Which big bank will sink first?

Question

Banks manage cash: inbound and outbound and "play" with that cash while they have it. Right?

What is happening now and is going to accelerate is that the inbound cash is drying. Cash out by traders is not in anymore. Small businesses are not sending cash to their banks. Employees are depositing less cash. Airlines, Hotels and many others have stopped depositing cash.

Now let's check the outbound. We are still using cash , sometimes even more (yeah those extra toilet papers were purchased with cash too. lol). Lines at Costco need more cash. Check yourself : In the past couple weeks how much did you deposit and how much did you spend?

On the other hand, with the stocks being cheap, banks had started buying their own stocks. (aka share buybacks). But under pressure from the Federal Reserve, they agreed to stop doing that because they realize they'll soon have a problem.

https://www.cnn.com/2020/03/16/investing/bank-stock-buybacks-coronavirus/index.html

Just a reminder: FDIC cap is $250k per bank per depositor

All these shutdowns and confinements leading to less income and more expenses, aren't they put more pressure on cash? Is anyone else worried about that? Thoughts?

Patricia Steiner · Answer

Banks buy and sell money. They buy deposits by paying interest and then sell the same money by lending it out at higher rates and retaining not only the interest spread but fees.  The banking system is extremely healthy now.  No "big bank" is on the watch list.  There has been one bank failure this year (a small farmers and merchant bank), four in 2019 (again, small independent banks), and none in 2018.  Here's the complete list of bank failures since 2000:

https://www.fdic.gov/bank/individual/failed/banklist.html

It's not banks - but the credit markets aka corporate bond market that is in turmoil and present a real danger:

https://www.cnbc.com/2020/03/12/bonds-the-credit-markets-are-signaling-that-a-problem-is-afoot.html

And, despite all the lessons and regulations stemming from the global financial collapse in 2008, derivatives are still way too dangerous and could create another crisis:

https://www.bloomberg.com/opinion/articles/2019-04-10/derivatives-are-still-too-dangerous

The financial markets are complex; interest rates, cash supply, and bank health are not the issues. If you want something to worry about in the financial world, it's bonds and derivatives.

Bill F. · Answer

@Kevin Lefeuvre

To which banks do you refer? Commercial banks, Investment Banks, Merchant Banks, Credit Unions? What space? Retail banking, business banking, corporate banking, private banking?

Bill F. · Answer

Ok, good to know. And what has lead you to this conclusion?  Do you not have faith in the CCAR and/or its requirements?

It seems that your thesis hinges upon customers pulling their deposits out of banking institutions. Where have you seen that?

The latest data I can see from the Fed (11 Mar) doesn't show a decline in either deposits or assets, but actually a slight uptick.

Kevin Lefeuvre · Answer

Retail banks, as mentioned, those directly dealing with consumers who are no longer depositing and keep taking cash to their last penny.

Jaysen Medhurst · Answer

From the outside, I think Wells Fargo is the most vulnerable, @Kevin Lefeuvre. They're a bloody mess.

I would strongly disagree with your statement that banks "play" with cash while the have it. This is not right. It is, in fact, dead wrong. You're assumptions are based on very old ideas of what a bank actually does (and what's legal for them to do). How does a bank make money? Far too many ways to detail, but here are just a few:

• Fees: all kinds from what you may be charged on a checking account (a few dollars) to what IBs charge their corporate clients (tens of millions of dollars or more).
• Services: This includes everything from servicing your mortgage (large banks rarely, if ever hold these on their own books) to physical check processing to running the backbone of payment services that allows you to buy nearly anything anywhere with just a small piece of plastic you keep in your wallet.
• Money management: Whether for individual (i.e. very wealthy) clients or managed products like a mutual fund.

And so, so many more ways.

Will there be less income for the banks? Most certainly, yes. We are going to go through a difficult patch that will impact every singe part of the economy. This isn't the financial crisis. It's something different. No yet knows what exactly. One key difference right off the top is that this time the catalyst isn't a fundamental issue in finance, it's a global slowdown from COVID-19. This may expose some underlying problems, of course. I hear a lot of talk about risky corporate debt...we'll see.

Some banks will do better than others. Those that aren't holding enough cash could face liquidity issues, which is why the buybacks stopped and the Fed extended the additional cash and started buying up corporate/government paper.

Which big bank will sink first?

Most Popular Reply