top of page

The Institutional Risk Analyst

© 2003-2024 | Whalen Global Advisors LLC  All Rights Reserved in All Media |  ISSN 2692-1812 

  • Ford Men on Amazon
  • Twitter
  • LinkedIn
  • Pinterest

A Rising Floor on Interest Rates? | Update: Bank OZK

Updated: Apr 7

“We are worried about a loss of adequate liquidity in the market.”

Treasury Secretary Janet Yellen

October 2023

April 8, 2024 | Premium Service | Last week, we made several changes to the WGA Bank Indices in the wake of the 70% drop in the share price of New York Community Bank (NYCB). Below we have a little pre-earnings look at Bank OZK (OZK). We interviewed founder and CEO George Gleason back in 2017 (“The Interview: George Gleason, Bank of the Ozarks”).

Last week, we updated our methodology for the WGA Bank Indices to allow us to drop a stock when it becomes not timely with the SEC and/or federal bank regulators. Since we use published financials for our tests, when an issuer says that their financials are no longer to be relied upon, then you may be dropped from the index immediately. If the restatement is material, then you lose your LA privileges.

Second, we have added a new test to the WGA Bank Indices to give some weight to size. Size matters. As we noted in an earlier comment, “Big Banks Good, Small Banks Bad,” in times of stress, investors flee to size. Thus in Q1 2024, for example, the best performing bank stock in our 108 bank surveillance group was Citigroup (C) owing to cost cutting announced in 2023 and market concerns about regional banks. Subscribers to The IRA Annual Service may inspect the latest WGA Top Bank 100 list below.

By adding a fifth test for size to our WGA Bank Indices, we keep the focus on operating strength, but acknowledge the human desire to avoid financial loss. When the fundamentals for the US markets are under a growing cloud, people line up in the parking lot at Costco (COST) in the wee hours to buy 1 oz gold bars. Only in the strange confines of Washington do you still find people who think that the federal budget deficit is not a problem. But then again, the left in Albany and Buenos Aires still have yet to repudiate socialism. 

We naturally say “told you so” on interest rates as the Wall Street consensus walks back the idea of multiple rate cuts this year. Back in January, most bankers were telling investors to look for three cuts in 2024. But for banks, frankly, higher rates and thereby higher gross yields on earning assets is what the industry needs to support market valuations and deal with loss mitigation.

Troubled banks survive because they have enough net operating income to clean up the mess without spending capital. Recall the performance of BB&T after 2008, when the bank just kept on going without suspending dividends or showing any real operational stress. But the volatility injected into credit markets by the FOMC and the Treasury’s debt issuance makes running a bank or any financial enterprise today increasingly problematic.

Retired Tudor Investment Corp partner Robert Dugger opined in The International Economy that the shrinking pool of savings globally will make financing the US public debt far more difficult.

“Asian asset managers argue that the cost of investable capital worldwide is determined where the curves of world net savings supply and demand intersect,” writes Dugger. “They refer to this cost as the “savings-market clearing rate” (SMCR). There is a yield curve of SMCRs ranging from hours to decades. In their view, the SMCR curve is the key determinant of national interest rates at all maturities and currency values worldwide.”

As the pool of investable savings tightens, the US, China and Europe will be drawing down savings to pay for their respective retirement waves. The cost demanded by those asset managers to finance tomorrow's fiscal deficits will rise, meaning that nations that balance spending and revenue will be advantaged. Dugger continues:

"Currently, Powell prefers to “stay in his lane” and not discuss fiscal policy. However, because the SMCR and ideas like R* are directly affected by Congressional budget policy, he will have no option but to comment on the need for fiscal sustainability. When he does, it will mark the end of the beginning of Congressional resistance to fiscal reform."

Financial institutions that understand this dynamic of a rising floor on interest rates and prepare themselves accordingly will prosper in the years ahead. The age of saving surpluses and lower interest rates forever is ending as the Baby Boom dissipates, another great example of entropy right in our faces.

Source: FDIC

In the world of banking, as shown above, the two key relationships investors must follow are operating income on the one hand and credit expenses in the form of provision for future loss on the other. The ebb and flow of these two key parts of the expense ledger determine what is left for equity holders in the form of earnings. This brings us to Bank OZK, a bellwether in the industry when it comes to commercial real estate and banks generally.

Bank OZK

Want to read more?

Subscribe to to keep reading this exclusive post.


Recent Posts

See All


Couldn’t Load Comments
It looks like there was a technical problem. Try reconnecting or refreshing the page.
bottom of page