March 20, 2023 | Premium Service | As the Fed-induced banking crisis in the US rolls into another week, markets and investors are already starting to pick winners and losers. As we’ve noted earlier, the past several decades of steadily declining interest rates allowed a number of niche business models to bloom and even prosper, both in banking and nonbank finance. Now that process is being reversed as the Fed bumbles the post-QE adjustment process.
Less stable bank business models are under attack by a 4% yield on Treasury bills and concerns about bank asset quality. Reserves at the Fed are being paid almost 5% this AM, an act of idiocy that suggests every member of the FOMC ought to be impeached immediately. The indifference and insensitivity shown by the FOMC with respect to the banking sector and the bond market reveals a level of incompetence that borders on the criminal. Interest expense/average assets for all large US banks at year-end 2022, of note, was a smidge over 1%. What else need be said?
Source: Federal Reserve Board
For marginal banks, the trouble starts on the asset side of the balance sheet due to unrealized losses on securities and also loans. Then the trouble quickly migrates to the liability side, when large depositors depart in favor or T-bills. Sure, Silicon Valley Bank committed ritual suicide by buying too many mortgage-backed securities, but have no doubt that 4% T-bill and similar yields on reserves deposited at the Federal Reserve Bank are a primary source of deposit runs on small banks.
One bank that we believe will weather the storm created by the Federal Open Market Committee is New York Community Bank (NYCB), which acquired Flagstar Bancorp (FBC) on December 1, 2022. We previously profiled the combination of NYCB and FBC in May 2021 (“Profile: NYCB + Flagstar Bancorp”), but due to progressive yowling and political extortion in Washington, the merger was delayed over a year. Below we update that profile and reflect on how the acquisition of assets from the failed Signature Bank will make this $90 billion asset lender even more interesting.