting on $105.8 billion of losses on a $614 billion portfolio of mostly agency mortgage securities at the end of the second quarter.  That loss could have widened by $10 billion to $15 billion in the current quarter assuming no major rate moves by the end of this week, Barron’s estimates.  MarketWatch 28 September 2023 https://www.marketwatch.com/articles/bank-of-america-bond-losses-c09aa0f6 It was duration that precipitated the regional bank failures in March, as banks that had heavily invested in longer bonds were unable to access liquidity without taking losses. John Authers Bloomberg 28 September 2023 https://englundmacro.blogspot.com/2023/09/rounding-up-usual-suspects-after-new-low.html The speed of the current selloff in U.S. government debt  i s raising the possibility of renewed trouble for banks  and other existing h...

  27/9 Mulen morgon. Måhända det blir en surmulen öppning i Stockholm. 10-Year Treasury Yield Climbs Above 4.6% Den svenska tioårsräntan brakade på torsdagen med viss kraft igenom 3 procent. https://www.di.se/nyheter/tioarshogsta-for-den-svenska-tioarsrantan/ ‘Extreme fear’ has returned to the U.S. stock market Published: Sept. 27, 2023  https://www.marketwatch.com/story/extreme-fear-has-returned-to-the-u-s-stock-market-e317fc3b Market Extra Entire U.S. Treasury yield curve moves toward or above 5%, raising risk something may break The speed of the current selloff in U.S. government debt is raising the possibility of renewed trouble for banks and other existing holders of Treasurys, which tend to get hit hardest by rising yields.  TD Securities strategists Gennadiy Goldberg and Molly McGown said that a persistent selloff in bonds “increases the risk of ‘breaks’ similar to” those seen during the U.K.’s  liability-driven investment crisis  of last year and this ye...