During his recent Q1 2023 Earnings Call, Steve Romick explained why Banks are incredibly vulnerable due to duration mismatch. Here’s an excerpt from the call:
Romick: So, I guess I’ll sum this up and say that the banks that have failed now, I think if we were to rewind a year ago and certainly 1.5 years ago, and if you were to ask regional bank analysts on Wall Street.
If you had asked them for their list of the 5 best regional banks in the country. I would bet you that every one of the analysts would have had at least 1, if not 2 or 3 of the banks that failed on their list of the best franchises in banking, say, sub the globally, systemically important companies.
And so to see them fail so quickly is somewhat disconcerting. And I think it breaths to bear the last question, which is how vulnerable are banks to runs or increases in cost in interest rates.
And I think the answer is that they are incredibly vulnerable because to the extent they have a duration mismatch, which to some degree, every bank does and short-term rates are significantly higher than deposits. It’s really irrational for people to keep any type of deposits at a bank.
You want to swap it into a treasury money market. I shouldn’t give you any advice. There’s a lot of options that one could do to improve their yield and improve the security of their cash holdings that are not deposits at banks.
And so given that I think one of the big facilitators of the bank crisis was the ubiquitous digital services that allow bank runs to happen in a day instead of in weeks or months. I think that observation would cause me to have some level of concern on any bank’s deposit franchise given the current regulatory environment.
The regulatory environment might change. And there are certainly banks that are much, much better positioned than the average or from your generic regional bank in terms of the nature of their deposit franchise and how much of it is sort of operating frictional cash versus something like a savings account. But all of that sort of sums up to. We’ve not done anything with regional banks.
And I’ll just put one pin in the question about Signature, which clearly we didn’t expect that it would be seized. Cumulatively, we’ve roughly doubled our money in signature, including accounting for the sort of wipe out in the last 5 to 10 basis points we held when it was seized.
You can read the transcript, or listen to the entire call here:
Steve Romick – FPA Crescent Fund – Q1 2023 Earnings Call
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