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Bank credit rating downgrades and warnings

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Anonymalous
Valued Contributor

Bank credit rating downgrades and warnings

https://www.wsj.com/amp/articles/bank-stocks-slide-after-moodys-downgrade-8c598a0

https://www.washingtonpost.com/business/2023/08/08/moodys-banks-downgrade/

https://www.cnn.com/2023/08/08/investing/moodys-credit-ratings-us-banks/index.html

https://finance.yahoo.com/news/moodys-downgrades-10-us-banks-032059270.html

The first two might be paywalled.

 

Summary: Moody's downgraded the credit ratings of 10 banks by one notch, gave notice that 6 more are under review, and for 11 others gave a negative outlook. While the biggest bank to get an actual haircut is M&T, the ones under review include much larger and more familiar names like U.S. Bancorp (parent of U.S. Bank and Elan) and Truist, and those given a negative outlook include Capital One, PNC, Citizens, and 5/3. Stocks tumbled across the banking industry as a whole.

 

Moody's says the banks "remain vulnerable to nervous depositors and investors, risks from higher interest rates, and a weakening commercial real estate market." Which is basically the same thing that took down Silicon Valley, Signature, and First Republic banks -- they locked up too much money in long-term investments like 30 year treasuries or mortgages, and as interest rates rose and new bonds were issued with much higher rates, the resell value of those long term investments plummeted. So when investors got scared and started pulling out their money, they couldn't cover it. They also suggest that customers have shifted more of their money from no-interest to interest-bearing accounts, which hurts profits.

Message 1 of 12
11 REPLIES 11
Lou-natic
Established Contributor

Re: Bank credit rating downgrades and warnings


@Anonymalous wrote:

They also suggest that customers have shifted more of their money from no-interest to interest-bearing accounts, which hurts profits.


One of the reasons the Fed raises rates is to encourage saving...These banks really are dumb. Anybody that didn't have their head under a rock have been screaming about the incoming inflation and interest rate hikes and were promptly ignored (remember "transitory inflation"...) and everybody bought into it because the lie was easier to swallow than the truth. Oh well.




3/3/24
Message 2 of 12
AndySoCal
Valued Contributor

Re: Bank credit rating downgrades and warnings

@Anonymalous    The bank failures are for different reasons but the end result was the same.  The reason(s) for the failure are different

SVB-  The title of article says enough https://www.usnews.com/news/economy/articles/2023-03-28/fed-official-svb-failure-a-textbook-case-of-... 

 Signature Bank - https://www.bloomberg.com/news/articles/2023-03-14/signature-was-seized-after-leaders-caused-crisis-... 

First Horizon -  After the SVB failure some of the bank's largest depositer got nervous. The telling sign in the article is the percentage of uninsured deposits (over 250k) https://www.investopedia.com/what-happened-to-first-republic-bank-7489214 

 

All that said not sure what the logic Moody's was using M&T bank capitalization ( equity / total assets) is very good. All the banks are profitable and added to the their equity. Do not rememember if Moody's made any comment on capitalization and what they considered enough.  The big concern for banks is the corporate real estate loans. This needs to evaluated on what percentage of the loan portfolio is invested in corporate real estate loans.  Banks should have a well diversified loan portfolio. If you want to see how well a bank or credit unionis capitalized goto Depositaccounts.com  search for the bank or credit union and click on health.

 

 

 

 

 

 

 

 

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Message 3 of 12
Anonymalous
Valued Contributor

Re: Bank credit rating downgrades and warnings


@AndySoCal wrote:

@Anonymalous    The bank failures are for different reasons but the end result was the same.  The reason(s) for the failure are different

SVB-  The title of article says enough https://www.usnews.com/news/economy/articles/2023-03-28/fed-official-svb-failure-a-textbook-case-of-... 

 Signature Bank - https://www.bloomberg.com/news/articles/2023-03-14/signature-was-seized-after-leaders-caused-crisis-... 

First Horizon -  After the SVB failure some of the bank's largest depositer got nervous. The telling sign in the article is the percentage of uninsured deposits (over 250k) https://www.investopedia.com/what-happened-to-first-republic-bank-7489214 

 

No, all the collapses had roughly the same cause.

 

The U.S. has a fractional reserve system, which means as soon as you deposit money, the banks lend most of it out. If all (or even a small percentage) of their depositers want their money back now, the bank simply doesn't have the cash on hand to fulfill those commitments. There is no bank in the country that can survive a sufficiently large bank run, without the backing of the Federal Reserve. That's why so much of this is about psychology. Bank runs aren't based on hard numbers on asset sheets, but on the perception that the bank is in trouble.

