The past 24 hours were a bit calmer, but a crisis of confidence is still shaking the banks.
Investors are trying to catch their breath as they await the Federal Reserve's monetary-policy decision.
The Fed faces its toughest choice since it began raising interest rates in the second half of 2021 to fight rising prices, currently at record highs.
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But what complicates the equation now is the Mar. 10 outbreak of a banking crisis, caused by the sudden collapse of Silicon Valley Bank.
The irony is that SVB failed because the bank did not protect itself from the risk of a reversal in market conditions, linked to the upward move in interest rates. SVB had acquired Treasury bonds when interest rates were low.
These assets are among the highest quality because the risk that the borrower -- the U.S. government -- defaults is almost nonexistent.
The problem is that the bank had not anticipated that interest rates would rise. When the Fed began boosting rates to fight inflation, the bank's bond portfolio lost value. Bond prices and interest rates move inversely to each other.
The price slump caused the bank a $1.8 billion loss when it sold some of its bonds to meet customer withdrawal requests. Those customers had suddenly found borrowing difficult, because loans had become expensive when interest rates rose.
Comerica and U.S. Bancorp
SVB (SIVB) then needed to raise $2.25 billion in capital. This announcement caused a run on the bank, forcing regulators to shut down the company on Mar. 10. Since then, investors and depositors have feared that SVB's issues might spread to other regional banks with similar profiles. (The industry term is "contagion.")
The emergency measures regulators have announced have so far failed to restore calm.
It is in this context that the Fed will announce on Mar. 22 its choice between fighting inflation by further increasing interest rates and easing fears of a conflagration in the financial system.
Economists and analysts are divided.
"Don't just do something: sit there," said the Nobel Prize winner in economics Paul Krugman. "The banking mess is, as far as I can tell, sufficient reason for the Fed to pause until we know more."
Larry Summers, the star Harvard professor, says the Fed should raise rates despite the problems within the banks.
"I believe it’s appropriate — at least on current facts — to raise interest rates by 25 basis points," [0.25 percentage point] Summers said.
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While in recent days, observers had focused on First Republic Bank FRC, the prominent investor Michael Burry adds more color to the underlying risk of other regional banks.
In a chart, the Burry shows the relative position of major banks against the percentage of uninsured clients and unrealized losses in their portfolios. Some banks appear to be in a more difficult position.
It appears from the chart/guide, as Burry called it, that Silicon Valley Bank and Signature Bank in New York -- two banks closed by regulators -- were the institutions that had the most uninsured deposits. That means customers holding more than the FDIC insurance limit of $250,000 in their accounts.
First Republic is the No. 3 bank most dependent on wealthy customers. If we look at the banks with more than the median 30% in unrealized losses -- Comerica and U.S. Bancorp have among the next highest percentage of uninsured deposits, according to the chart.
The investor is dubbed 'Big Short' by Wall Street because he became a legend after he successfully bet against the subprime mortgages that caused the 2008 financial crisis.
Moody's Warns on Comerica; US Bancorp Weighs In
At the same time, Comerica's unrealized losses represent 40% of its common equity tier 1 capital, which is a bank's highest-quality capital as it is fully available to cover losses.
This percentage is even higher than 40% at U.S. Bancorp. The unrealized losses represent 40% of First Republic Bank's tier 1 capital but about 80% of the bank's customers are uninsured.
For comparison, unrealized losses constituted between 30% and 40% of common equity tier 1 capital for Signature Bank and 120% for SVB.
"This is a good chart/guide," Burry posted on Twitter on Mar. 17.
Three days later he added: "Hope that chart helped."
As usual as with Burry, the tweets have been deleted.
The hedge-fund manager has added context to the current crisis in terms of the relative position of key banks. First Republic Bank, Comerica and U.S. Bancorp appear to be more vulnerable to bank runs and USB is the one with the most unrealized losses as a percentage of its capital of the group.
U.S. Bancorp has indicated in its annual regulatory filing, SEC Form 10-K, that 55% of deposits were uninsured as of Dec. 31, 2022.
"U.S. Bank maintains strong capital and liquidity positions, along with a disciplined asset liability management framework, to ensure sound balance sheet actions," the Minneapolis bank said.
The bank also indicated that it recorded inflows last week, as opposed to other regional banks, which instead are seeing customers withdrawing their money.
"Our deposit flows are not only stable, we are adding new accounts and new customers every day," a spokesperson for the company said on Mar. 22 in an emailed statement.
U.S. Bancorp also referred to its latest financial filings in which it said that unrealized losses represent about 47% of this tier 1 capital.
Comerica said that "any correlation between Comerica and the recently impacted banks – especially in regard to deposits – is an apples-to-oranges comparison."
The bank added that it "has a more diverse, stable and ‘sticky’ deposit base and we remain well capitalized and highly liquid. In short, it is business as usual at Comerica as we continue to focus on caring for our customers and meeting their financial needs."
After the article was published, Burry posted another message saying that he had not suggested that U.S. Bancorp and Comerica were the next banks to fail.
"There is an article out there saying I was suggesting USB and Comerica were next. That is not true," the financier said on March 22. "One chart, a couple data points - such cannot encapsulate all a bank is."
The chart he shared the previous days seems to be consistent with credit rating agency Moody's, which warned on Mar. 14 that it was considering downgrading Comerica's rating.
"Today's rating action reflects Comerica's high reliance on more confidence-sensitive uninsured deposit funding, its high amount of unrealized losses in its available-for-sale securities portfolio, as well as a relatively lower level of capitalization," Moody's said.
"Comerica's share of deposits which are above the Federal Deposit Insurance Corp.'s insurance threshold is material, making the bank's funding profile more sensitive to rapid and large withdrawals from depositors."
The rating agency continued: "If it were to face higher-than-anticipated deposit outflows, the bank could need to sell assets, thus crystallizing unrealized losses on its AFS securities, which as of 31 December 2022 represented a sizable 38.5% of its common equity tier 1 capital."
U.S. Bancorp has received support from Baird analysts, who called the bank a "high-quality regional bank with little to no downside and ~50% upside over time."
"We are generally constructive on the Union Bank transaction and feel that USB and other superregionals will likely be net beneficiaries from a deposit funding perspective to the extent larger depositors want to mitigate their funding risk at smaller regionals," Baird said.
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