Bank Stocks Battered by Trump, Inflation and Interest Rates | BAC, C, JPM, WFC, USB, TFS, PNC
September 21, 2026 | This past Friday, Federal Reserve Vice Chair for Supervision Michelle "Mickey" Bowman announced the initial findings of an independent review conducted by the Starling Advisory Group regarding the 2023 collapse of Silicon Valley Bank (SVB). Vice Chairman Bowman said in her remarks:
“SVB failed as the result of a confluence of vulnerabilities including real but unrealized accounting losses on its securities portfolio that exceeded its capital, a run-prone deposit base that was 94 percent uninsured and concentrated in venture capital–backed technology companies, and a lack of operational readiness to borrow from the discount window when it was needed.”
We have written extensively about SVB (“Who Killed Silicon Valley Bank?; The IRA Bank Book Q1 2023”). The key attribute was that the bank was an outlier among banks in terms of its assets, specifically securities. We wrote in March of 2023:
“Why did Silicon Valley Bank, the 18th largest bank in the US fail last week? Because the bank’s management naively invested half the bank’s assets in “risk free” securities. The bank had 43% of total assets in mortgage-backed securities vs an average of 12% for the 132 largest banks in the US. Extension risk killed Silicon Valley Bank.”
Source: FFIEC (Q1 2023)
What is “extension risk?” It’s when an investor buys an asset or security with variable maturity or duration such as a mortgage-backed security (MBS). When SVB started increasing its position in MBS, the maturity of mortgage securities was measured in months. By the time that the Fed started to raise interest rates in March of 2022, the average life of the MBS was now measured in years and SVB was already completely underwater on its securities book. By June the bank was visibly insolvent, prompting hedge funds to short the stock, but it took a few more months for customers, regulators and the markets to figure this out.
The chart below shows the gross yield on securities for the top seven depositories. Notice which bank is at the bottom. While SVB failed in March of 2023, larger depositories just sat on low coupon portfolios, killing net earnings for years to come. With interest rates rising, the unrealized losses on these loser portfolios is now growing. Note which large bank is at the bottom of the group.
Source: FFIEC
Vice Chairman Bowman is going to be making a number of changes to how the Fed supervises banks, but the key change that she needs to make is getting supervisory personnel to look at their own data. The first thing that the Fed should do when conducting a stress test, for example, is to look for outliers in the group. Hedge funds do this as a matter of course.
SVB was an outlier in 2023 and had the largest position of MBS of any large bank by an order of magnitude, but nobody at the Fed or FDIC noticed. SVB represents a substantial failure by the US bank supervision community. After all, if the Fed and FDIC are not going to look at the standardized regulatory data from the banks, then why bother going to work at all?
Variable duration securities have been at the root of many of the financial crises in the US over the past three quarters of a century. As we noted in our comments on the Basel III proposal, the Fed and other regulators cannot assume that bank managers understand the extension risk inherent in assets or securities with variable duration. Clearly the management of SVB was completely clueless. When interest rates rise, the effective maturity of an MBS or loan extends and the valuation falls dramatically because it is now priced further out the Treasury yield curve. The value of an MSR, on the other hand, goes up. We wrote:
“The bank regulatory agencies need to develop an entirely new approach to managing the risk from not only [mortgage servicing assets] MSAs, but the entire family of loans, securities and intangibles such as MSAs that have variable duration. Most of the major crisis in the financial markets over the last 50 years have involved risk exposures with variable duration. The failure of Kidder Peabody, Long-Term Capital Management and Silicon Valley Bank all involved episodes where management did not recognize the explosive duration risk embedded in portfolios.”
Earnings Setup: Top Seven Depositories
Below we provide some thoughts on Q3 2026 earnings for the top seven US depositories and some thoughts on trading the group for the balance of 2026. As we noted several weeks ago in The IRA Bank Book for Q3 2026, reported credit costs are down and the largest area of growth on bank balance sheets is in "all other loans," which is dominated by securities lending. Notice in the chart below that, unlike last year, the portion of all other loans that includes stock margin and securities lending is growing faster than loans to non-depository financial institutions (NDFIs).
Source: FDIC/WGA LLC
Many of the top banks provided updates to guidance at the recent conference sponsored by Barclays Bank (BCS). But the fact is that the entire banking sector is laboring under a cloud of uncertainty about inflation, interest rates and the Iran war that all come thanks to Donald Trump. More than two-thirds of the 101 bank stocks in the WGA Bank Top 50 test group are down. Of note, subscription rates for the Premium Service are going up on October 1, 2026.
Bank of America (BAC) CEO Brian Moynihan made his usual excuses for the bank’s poor performance, but talked at length about how U.S. economy proved more durable than expected. When bankers don't want to talk about their financial performance, they talk about the economy and consumers. As you go through the charts of the top seven depositories below, BAC is often the worst performer in the group. We don't make up these numbers.
Bank of America disclosed at the Barclays conference that its third-quarter trading revenue is somehow is expected to remain flat compared to the prior year — news that sparked a broad-based sell-off across major bank stocks last week. Most US banks will see Wall Street earnings declining in Q3 but Main Street banking revenue up on volume and higher rates. The chart below shows ROEA for the top seven depositories using data from the FFIEC.
Source: FFIEC
Want to read more?
Subscribe to theinstitutionalriskanalyst.com to keep reading this exclusive post.