 

That's the root cause, but the more proximate cause of this latest crisis is rising interests rates. A lot of banks invested in long term assets when interest rates were low. Since people can now buy new bonds at much higher rates, the resale value of those older long-term bonds and other investments has dropped significantly. It's a double whammy, because not only will they run out of cash sooner when people start leaving, but investors realize that, which makes them more skittish.

 

This is what killed Silicon Valley Bank. Senior management did apparently see the collapse coming, and tried to get their own money to safety, which at the very least is bad optics, and is probably illegal. But that's not what caused the problem. The problem was they locked up too much money in long term treasuries and the like, which dropped in value as interest rates rose, and when they tried to sell some to ensure they had sufficient reserves on hand, this caused a panic. None of this was mismangement. In fact, they were following the regulator's playbook precisely. Their money was invested in low-risk, high quality investments (treasuries), their reserves met all applicable requirements, and even trying to liquidate some assets at a loss to cover depositers who decided to leave was the responsible thing to do.

 

Blaming the bank is just scapegoating. SVB were just following the advice of the Fed, who promised to keep interest rates low. So they were caught with their pants down when the Fed did a complete 180. This made many, many banks vulnerable to a bank run, it's just the investors at SVB panicked first. The root problem is the underlying system guarantees that 100% of banks in the U.S. are technically insolvent.

Message 4 of 12
AndySoCal
Valued Contributor

Re: Bank credit rating downgrades and warnings

@Anonymalous I would disagree with your statement that the failures were for the same reason. SVB  Had over 21 billion dollars in long term bonds. Bought when interest rates were at its lowest which means the price of the bonds was at or near its highest.  Simply they bought high and sold low.  Simply when rates increase bond prices decrease the reverse is true when interest rates decrease. No professional bond fund portfolio manager would have made these mistakes in investing they made.  The internet and social media hastened SVB demise. Why is it the regulators out of the San Francisco office could not see what Chase CEO saw as a problem among others. The regulators had been at SVB  shortly before the problems started and did not see anything wrong. Your observation about how SVB management acted in regards to their own stock is also under investigation. It will be interesting to see how these investigations turn out. 

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Message 5 of 12
Anonymalous
Valued Contributor

Re: Bank credit rating downgrades and warnings


@AndySoCal wrote:

@Anonymalous I would disagree with your statement that the failures were for the same reason. SVB  Had over 21 billion dollars in long term bonds. Bought when interest rates were at its lowest which means the price of the bonds was at or near its highest.  Simply they bought high and sold low.  Simply when rates increase bond prices decrease the reverse is true when interest rates decrease. No professional bond fund portfolio manager would have made these mistakes in investing they made.


Yes, I explained how bonds reacts to interest rates.

 

Hindsight is 20/20. It's easy to say buy low and sell high, if you know when you've reached a high or low. But we don't know, until after it happens. My argument is that the Fed was swearing up and down that near-zero interest rates would effectively last until perpetuity. If that panned out, the bank wouldn't have been buying at a high. In fact, eking out the maximum rate would have been the smartest move.

 

In that case, who's to blame? The bank, who essentially did what the regulators who have coercive power over told them to do? Or the Fed, created the system with all the inherent vulnerabilities, and who completely flip-flopped and took action that left the banks who followed their advice in dire straights?

Message 6 of 12
AndySoCal
Valued Contributor

Re: Bank credit rating downgrades and warnings

@Anonymalous  There are many blame points in my opinion.  I am of the opinion that the regulators did not do their job correctly. The related problem to the bond market investing is SVB as March of 2023 had over 80% of their deposits were uninsured.  A bank needs to have capital to insure those accounts are secure. Second blame point is the Fed's were slow to take action on inflation. Early on when inflation began to rise the adminstration and Feds thought is was supply chain and  transitory. At some point in 2021 or 2022 the bond market disagreed with that point of view. You had bond prices falling and bond interest rates rising. The 2 year treasury bond ( I think) had risen to 2% or higher. It was around that time the Feds started raising rates. The Fed was late in acting on inflation.  

In anyone in banking knows that  interest rates will go up and will go down. The banks need to be prepared to handle either rate of the rate cycles. For SVB to invest their capital in bonds in the manner in which they did was wrong. It is wrong because the bond portfolio should have had leaned much more towards short term securities due where interest rate were. The fluxuation in prices for the bonds they owned would not have been as volitile as the longer term bonds.  For management to sell their stocks in the manner in which they did was wrong.  If SVB management believed that interest rates would stay at historic lows for a prolonged period time is simply nieve in my opinion.

