During their latest episode of the VALUE: After Hours Podcast, Travis, Taylor, and Carlisle discuss Solvency – There Is No Banking Crisis. Here’s an excerpt from the episode:
Jake: A couple of things there. One, I don’t know the exact number. I’d be curious if someone else could ferret this out, but I thought I saw it at one point that there’s, call it, $1 trillion worth of uninsured deposits in banks right now. So, which effectively the Fed has put onto their own balance sheet now. That’s a liability. They’re underwriting another trillion dollars. Where if they have to come out of pocket for that somehow, where is that going to come from? Well, the asset side is going to come out of thin air, like, they print the money to give it to cover that. How is that not potentially going to be inflationary, which just keeps us raising the rates and potentially– We’re going to be in this difficult situation, I think, for a while.
The second thing– So, let’s ignore the panic and the bank runs the psychology side of things, and let’s look at, if you’re a bank and your deposit base, how do you keep your deposit base? You have to offer a competitive interest rate to the clients for them to stay. If you locked in a bunch of really low yielding long-term assets like MBS’s and Treasuries, and someone else lent short term and now they’re rolling back over with a 5%, let’s say, return on their asset side, they can offer a much more competitive rate now to depositors.
So, interactive brokers, let’s take as an example versus maybe Schwab, who might be on the longer side of things. Interactive brokers kept theirs low and now can offer– Well, will absolutely go out of their way to advertise how much more they can offer for cash balances relative to their competitors. And so, how eventually just the economics of being offered five instead of two because of the nature of the way the bank structured themselves, I think, erodes that potential base and how quickly that happens. It can look like a bank run and it doesn’t have to be a panic. It can start slow, and then build up from there, and then it turns into the psychology part of it kicks in, and now people are fleeing. It’s a very– [crosstalk]
Tobias: That’s a phase shit at some point.
Tim: Yeah, it can be a phase shift. I think it’s a fragile situation right now. [crosstalk]
Tobias: Is that what Silicon Valley Bank is? Is that the first of the phase shift that we’re seeing?
Jake: They were probably the most exposed to being super long duration and high interest rate sensitivity along with a very aggregated risk pool of depositors. So, it makes sense why it might be the canary in the coal mine. But it could happen at other banks on a slower, maybe like more played out basis. It wouldn’t surprise me.
Tim: Where you see that is, banks can manage for that. So, going into like, let’s say last year, a lot of them had excess deposits because there was so much cash on hand and interest rates were low and so they had too many deposits and so they’ve actually been surprised at how well they’ve been able to benefit from higher interest rates without paying more. On the deposit side of things, different banks have various advantages. A company like a bank of America or Wells Fargo, they offer services beyond maybe just interest rate, like were talking about earlier, before the show, just you might have your payroll or your estimated taxes in the accounts at those types of banks, and you’re not nearly as rate sensitive. So, I think where you’d see it is not some climactic, massive thing. I think you see, okay, deposit rates are going to go up a little bit.
Where you see that is, banks can manage for that. So, going into like, let’s say last year, a lot of them had excess deposits because there was so much cash on hand and interest rates were low. They had too many deposits. And so, they’ve actually been surprised at how well they’ve been able to benefit from higher interest rates without paying more on the deposit side of things. Different banks have various advantages. A company like a Bank of America or Wells Fargo, they offer services beyond maybe just interest rate.
We were talking about earlier before the show, just you might have your payroll or your estimated taxes in the accounts at those types of banks, and you’re not nearly as rate sensitive. So, I think where you’d see it is not some climactic, massive thing. I think you see, “Okay, deposit rates are going to go up a little bit. Net interest income or net interest margin gets squeezed a little bit. There’s plenty of room for that to happen. That is what’s expected to occur.” The idea that– Don’t forget, they offer CDs, they offer a lot of the banks now, almost all of them have some types of investment accounts associated with it. So, you could keep it in house where they’re still benefiting from it.
Where it takes on a different phenomenon is when it’s a bank run. So, yes, net interest margins should be squeezed. That’s better for everybody. The banks have gotten away with paying too low. I totally agree with that. But a huge difference is, people are trying to say, like, Schwab has an issue there. Well, they have huge, huge liquidity resources that they can use. They have plenty of capital, plenty of access to capital. The thing that we haven’t mentioned, guys, is that if you just take out bank runs and leave all the other factors in play, including credit, including commercial real estate, everything, they’re still making a ton of money. This is not a 2008. It’s not even a 2011.
Profitability is so much higher going into this. The reserves, because of CECL accounting are so much higher reflective of a recessionary environment that hasn’t materialized yet. So, I think we need to separate the bank run aspect of it with a solvency aspect. I think that’s important and I haven’t seen enough of that. I think it’s been a lot of panic the last few days, understandably.
You can find out more about the VALUE: After Hours Podcast here – VALUE: After Hours Podcast. You can also listen to the podcast on your favorite podcast platforms here:
For all the latest news and podcasts, join our free newsletter here.
Don’t forget to check out our FREE Large Cap 1000 – Stock Screener, here at The Acquirer’s Multiple: