Monday, May 1, 2023

Another Bank Bites The Dust — Brian Romanchuk

 First Republic Bank was forced into a take over by J.P. Morgan Chase, and was yet another Californian victim of bad banking risk management. My bias was that First Republic was not large enough to worry about, so I cannot offer any insights into the event. My main complaint is that this appears to be another bank that blew itself up with interest rate risk, which makes my life of writing a banking primer more difficult. I had always made allowances for bad bank risk management in the United States, but I had underestimated how large an incompetent bank can get....

Bond Economics
Another Bank Bites The Dust
Brian Romanchuk

6 comments:

Matt Franko said...

“ My main complaint is that this appears to be another bank that blew itself up with interest rate risk, ”

Where’s he getting that?

All I’ve been reading in the reporting is that these failing banks are experiencing large deposit withdrawals…

Matt Franko said...

https://www.bbc.com/news/business-65382231

“ First Republic: Shares fall after more than $100bn of withdrawals”

“ The bank said it lost roughly 40% of its deposits in the days following those collapses, as customers rushed to withdraw funds.
It ended March with roughly $104bn in deposits, including $30bn it received from other banks in a rescue plan aimed at shoring up confidence.”

Nothing is “blowing up!”

$2.3T daily in Fed’s RRP at 4.8% … creating financial incentive for USD savers to transfer USD balances from bank deposit accounts into MMMFs accessing the RRP…

Going to probably keep happening as Fed continues to increase RRP rate 0.25% every month…

Matt Franko said...

https://www.kitco.com/news/2023-04-28/Global-money-market-funds-see-big-inflows-in-the-week-to-April-26.html

“ April 28 (Reuters) - Investors put their cash in the relative safety of global money market funds in the seven days to April 26, on worries over a slowdown in global economic activity with the recent decline in U.S. companies' quarterly earnings feeding pessimism.

Data from Refinitiv Lipper showed investors purchased a net $42.68 billion worth of money market funds in the week to April 26, taking the cumulative inflows for the year to a massive $427.4 billion.”

RRP causing bank runs… Fed paying RRP with negative equity while the member institutions cannot report negative equity…

Nothing is “blowing up!” …

NeilW said...

"Where’s he getting that?"

Large deposit withdrawals - possibly to the RRP facility, but the Fed won't reciprocate on the other side because the Bank's asset base isn't earning enough.

Result: boom.

The Fed won't put its money where its regulatory mouth is.

Matt Franko said...

Try to say it without the figures of speech…

https://www.forexlive.com/news/regional-bank-fears-resurface-with-some-down-more-than-15-today-20230502/amp/

“Shares of Metropolitan Bank are down 21% today, PacWest Bancorp down 17% and Western Alliance down 16%.

Metropolitan and PacWest are both at the lowest levels since the panic bottom on March 13.”

Fed raising RRP rate again Weds by 0.25%…

Going to accelerate the rate of USD savings withdrawals from member institutions… “bank runs”…

Art degree morons running amuck…

Matt Franko said...

“ stability creates instability!” … “the sine creates the cosine!”…