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Regional Banks Keep Crashing: Where Things Now Stand


  • The Fed and FDIC took substantial measures on Sunday to stabilize the banking system.
  • These have not quelled the panic; regional bank shares continue to tumble Monday.
  • Here's what happened, what to watch now, and a few places where I see opportunity.
  • Looking for a helping hand in the market? Members of Ian's Insider Corner get exclusive ideas and guidance to navigate any climate. Learn More »

Withdraw or deposit from cash machine

Enes Evren

On Sunday, it seemed like the banking sector might have made it through the worst of the storm. The government announced a series of new measures to provide stability to the banking system. It did so in conjunction with

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This article was written by

Ian Bezek profile picture

Ian Bezek is a former hedge fund analyst at Kerrisdale Capital. He has spent the decade living in Latin America, doing the boots-on-the ground research for investors interested in markets such as Mexico, Colombia, and Chile. He also specializes in high-quality compounders and growth stocks at reasonable prices in the US and other developed markets.

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Comments (123)

Serge d'Adesky profile picture
Ian , Nice article, Well written and easy to understand. That said, I challenge your belief that the regional banks will recover significantly any time soon For them to recover, you'd have to see interest rates revert once again. That would be the signal that the bottom is in.

Now you may think the Fed will lower interest rates on Wednesday. I don't see that. At best they will pause the increases.

Even a pause locks the banks into the following situation:
1) they are getting a low return on long term treasuries 3% ish and slightly higher on mortgage backed assets. Their cost of capital is going to quickly rise to levels close to that, as they are forced to offer higher interest rates to even sub-250k (insured) depositors. What this whole crisis has done is to make every Tom Dick and Harry aware that they can get 4% ish in short term Treasuires with zero risk of default. Granted, not every one can tie up all their cash for 30 day intervals, but many, many people can put 70 to 80% in such vehicles.
2) when depositors flee to bigger banks or short term treasuries, they are forced to recognize the losses on those hidden HTM assets. This will mean negative earnings reports, lower stock prices, poorer reputation, more uncertainty, fewer depositors etc in a vicious circle.

What would fix this situation? The Fed engagng in yield curve control, buying back long term treasuries and selling short term notes. This would reestablish the banks' asset base, improve their financial condition, and eliminate the attraction of short term treasuries as opposed to bank savings and checking instruments. Problem is -> this more likely than not would reflate the economy, the opposite of what the Fed is trying to accomplish. (This is btw a debatable point and too long to get into) But until you see the Fed taking this path, it's too early to go long KRE.

If long term bonds were to continue to rise a lot in value to recover what they have lost, this would also do the trick without any Fed intervention. But that would imply that bond vigilantes foresee a stock market crash or deep recession that sends inflation below 3 percent with the expectation that the recession and low inflation will last many years. Possible? Of course. But it's way too early
to claim victory on inflation, in my book.

Right now, if I were an insurance fund, I would not be loading the books with long term bonds, betting on low inflation. Not with a continued Ukraine war, a recalibration of global trade, and a continued shortage of young workers as baby boomers retire.

i believe the damage is far from over. To the point where I've used options to protect my portfolio if KRE moves lower, using a calendar put spread.
@Serge d'Adesky You are describing a bottom. When every Tom, Dick, and Harry are putting money into 4% money market funds... it's time to move your funds back into the market.
Serge d'Adesky profile picture
@Tinkalicious Tinkalicioius, you are not wrong. But that has not happened yet. It is a process that will take about two to six months. During that time the market could easily move down another 20% to 30%. Note that in past market collapses the market kept dropping even AFTER the Fed had reversed and lowered interest rates. Trying to anticipate that can indeed "catch the falling knife" at its perfect bounce point. That's not what I will do nor what I would advise others to do. It's fine for an individual investor who is a conviction owner of a given equity and willing to weather any 20 to 30 percent drops knowing that the long run prognosis is for 100% to 300% gains.
4Logos profile picture
@Serge d'Adesky Serge the Sage -well said

The comment you responded to, and others, just convince me that the excess has not been wrung out as of yet...it will take time, and a torturous process, as the Fed and the news cycle talks down things that have gotten way to frothy for some time
4Logos profile picture
thanks Ian - nice write up, but let me push back a little

....my understanding is the three headed monster is making whole the recent failed bank(s) depositors over the limit of FDIC....the "backstopping" of the others, is simply a loan on the impaired asset values for short term liquidity to obviate the potential for a run.....

please correct?

