Updated: Sep 12
September 11, 2023 | Premium Service | WGA has released The IRA Bank Book for Q3 2023, including a review of the latest financial results for the banking industry and our outlook for the rest of 2023. Copies of the IRA Bank Book for Q3 2023 are available to subscribers to the Premium Service of The Institutional Risk Analyst.
Of note, you may enjoy our letter in the Financial Times "Accommodating private banks is in no one’s interest." If regulators could not see the suicidal business model of Silicon Valley Bank a year before the collapse, why do we need them? Of note, read the report on the FDIC’s Supervision of First Republic Bank, from 2018 until its failure in May 2023.
The US banking industry has seen now two consecutive down quarters for net income as the disruption caused by the Fed’s massive open market operations in ‘20-’21 slowly works through the system. We predicted the decline in income in 1H 2023. Fortunately, the change in funding costs in Q2 2023 was below our expectations. We're happy to be wrong.
Highlights from the latest edition of The IRA Bank Book for Q3 2023 include:
Net interest income and broad banking industry earnings will likely decline again in 2H 2023 due to unprecedented deposit interest rate repricing and a slowdown in the increase in asset returns. The rate of change of many metrics connected to bank deposits have slowed.
With the 10-year Treasury note yielding 4.25%, the mark-to-market on the assets of the U.S. banking system results in a negative capital position of over $1 trillion as of Q2 2023. We note that the FDIC says that the negative mark-to-market on all bank owned securities is somewhere over $500 billion. We're closer to a "7" because of fear of soft marks we see around the industry. Or no marks. And don't even ask about loans. Our banking industry mark-to-market as of Q2 2023 is below.
U.S. Banking Industry Solvency
Source: FDIC/WGA LLC
Consumer credit losses are likely to remain below expectations through 2023, but losses on commercial and multifamily real estate, and related commercial exposures are likely to be far higher than during the previous downturn a decade ago. And with exposure at default rising in the banking industry, is there any sign of a recession in consumer credit? Not yet.
Source: FDIC/WGA LLC
Our big fear going into the end of 2023 is that we’re just entering a period of normalization for credit. The first phase of the credit cycle will be dominated by losses on commercial exposures. But by the middle of 2024, we could see above average credit losses on consumer exposures like autos and credit cards. Last will come the residential mortgage market, if and when home prices begin to fall.
Copies of the IRA Bank Book for Q3 2023 are available to subscribers to the Premium Service of The Institutional Risk Analyst. Standalone copies of the report are also available for purchase in our online store. Subscribers login to download the report using the link below.