To The Moon

The headline caught my eyes (see above).

After reading the news article, I don’t know whether to laugh or cry.

Incompetence seems to be the common denominator amongst all the US governmental agencies that are supposed to support United States into the next century.

What Happened? (** = personal thoughts)

• As a result of FDIC’s executive decisions to manage the 3 runaway banks - (a) Signature, (b) Silicon Valley and (c) First Republic - $16 Billion of FDIC total funds of $128.2 Billion (as of end 2022) have been used.

• FDIC is now trying to “re-coup” the deposit insurance fund’s drained as a result of their “hasty” and “ill-thought” actions.

• ** “Ill-thought” because FDIC’s actions did not bring stability to US regional banks. Deposits are still being withdrawn. The regional banks’ stock prices are still extreme volatility.

• This “special levy” is targeting big banks with high levels of uninsured deposits.

• When implemented, the “new” levy would impact the largest 113 US banking organizations and banks with > $50 Billion in assets - “forcing” them to foot > 95% of the bill.

• At the same time, the “new” rule effectively exclude most small banks from the special levy.

• ** Is this FDIC way of letting smaller banks off-the-hook & allows them to continue “their wrong ways of running business in risky manner”?

• Wasn’t “risky” investments (in the face of rising interest) the main cause that led that to the 3 banks’ demise?

• ** Instead of getting to the root issue and resolve it, the FDIC is keener to cover the “potholes” instead. LOL!

Special Levy - Formula.

• Every bank would be charged a fee of 0.125% annually on all uninsured deposits above $5 Billion (as of end 2022).

• After amount is calculated, each bank’s total amount will be paid in 8-quarterly-instalments. First instalment will be in Jun 2024. Last instalment will be in Mar 2026.

• FDIC is “caring” to structure into 8 instalments to ensure liquidity is maintained in US banking system. How thoughtful!

One-Off Levy - IMPACT!

Based on Credit Suisse’s analyst Susan Roth Katzke initial analysis,

• The top 14 US lenders will need to fork out an estimated “extra” $5.8 Billion a year.

• This would effectively “erode” each affected financial institution’s earnings per share by a median -3%

• $JPMorgan Chase(JPM)$ is estimated to pay $1.3 Billion levy. Each quarter $162.5 Million.

• $Bank of America(BAC)$ is estimated to pay $1.1 Billion levy. Each quarter $137.5 Million.

• $Wells Fargo(WFC)$ is estimated to pay $898 Million levy. Each quarter $112.25 Million.

Why FDIC’s Levy Is Flawed?

• It hurts profitability and competitiveness of US banks, especially in international market.

• FDIC's levy will reduce a banks' top line by lowering their net interest income & fee income.

• It will inflate a bank’s bottom line by increasing their expenses & taxes.

• This creates a disincentive for a bank to grow beyond $5 Billion in uninsured deposits. Eventually limiting a bank’s ability to lend and innovate.

• This levy undermines US's standing as an International Financial Hub, as foreign banks may gain an advantage over their US counterparts and/or withdraw from US market altogether.

Separately this “flawed” levy also raises questions about FDIC’s :

• Effectiveness (as an autonomous authority)

• Sustainability of its deposit insurance system

• Ability to legislate and supervise US Banks.

What’s Next?

On Thu, 11 May 2023, the FDIC board voted 3-2 to issue the proposal. The body's two Republican members voted against the proposal.

Public has 60 days to comment on the “special levy” proposal before the board can vote to adopt it.

My Personal View:

• This proposal only serves to penalize well-managed banks versus those who weren’t and have since “taken into custody” by FDIC.

• Why is FDIC not going after the collapsed banks’ CEOs and claw back the millions of dollars of salaries earned leading right up to the banks’ collapse?

• Is the concept of “accountability” so foreign a concept?

• As mentioned above this levy is only going to cover the monies expended during the 3 banks’ crisis.

• It does not resolve the problem of “bad governance” by the banks’ management team.

• Shouldn’t FDIC look inwards, improve in their supervision & resolution of banks, as well as its coordination with other regulators?

• Shouldn’t FDIC re-examine the current saga and come up with a “foolproof” approach should something similar happens in the future?

• Shouldn’t there be an enhancement in banking rules & regulations where customer needs to co-sign and accepts the inherent “dangers” that comes with having deposits > $250,000?

• Shouldn’t bank-run be part of US banking sector annual bank-wide simulation so that in future no one panic should similar incident really happens?

• The reason why US is “great” because its supposed to have “great” talents. Why is the FDIC not taping into such talents? Mystery of the mind.

Levy aside, we should be “careful” about US bank stocks, knowing that its top line and bottom line will be affected every quarter until after Mar 2026?

• Do you think the proposal will impact the bigger banks & its profitability?

• If you have to, do you think you would vote for or against the proposal?

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