....the assets that caused this run are still impaired, and AFS will still have to be marked to market, with now the HTM getting increased scrutiny (like Schwab) and be imputed as a drag on future profits

....and some portion of the deposit base in these regional banks will suffer, causing them to slow down lending because of ratios, and impact NIM going forward as they likely will have to pay more for deposits going forward...
....so until the analysts do their estimates of the long term consequences on earnings of all this, some level of the regionals will suffer share price decline and/or dividend reductions, further depressing stock values

this could lead to a wave of consolidations

....also it should be noted, that this FED lending facility is for only one year, which covers them for just a few periods....so it is effectively kicking this can down the road

the real risk I see I the near term is capital flight to safety to the large "too big to fail" banks, especially for business accounts that have too much slushing around in regionals that likely will not get the favored treatment that SVB got

So the unintended consequences of jacking up rates to fast has exposed some banks and their management's to increased scrutiny going forward, IMHO (both by regulators and the market)....some of these, like SVB, had little or no risk management

If you agree that the big banks will the the beneficiaries, then maybe the larger regionals that are well diversified and not as dependent on just loans for their margins/earnings will be a safer play here?
Good article although agree with others deposit insurance has not been extended industry wide. I believe FDIC assured SVB depositors will be paid in full as their analysis gave them comfort deposits are adequately covered by SVB assets.

Thanks for pointing out SVB, and other's issues with bonds is somewhat self correcting. Flight to quality has driven up bond prices which improves asset values for all banks holding long term bonds. I have not seen this discussed in financial media. They prefer to stoke hysteria.
jerseyvalueinvestor profile picture
@Centvalu indeed that is a very valid thing to consider, kudos to the author! (that long term bonds have spiked up in this fear driven situation)

the trading desks of banks who have these bonds, are getting one last chance to get out.
This is a preview of the coming real estate crash. The small, community, and regional banks are holding Commercial Office real estate bonds. These bonds could destroy an entire small bank's portfolio. The largest asset class is real estate and its future is on the Titanic.
Brad.Clarkston profile picture
@Las Vegas Drcharles No bank worth it's name is buying anything but US treasuries. The bank I work for is a community, it hold 70% 10yr treasuries and 30% 3/6/9 month T-Bills and zero commercial anything.

The only thing you need to know is three banks did stupid things and won stupid prizes, then stupid people panicked.
MarionPolk2017 profile picture
@Brad.Clarkston Then you don't work for a bank. You work for a US Treasury fund. A "bank" makes loans in the community it serves. It doesn't simply funnel local financial resources into government coffers!
Brad.Clarkston profile picture
@MarionPolk2017 That's another way of saying you have absolutely no idea how a bank works.

All banks hold treasuries short/long term by law to stopgap loan investments (bank deposits are different) in case of a run on the bank.

Do you really think any bank holds more than a business worth of cash a day? That's an insane thought made even worse with inflation.
Back into WASH in January after having sold out months ago at 50. I have added to that position a few times since. Just bought TFSL shares back that I had trimmed at 15 and am very long NYCB as well. I have not added to that position as it worries me a bit...
Illuminati Investments profile picture
@Arimnestos I have all of those as well, which probably means they're about to collapse.
Thank you for the analysis.
Unfortunately KRE and QABA are not available in the EU - which regional bank stocks would you consider most interesting ?
S&P Global called the liquidity ratio problem back in early January citing that mounting unrealized losses would make liquidity planning key going forward.

