NEW YORK–(BUSINESS WIRE)–KBRA Analytics publishes this month’s edition of The Bank Treasury Newsletter, Bank Treasury Chart Deck and Bank Talk: The After-Show.
This month’s newsletter discusses the Federal Reserve’s upcoming decision to raise the Fed Funds target rate in September. He then traces the history of monetary policy from when Paul Volcker was Chairman of the Fed and explains why his inflation prescriptions in the late 1970s and early 1980s would not have much sense today, given the current structure of the economy and the financial crisis. a system where non-bank competitors dominate large parts of the capital markets. Mr. Volcker’s heavy-handed approach to curing the economy from inflation is then linked, first to the crisis in the S&L industry and later to the banking crises over the next decade, and also to the birth of the money market fund industry as a direct competitor to bank deposits. . After also showing why his actions may then be indirectly linked to the expansion of mark-to-market accounting for the investment portfolio, the newsletter discusses the recent fall in accumulated other comprehensive income (AOCI) to a loss. negative $236 billion and what that would mean for the future health of the financial sector. And briefly reviewing more than 90 years of history, the newsletter notes how accounting regulators and standard-setters have back-and-forth on the usefulness of mark-to-market accounting in financial reporting.
The bulletin also examines how accounting rules such as Statement of Financial Accounting (SFAS) No. 115 and Current Expected Credit Losses (CECL), despite the best intentions of incorporating lessons learned after the financial crises of years 1980 and the global financial crisis, which was primarily about improving transparency, ultimately produced the exact opposite results. SFAS 115 was intended to expand the share of investment securities carried at fair value, but instead led bank treasurers to increase the securities they were willing to lock into held-to-maturity securities to avoid an adjustment. negative. And CECL, which was supposed to improve accounting for credit losses, rather confused investors. Finally, the newsletter explains how bank treasurers haven’t seen much change in deposit flows, mixes, or balances since the Fed raised rates year-to-date, but expect that deposit betas increase in the not-too-distant future. Some are preparing to pay deposits to cover recent loan growth.
The Bank Treasury Chart Deck begins with a review of the progress the Fed has made two months after quantitative tightening (QT) in shrinking its bond portfolio. He then examines the latest household survey from the New York Fed, which found that consumer expectations have turned negative, and points out that the 2s-10s Treasury yield curve inversion is the sixth time that it has been reversing since the 1980s. Moving from there to bank balance sheets, the bridge notes how bank balance sheets are remarkably liquid to ride out a storm of liquidity no matter what, presenting as evidence the ratio 7 of non-maturity deposits which cover securities and loans with maturities greater than three years, as well as other data from the Fed and FDIC that show how core deposits now dominate the composition of deposits in the system. In the latest series of slides, the bridge explains how the industry has expanded the securities portfolio by more than $1 trillion over the past two years, just in time for the Fed rate hikes that led to a historic increase in negative AOCI that impacted equity, despite a near doubling of held-to-maturity securities, thanks to a sharp increase in bond market volatility over the past year.
In Bank Talk: The After-Show, Ethan explains to Van why bank managers have an economic incentive to optimize their deposit mix and reduce unprofitable activities, examining with him how earnings dilution and regulatory requirements capital issues come into play. Ethan argues that the cost of excess deposits from a shareholder’s perspective goes beyond simply diluting profits and increasing the capital needed to carry them onto bank balance sheets. It also entails interest rate risk, as banks have added $1.2 trillion in Treasury and agency MBS since August 2020. The consequence of their investment timing has been a sharp drop in the AOCI to capital ratio. Level 1. Although, with the exception of very large banks, it is not necessary to count AOCI in calculating their regulatory capital, a large minority of regional and community banks reported negative AOCI greater than 25% at the end of June 30, 2022. Van asked Ethan about ways analysts can observe how banks are optimizing their deposits. After reviewing the publicly available data in call reports and how the FDIC says 80% of deposits are basic (compared to 50% in 2010), Ethan and Van reviewed information reported by the largest banks regarding the cash coverage ratio. on deposit trends towards a greater concentration of funding in retail deposits.
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