The Financial Riddler 5-10-23

Not knowing is not knowing.

Please: Terry Savage, at terrysavage.com, and I are collecting Social Security horror stories. If you have one to share, please email it to terry@terrysavage.com.

1. Why are uninsured depositors of non systemically important banks maintaining their deposits in such banks given that the Treasury Secretary says their deposits will not necessarily be protected if their bank fails?

   a. They think the Treasury Secretary is bluffing.

   b. They are attracted by the higher interest rates being paid by the small- and medium-fry banks.

And the answer is …

The first answer seems unlikely. The Dood-Frank legislation makes it much harder to legally extend deposit insurance to the little guys. The little guys are paying several hundred more basis points of interest to retain their deposits. This means three things. First, we, the taxpayers, are providing a massive subsidy to the big banks who can pay far less for deposits, but invest at the same returns as the little banks. Second, the CEOs, CFOs, accountants, rich folks, and other uninsured depositors in small and mid-sized banks are, frankly, out of their minds. You don’t risk vast sums of money, which is critical to your business or future living standard, in order to earn, say, 300 more basis points. There are other ways to manage cash and earn the higher return. The mutual fund companies are missing a profit opportunity by not marketing cash mutual funds that hold just cash — funds that come with debit cards, unlimited check writing, and access via ATMs. A company that’s now at risk could avoid banks altogether and still earn market interest on funds they need for liquidity by moving money between a short-term Treasury bill mutual fund and a cash mutual fund. Mutual fund companies should also move to take over mortgage and small business lending by issuing closed end funds that entail real time disclosure of the underlying assets. This will make closed end fund shares highly liquid.

2. In 2008, there were 7088 FDIC-insure banks, How many were at the end of last year?

   a. 11,321

   b. 8616

   c. 4135

   d. 3777

And the answer is …

The answer is 4135 and dropping!

3. Has banking become more concentrated over time?

   a. Yes

   b. No

And the answer is …

In 2000, the largest five banks had 28 percent of all bank assets. Today’s figure is 46 percent.

4. By what percentage has PacWest Bank share price fallen this year?

   a. Less than 25 percent

   b. Between 25 percent and 50 percent

   c. Between 50 percent and 75 percent

   d. More than 75 percent

And the answer is …

Just under 80 percent. Is there a clear reason that this bank, and Western Alliance Bancorp too, appear to be heading for their financial graves? PacWest says not to worry. But it has lost about one fifth of its deposits since SVB went down. Yet, one quarter of its deposits remain uninsured. Yes, that’s below the banking system’s overall ratio and, yes, PacWest says it has enough cash to cover all its uninsured depositors. But doing so could trigger selling more potentially overvalued assets (i.e., recognizing more losses) due to liquidity ratios the bank would need to meet. I can’t tell from PacWest’s public statement what’s going on with the bank. Every sentence raises questions that would make a remaining uninsured depositor concerned and short sellers licking their lips. The big questions are a) Is PacWest one of the 2300 plus banks that is currently insolvent on a marked to market basis? and b) Is it in worse shape than the others or is it being picked off by short sellers who are hunting in a pack?

5. What’s the outlook for small banks according to Apollo’s Torsten Slok?

“Bank credit conditions are tightening, and the negative impact on the economy from the ongoing banking crisis is going to be significant because small banks account for 30% of assets in the banking sector and 40% of lending, and small banks are facing three headwinds from 1) higher funding costs, 2) lower asset prices because of higher interest rates, and 3) more regulatory scrutiny.”