I think regionals are going to be under the microscope. Regulators will focus on their tangible equity each quarter as their their for-sale security portfolios are marked to market. There is probably also going to be more scrutiny on their deposit base, especially if their loan to deposit ratio is rising and they already have declining liquidity.

I don't see how this benefits anyone except the big money-center banks. The fact that the Regional's bond portfolios aren't at risk of default or that the FDIC has backstopped deposits in excess of $250K does little for investors in Regionals.

I'd love to take a speculative in Truist Financial right now, but looking at their unrealized losses and liquidity ratio just makes me wonder if that 6.5% divy isn't a little generous.
Studioso Research profile picture
Ian, I respectfully submit that your (implied) assertion - that all bank deposits over $250k at banks (other than Silicon Valley $SIVB and Signature $SBNY) are now insured - is misleading.

You wrote that "By extending deposit insurance to all deposits, this should greatly reduce the possibility of future such bank runs. Now, clients know that even if their regional bank fails, the FDIC will still be making deposits available to them the next day. This should disarm the fear of a large bank deposit holder losing everything (save $250k) in the event of a sudden run on their own bank."
"In any case, with broader deposit insurance now in place"
"While these funds are now backstopped by the FDIC"

While it is true that deposits over $250k are insured at $SIVB and $SBNY, there is only an *implicit* or perceived guarantee for such deposits at other banks. Therefore, assuming the time/money/hassle costs of moving money over the $250k limit is low, there is the strong incentive to move that money elsewhere, given that the failures of $SIVB and $SBNY reminded everyone of the limits to FDIC insurance.

If the government/FDIC were to announce an *explicit* guarantee for all deposits, then this would be incredibly bullish for regional banks, especially the likes of $FRC. However, there is a massive difference between a perceived implicit guarantee and an explicit guarantee.
I just don't think they shpuld back stop deposits over $250,000.It's just another case of moral hazard in America.
six-oh profile picture

Ridiculous. Guaranteeing to people that they will be able to withdraw their own savings is not a “moral hazard”.

A “moral hazard” would be things like bank bailouts where essentially profits are privatized and losses are socialized and absorbed by the tax payer.
@Constitionalist the FDIC changed from covering 100k to 250k in 2008. That was 15 years ago. By definition of inflation and wealth growth this should be minimum 500k to 1 million for private individuals.

Costs have been dumped on consumers to the extent that people now need 7 figure accounts for retirement. If those 7 figure accounts are exposed then that is where the real risk is.
CapVandal profile picture
It is my opinion after looking at SIVB's 10-k that it can be resolved for less than the shareholder equity of $15 billion, plus bondholders/preferred stockholders $5 billion. Meaning that the FDIC should be able to avoid loss when insuring all deposits regardless of size. The major issue in their capital structure is the unrealized loss embedded in their HTM portfolio, which was $15 billion at 12/31.
And that the combination of deposits insurance plus a lender of last resort should suffice to eliminate runs on banks. It is a proven, workable concept for vanilla community banks. The combination needs to work and we could work backwards to adjust the details to make it work. Fine tuning could include a limit on full guarantees and graduated modest haircuts for large depositors, for example. Like full on he first $250,000. 99% on next $100,000 98% on the next $100,000. Or whatever terms would be a sufficient guarantee without adding materially to the moral hazard.
Guaranteeing deposits is an essential tool in avoiding runs. And reflexive concerns about moral hazard need to be realistically evaluated. I would say that the 2008 capital requirement increases will reduce the cost of insuring deposits. SIVB had a huge securities portfolio, and it had a negligently lengthy duration.
@CapVandal FRC was a well respected bank. It's bonds traded at a persistent premium to similarly bank debt securities. You can point a big finger at Janet 'I'm monitor the situation closely' Yellen. It wasn't until Sunday night she realized ' Opps We will insure all depositors'. She just blew up US banking. SVB was a custodial bank with scores of credit card clearing syndicates . In other words they handled massive dollars of other banks monies. The FDIC couldn't walk away without cross currents of pain. And how about all those local Ca government tax receipts? Poof gone??

