To The Moon

When I came across the post on US regulator FDIC (see below). it sets me thinking. For sure, US banks or at least the regional ones are still in the woods; not out of it yet. HOW SO? Briefly, The U.S. government is looking to offload nearly $13 Billion of mortgage bonds it amassed from collapsed banks - Silicon Valley Bank (SVB) and Signature Bank following FDIC seizure of the lenders back in March 2023. The mortgage bonds were backed by long-term, low-rate loans made primarily to developers building affordable apartments. The bonds were part of the $114 Billion of assets that the Federal Deposit Insurance Corp (FDIC) picked up when it took over SVB and Signature in March 2023, this year. In April 2023, FDIC outsourced to BlackRock unit Financial Market Advisory to sell the securities portfolios of the two failed lenders. BlackRock managed to dispose the valuable parts of the $114 Billion of assets. As for the remaining mortgage bonds, BlackRock had preliminary discussions with investors about them, but they proved hard to sell. SVB had over $80 Billion worth of investments in mortgage-backed securities (MBS). SVB collapsed due to an asset-liability mismatch, as it had to sell its bond portfolio at a loss to meet depositors' withdrawals amid rising interest rates. The FDIC has also discussed alternatives to cutting the prices on the bonds, including potentially repackaging the debt into new securities. Personally I think FDIC is caught in a LIMBO. It doesn’t want to be stuck with the mortgage bonds. And there are no takers (no fools!). If we take a look at the whole saga from a higher plain, it is very clear that the regulatory departments within the US system are not communicating with each other. The mortgage bonds were issued before 17 Mar 2022, the first time when the Fed decided to embark on its interest hike exercise, from 2022 and into 2023. As we know, before March 2022 — US interest rate was almost 0%. In 2021, SVB's deposits jumped from #102 Billion to $189.20 Billion (sudden surged of $89 Billion) amid the boom in VC business, leaving it awash in excess liquidity. Like any banks out to generate profits, SVB bought > $80 Billion in mortgage-backed securities (MBS) with these “excess” deposits for its hold-to-maturity (HTM) portfolio, at an average yield of 1.56%. Unfortunately, these MBS’s value fell as the Fed increased interest rates 9 times from March 2022 until March 2023, in their endeavour to arrest inflation and bring it under control. At the same time investors began to cash out on the mortgage bonds and buy into long-duration bonds from Fed at a 4%-5%, that is way more attractive in returns compared to the mortgage bond rate of 1.56% Why didn’t the Fed and the FDIC discussed on the possible repercussions as a result of continuous interest hikes raining down on US banking sector? Why didn’t SVB & Signature Bank approach FDIC about their possible fallout that was about to hit them when they were caught in the eye of the storm? It shows how dysfunctional the whole banking community really is. Regulators lacking vision on possible fallouts from their legislations implemented. Regulators not touching based with each other, on a regular basis to fortify the US economy collectively. WHAT ELSE? After reading the above post, I began to have a “bigger” picture, digging out the post I came across on 29 Aug 2023 or was it on 30 Aug 2023 (see below)? Briefly, U.S. regulators plan to force Regional banks with at least $100 Billion in assets to (a) issue debt and (b) improve their living wills to prevent more failures . Banks need to maintain long-term debt levels equal to 3.5% of average total assets or 6% of risk-weighted assets, whichever is higher. Banks are discouraged from holding the debt of other lenders to reduce contagion risk. These requirements will create moderately higher funding costs for Regional banks and will add to their earnings pressure. According to another post, this “new” rule for Regional banks is a scaled-down version of a similar rule for US international banks eg. JP Morgan, Citibank, Wells Fargo etc.. Regulators are accepting comments on these proposals until end November 2023. Its just a ploy for the “rage” to simmer down and for the banks to “accept” the fact and moved on. The industry has 3 years (so generous!) to conform to the new rule once enacted. Based on the new rule, there are already 5 Regional banks that may need to raise a total of roughly $12 Billion in fresh debt, according to the analysts. The 5 banks are: $Regions(RF)$ , $M&T Bank(MTB)$ , $Fifth Third(FITB)$, $Citizens(CFG)$ and $Northern(NTRS)$. Is there any remote chance that US regional banks might be asked to take a stake in the mortgage bonds? What about US international banks eg. JP Morgan, Bank of America, Wells Fargo, Citibank, would they need to prove allegiance and “throw in” their support? KBW YTD index Nasdaq’s regional bank index YTD performance is down -18.81% (see above). Hitting lowest on 11 May 2023 at $76.97. Based on almost-latest price, it has “bounced” back by +19.12% not a bad feat. Still have some way to go before revisiting its high, attained before March 2023. Likely that new legislation will be voted into effect after end November 2023. Life will become increasingly challenging for US regional banks going into 2024 in terms of generating profits. Will banks (regional or international) face headwinds going into Q4 2023 with another interest hike looming? Will banks (regional or international) face economic challenges should US economy slipped into “mild” recession as forecasted (see below)? Using $M&T Bank(MTB)$ YTD performance — one of the regional banks affected by the “new” regulation — for illustration. It bottomed on 12 May 2023 at $111.43. Based on yesterday’s closing price, it has “re-gained” about +12.05% from its YTD lowest. The new rule will probably coming into effect in 2024. And just like that, it will surely “reduced” the bank’s capacity to generation profits. How Will That Affect Investors’ Interests especially in US Regional Banks? For investors still holding onto bank/s stock/s do keep a close monitor so that you could react in time to cash out or add on from/to your portfolio. Rounding off this post with a statement from Bridgewater Associates’ founder Ray Dalio. He said he prefers cash and does not want to own bonds (see below). And just like that, did Ray Dalio’s frank & truthful opinion just made BlackRock’s job at pushing the $13 Billion mortgage bonds that much harder to sell than it already is ? LOL. Do you think US banks’ headwinds are avoidable? Do you think there will one last interest hike in November 2023? Please give a “LIKe”, “Share” and “Re-post” ok. 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