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Message 7 of 12
Anonymalous
Valued Contributor

Re: Bank credit rating downgrades and warnings


@AndySoCal wrote:

@Anonymalous  There are many blame points in my opinion.  I am of the opinion that the regulators did not do their job correctly. The related problem to the bond market investing is SVB as March of 2023 had over 80% of their deposits were uninsured.  A bank needs to have capital to insure those accounts are secure. Second blame point is the Fed's were slow to take action on inflation. Early on when inflation began to rise the adminstration and Feds thought is was supply chain and  transitory. At some point in 2021 or 2022 the bond market disagreed with that point of view. You had bond prices falling and bond interest rates rising. The 2 year treasury bond ( I think) had risen to 2% or higher. It was around that time the Feds started raising rates. The Fed was late in acting on inflation.  

In anyone in banking knows that  interest rates will go up and will go down. The banks need to be prepared to handle either rate of the rate cycles. For SVB to invest their capital in bonds in the manner in which they did was wrong. It is wrong because the bond portfolio should have had leaned much more towards short term securities due where interest rate were. The fluxuation in prices for the bonds they owned would not have been as volitile as the longer term bonds.  For management to sell their stocks in the manner in which they did was wrong.  If SVB management believed that interest rates would stay at historic lows for a prolonged period time is simply nieve in my opinion.


I find the uninsured discussion somewhat strange. The majority of their deposits were uninsured because of the nature of their client base. Individuals rarely exceed the FDIC limit, while companies often do, and SVB was known for providing banking services to startups, not individuals. Anything above or outside those limits is normally uninsured, beyond the Fed as a backstop. Though this is influenced by the moral hazard created by the mere existence of the FDIC, which has trained people not to bother looking at the stability of the underlying bank, because they know their money is safe whether their bank prefers investing in treasuries or derivatives (or their newer forms, in the wake of the regulation following the 2008 crash). That explains some of the behavior we saw with the relatively few but wealthy individual investors at SVB, who typically just kept their money in a single account instead of using bank sweeps or accounts with different POD designations. They were assuming it was safe because they'd been pavloved into thinking it was safe, instead of doing due diligence. There are similar effects with the moral hazards of the Fed acting as the lender of last resort.

 

No sane person grounded in basic economic theory thought the inflation was transitory, but nearly every government official, their captured economists, and their media mouthpieces were saying it was. This is another example of malincentives, because a fractional reserve banking system can break if the public panics, so they always say everything is going well even when it's clearly forming a mushroom shape.

 

The reaction of the market is... weird. The massive intervention and government controls have resulted in an environment where few are concerned with market fundamentals anymore, or even basic things like profitability. The news cycle and online speculation is almost entirely focused on the next cryptic statement from the Fed, and clamour that the market will be destroyed if the Fed doesn't immediately lower interest rates and open the loose money floodgates again.

 

You're talking from the perspective of someone like an individual buy and hold investor or a financial advisor. Which is a perspective I can appreciate, but the banking industry is insulated from that. They have different resources and incentives, and there's been a dizzying amount of talk about new normals or unprecedented and thus unpredictable interventions.

 

And if SVB was wrong, so were hundreds of other banks. There have been several analyses that show a lot of banks have a lot of exposure to long term assets. It's all about incentives and short term risks. Low interest rates themselves encourage yield chasing, which means taking greater and greater risks in order to eke out even a marginal positive return, and with the flood of free money and everyone chasing the small limited pool of assets, even the most risky assets had their potential returns eroded.

Message 8 of 12
AndySoCal
Valued Contributor

Re: Bank credit rating downgrades and warnings

@Anonymalous  Here is link for the transitory inflation

https://smartasset.com/financial-advisor/what-is-transitory-inflation 

 

Uninsured is accounts over the FDIC insurance coverage limit.  It is possible to have over 250K in bank and have full FDIC coverage

Here is a link to my post on the coverages for banks and credit unions.

 

https://ficoforums.myfico.com/t5/Credit-in-the-News/FDIC-Insurance-Coverage-and-NCUA-Insurance-Cover... 

 

 

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Message 9 of 12
Anonymalous
Valued Contributor

Re: Bank credit rating downgrades and warnings


@AndySoCal wrote:

@Anonymalous  Here is link for the transitory inflation

https://smartasset.com/financial-advisor/what-is-transitory-inflation 

 

Uninsured is accounts over the FDIC insurance coverage limit.  It is possible to have over 250K in bank and have full FDIC coverage

Here is a link to my post on the coverages for banks and credit unions.

 

https://ficoforums.myfico.com/t5/Credit-in-the-News/FDIC-Insurance-Coverage-and-NCUA-Insurance-Cover... 



I'm not sure why you're linking to such rudimentary information, since I've already demonstrated a much deeper understanding of those terms.

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