There are banks and then there are systemically important banks. These banks are too-big-to fail. They are required to maintain certain financial buffers to protect depositors from fast moving markets, concentrated bank investments and guard against putting the broader financial system at risk.
These systemically important banks face higher scrutiny and more stringent stress tests. One problem with the most recent round of stress tests scenarios from the Federal Reserve, though — they don’t include higher interest rates.
One only needs to remember the swift failure of Silicon Valley Bank to understand the risk of that omission. Now, the Fed’s stress test hypotheticals were released about two weeks before the run on SVB began. And, despite federal banking regulators using the systemically important exception to rescue depositors, SVB was not labeled a systemically important bank prior to its collapse.
Why is all this important to investors a month after SVB’s closing? Because several systemically important banks, JP Morgan Chase, Citigroup and Wells Fargo, are set to turn in their latest quarterly financial results in the week ahead.
It has been a tumultuous time for banks with the Federal Reserve hiking interest rates, consumers and companies battling high inflation, and the fear factor triggered by the bank runs at SVB, Signature Bank and First Republic Bank last month.
JP Morgan is the most important of the systemically important U.S. banks. CEO Jamie Dimon is the dean of finance executives having steered the bank through the Great Recession. In his annual letter to shareholders released this month, Dimon wrote, “There will be repercussions from (the current crisis) for years to come.” Yet he also cautioned against fanning fear. “Recent events are nothing like what occurred during the 2008 global financial crisis.”
Remember that in banking, your deposit is a liability. The bank’s loans made with your money are assets. Higher interest rates on those loans helps profits. When a bank has a lot more deposit money than it wants to loan out, it can buy other assets, usually US government IOUs and mortgage bonds. As interest rates rise, the real-time price of those bonds drops. (This is what got SVB in trouble.) So a bank has to balance its long term lending with its short term needs from depositors along with the drive for profits from shareholders.
These quarterly reports from these enormous banks will be examined anew for risk, resilience and results.
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