What Yellen did was Mickey Mouse stupid. She could have come out Thursday night Friday morning and re assured investors. Too late now. The real Q is where were the regulators? Oh you mean they were too busy researching DEI and climate change? SVB like tripled in two years. That the of growth necessitates strict oversight. Maybe instead of 86 billion for IRS agents the fed should have been doing it's job overseeing the banks??

And now the all the super regionals are in deep trouble. Cut their stock price in half? Then their equity ratio may slip into critically under capitalized. So while all those syndicates I referred to are hanging their contracts out of fear, assets will be sold/dumped. Shades of 1987. Remember the FSLIC mandated they sell all their Junk Bonds by like 4/1/1990 (ish)? The gov does the WORST job at asset sales.They are setting the table for another wipe out
2018 Bank Deregulation sign by trump = risk to the banking system……

Deregulation keeps hurting the American people again, and again…..

Train ride anyone…..
Contrarian Max profile picture
@Maverick 2021 Has nothing to do with why the ultra woke bank failed. Just like the Ohio train issue that was Dem breaking the strike that was demanding more people on the trains for safety.
The Secretary of Transportation called. He suggested a controlled burn.
MWinMD profile picture
Thanks for the succinct explanation of which banks failed, and why.
svalbard10 profile picture
What are your thoughts on TFSL and NYCB?
@svalbard10 I had trimmed mh TFSL position recently and just bought those shares back yesterday. NYCB seems the more vulnerable and while I am overweight all ready, I may well add to that position too. Still a bit worried about NYCB though...
@Arimnestos Agree with your thoughts on NYCB. It may seem like a screaming buy...or as many SA authors would say...back up the truck, but last annual report had their loan to deposit ratio at 116%. Instead I opted to top off my TFC yesterday at $32. Their ratio was 77% with a .77 P/B also. Now those numbers put my truck in reverse!
r Negoro profile picture
Ian , I just want to ask you whether you think depositors guarantee is actually legal and will it be extended for all banks ?
So far there has been no announcement that it will be extended to all banks' depositors.
Jim in Hav profile picture
Everyone and their grandmother is saying this crisis is contained and a huge buying opportunity exists. The contrarian in me is a bit worried.
@Jim in Hav Agreed, it feels too early. I get the sense a few names might already be stabilizing, but others almost certainly have more legs lower to go. And without having true expertise or a crystal ball I don't feel able to pick through them, other than just throwing in my lot with a "trusty" name like USB. During these plunges last year (in other sectors) I was buying first and asking questions later and that did not work out so well...
Convoluted profile picture
@Jim in Hav

Normally, there is a wave of initial relief based on ‘generic’ assurances that are not critically examined. The typical green-back medication proves highly potent-at least initially.

Confusion and ambiguity follow the initial responses.

Trading this typical pattern of human behavior has worked for over a century.
Serge d'Adesky profile picture
@Convoluted Agree wholdheartedly with your psychological analysis. That's why technicals behave like they do. KRE will temporarily rally, then drop a lot further.
I do not invest in any bank.
SouthCarolinaTrader profile picture
Then why are you reading this article and commenting?
@SouthCarolinaTrader Seems to me you're jealous that he may be smarter than you. He probably is reading articles like these to gain more knowledge about banks and the financial system in general. That's exactly what I'm doing. "Knowledge" is power!
Gainz Burger profile picture
Any thoughts on EGBN?
I think people will be disappointed if they believe in the pausing of QT and interest rate increases. This move by the Feds will make it easier to continue. The Fed not only wants inflation much lower, but wants real estate values much lower.
Anlam Kuyusu profile picture
Any thoughts on $HIFS - it also got beaten a bit.
Anlam Kuyusu profile picture
@Ian Bezek That's when the stock was trading at $295. Now it's come down to $241.
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