What is average duration of assets in bank HTM portfolios? I don't think it's crystal clear that rate cuts solve the issue. It would pare back the pace of deposit outflows as MMF looks less attractive, but it could have the opposite effect in asset prices.
MoM core cpi annualized is expected in the 4-5% range for the next few months.
If Fed panic cut 300bp to stave off a financial crisis in this inflationary regime then it's quite possible the long end actually sells off in an enormous twist steepener. Market would see this as abandonment of the 2% target.
Any bank that has a massive HTM portfolio in comparison to its deposits is in trouble. But virtually no bank is that dumb. SVB was really uniquely incompetent to put itself in that position. The vast majority of the deposits were in company-owned MMDAs. As of the last call report, the ratio of AFS securities to the company MMDA deposits was under 18%. In other words, they had locked themselves into a position in which they couldn't let deposits run off, but deposits were running off. You generally want your HTM portfolio to align more with your longer-term CDs. They had almost no CDs.
This is EXCELLENT and describes better than any other analysis I have yet seen the nature of the challenges for banking, regulators, and of course the Fed.
Well done Steve. I might add that the Federal Reserve dropping the front end rates materially will be massively destabilising for the whole system as inflation expectations could spiral out of control. What matters most is the HTM losses as well as CRE and other credit quality.
This information was circulating from the very beginning. You tweeted about it. Burry shared a chart showing that SVB is an outlier. Doesn't seem to matter. Rational thinking is out the door and the crisis story sells. Yesterday FT ran an article on Japanese regional banks being in trouble.
What is average duration of assets in bank HTM portfolios? I don't think it's crystal clear that rate cuts solve the issue. It would pare back the pace of deposit outflows as MMF looks less attractive, but it could have the opposite effect in asset prices.
MoM core cpi annualized is expected in the 4-5% range for the next few months.
If Fed panic cut 300bp to stave off a financial crisis in this inflationary regime then it's quite possible the long end actually sells off in an enormous twist steepener. Market would see this as abandonment of the 2% target.
Any bank that has a massive HTM portfolio in comparison to its deposits is in trouble. But virtually no bank is that dumb. SVB was really uniquely incompetent to put itself in that position. The vast majority of the deposits were in company-owned MMDAs. As of the last call report, the ratio of AFS securities to the company MMDA deposits was under 18%. In other words, they had locked themselves into a position in which they couldn't let deposits run off, but deposits were running off. You generally want your HTM portfolio to align more with your longer-term CDs. They had almost no CDs.
Steven,
This is EXCELLENT and describes better than any other analysis I have yet seen the nature of the challenges for banking, regulators, and of course the Fed.
I look forward to your future posts!
Cheers,
Ken
Fantastic chart, good analysis!
Well done Steve. I might add that the Federal Reserve dropping the front end rates materially will be massively destabilising for the whole system as inflation expectations could spiral out of control. What matters most is the HTM losses as well as CRE and other credit quality.
This information was circulating from the very beginning. You tweeted about it. Burry shared a chart showing that SVB is an outlier. Doesn't seem to matter. Rational thinking is out the door and the crisis story sells. Yesterday FT ran an article on Japanese regional banks being in trouble.
Thanks, your comments on yield curve steepening as salvation are spot on - though cutting rates will be tricky with inflation clearly still unbeaten.