A Little More on Banking

While the pace of turmoil subsided a bit this week with the spotlight currently focused on Switzerland and Germany, the US issues now provide fodder for political spin.  Many of these would be worthy of amusement except for the fact that many are taking the sound bites to heart giving rise to bank failures as a cause célèbre.  Examples include:

• The mantra ‘too woke to fail’ has been attached to Silicon Valley’s (SIVB) failure with Josh Hawley (R-MO) leading the charge.  Sure, this bank had some ‘woke’ policies but this appears to be more a deflection campaign as one beneficiary of the Democratic government protection was billionaire Republican mega-donor Peter Thiel who coincidently was a donor to Hawley’s Senate campaign.  Taking this thought line one step further, Hawley is strangely silent on the tribulations of his own constituents with North American Savings Bank (NASB) laying off employees, retrenching operations and cutting the dividend as this bank in a non-Woke state slow walks the crisis.
• Some supporters of the former president are planning a protest in the form of a bank run in the event of his arrest.  At least this one will be peaceful, but I doubt it will accomplish much.  I mean, take a look at how long it took for my migration between banks within the system.  Then is there enough critical mass behind this to be more than a blip? Plus, I would assume Trump supporters are banking in non-woke institutions – isn’t this akin to shooting themselves in the foot? And seriously, one the ringleaders goes by ‘CryptoPolka’ on Twitter.  Does anyone really think all the money will be drained from banks and placed where for safekeeping?  Under a mattress?  Into Crypto?  Perhaps that explains why Bitcoin has been on a roll this week.

The one I particularly liked was the suggestion to get into Ally Financial ahead of a move by Warren.  This one had me doing some research to see how much hot air was inflating this theory.  The reality is that it is plausible – if Berkshire becomes a Bank Holding Company as a Federal Savings Bank or a State Chartered Bank an amenable state.  The roadmap exists with Ameriprise (AMP), Deere (DE), First American (FAF), Hawaiian Electric (HE) and Macy’s (M) all Federal Banks and Schwab (SCHW), United Health (UNH), and Ally (ALLY) at the state level.  This doesn’t even touch the Industrial Banks.  With Warren I think the biggest issue would restrictions on how big a future acquisition he could make, as we all know he likes hunting his elephants.  Otherwise, I see benefits including cross-selling opportunities.

With all the analysis of uninsured deposit ratios and duration mismatches, there are a few touching on the issue of cost of funds.  The CDs I’ve been buying are one example – a short-term bridge for banks to navigate the duration mismatch on their books.  Long-term this is not sustainable without nailing their ongoing viability. 

Two areas I feel have not been addressed are partner banks to Vanguard and Fidelity and partner banks in the Fintech space.  Vanguard links to a client’s personal accounts but work with four banks, while Fidelity partners with 26 banks for services such as Checking and Debit cards, four of which are currently inactive, including First Republic (FRC) and Pacific Western (PACW).  Remaining abreast of risk mitigation would appear to be the flavor of the month.

A larger concern would appear to be the partner banks behind the rise of the Fintechs and Banking as a Service (BaaS).  To offer FDIC insurance coverage, non-bank fintechs rely on partnerships with one (or several) banks.  To pick on M1 Finance for this hypothetical, their partner being Lincoln Savings, a $1.5B community bank in Iowa.  At the first sign of distress, M1 as the owner of the clients could change partners.  With the vast majority of fintech partner banks being smallish in nature, I do believe there is an undefined level of risk – though not systemic by any means.

I do intend to perform some further research on the corporate owned banks in an attempt to identify the relative value to the corporation (or lack therof).

Next week – month end already and the close of the quarter as well.  Have a good week!