Moody’s commented about two weeks ago:
Pandemic-related fiscal stimulus, more than a decade of ultralow interest rates and unconventional monetary policy (i.e., quantitative easing) resulted in significant excess deposit creation in the US banking sector. Indeed, US banks’ loan to deposit ratio dropped to a 50-year low of roughly 60 percent in September 2021. Very low US interest rates pressured net interest margins and encouraged some banks to invest at least a portion of their excess deposits into longer-dated fixed-income securities. This proved to be a poor risk-management decision for some banks, as the rapid rise in US interest rates in 2022 has resulted in significant unrealized losses on some US banks’ AFS and HTM securities holdings even as the Federal Reserve’s quantitative tightening has reduced banking system deposits, pressuring some banks’ funding. US banks’ loan to deposit ratio has risen to 68 percent as of February 2023, but a further rise seems likely as the ratio is still well below pre-pandemic levels in the high 70s. The newly created BTFP is intended to buffer banks from the increased risks that ongoing tightening in bank funding raise; namely, the possible need to sell underwater securities and crystallize unrealized losses related to higher interest rates, reducing their capitalization.
We have commented on the broader risk of US banks’ high AFS and HTM securities holdings, especially in a period of renewed quantitative tightening (QT2), as well as regional banks’ weakened liquidity as tighter monetary policy has created greater deposit competition and even deposit outflows. QT2 and rising interest rates have driven up substantial unrealized losses on banks’ AFS and HTM holdings, which banks increased during the preceding period of ultralow interest rates to defend falling net interest margins. In 2005, US banks’ holdings of government securities totaled $1 trillion, or 13 percent of US banks’ balance sheet. Today banks’ holdings of government securities have ballooned to $4.4 trillion, or a whopping 19 percent of US banking system assets (Exhibit 3).
…
Specifically, for regional and community banks, unrealized AFS losses reduce the shareholders’ equity of the firm, but not the regulatory capital measures unless the AFS or HTM securities actually are sold to meet the bank’s liquidity needs. By contrast, for US Global Systemically Important Banks (G-SIBs), unrealized AFS losses not only reduce shareholders’ equity, but also flow through directly to a bank’s regulatory capital through adjustments to other comprehensive income. For some US G-SIBs, these unrealized AFS losses have reduced capital. G-SIBs’ unrealized HTM losses, however, do not flow through to regulatory capital.
On a brighter note First Citizens BancShares will acquire Silicon Valley Bank:
The deal for the bank, which became Silicon Valley Bridge Bank after the F.D.I.C. seized it, included the purchase of about $72 billion in loans, at a discount of $16.5 billion, and the transfer of deposits worth $56 billion. Roughly $90 billion in Silicon Valley Bank’s securities and other assets were not included in the sale, and remained in the F.D.I.C.’s control.
The bank regulator will receive rights linked to the stock of First Citizens, which could be worth up to $500 million. The F.D.I.C. estimated that the cost of Silicon Valley Bank’s failure to the government’s deposit insurance fund would be around $20 billion.
First Citizens and the F.D.I.C. will share in any losses on the loans included in the transaction, in an arrangement that often features in sales of failed banks. For example, the F.D.I.C. agreed to reimburse First Citizens for half of any losses above $5 billion on the portfolio of commercial loans transferred in the deal.
But the fingerpointing continues:
The Federal Reserve’s vice chair for supervision blamed Silicon Valley Bank’s demise on poor internal management and excessive risk-taking and detailed the steps that Fed supervisors took to address the snowballing problems that ultimately killed the company, according to prepared remarks ahead of a congressional hearing on Tuesday.
The vice chair, Michael Barr, who will appear at a Senate Banking Committee hearing along with other regulators, also acknowledged in his written testimony that bank supervision and regulation might need to change in the wake of the collapse.
…
“SVB’s failure is a textbook case of mismanagement,” he said, while adding that the “failure demands a thorough review of what happened, including the Federal Reserve’s oversight of the bank.”
…
And questions could arise about issues that Mr. Barr did not address in his remarks. For instance, while he pointed out that supervisors were aware of risks at Silicon Valley Bank, he did not note that the group of Fed Board staff members and supervisors overseeing the bank gave it a satisfactory rating when it came to liquidity in 2022 — even after a range of problems, including some with liquidity risk management, had already been flagged.
There will also be testimony from Martin J. Gruenberg, Chairman, FDIC:
In addition, I will share some preliminary lessons learned
as we look back on the immediate aftermath of this episode.
In that regard, the FDIC will undertake a comprehensive review of the deposit insurance system and will release a report by May 1, 2023, that will include policy options for consideration related to deposit insurance coverage levels, excess deposit insurance, and the implications for risk-based pricing and deposit insurance fund adequacy.In addition, the FDIC’s Chief Risk Officer will undertake a review of the FDIC’s supervision of Signature Bank and will also release a report by May 1, 2023. Further, the FDIC will issue in May 2023 a proposed rulemaking for the special assessment for public comment.
Subsequently, as word of SVB’s problems began to spread, Signature Bank began to experience contagion effects with deposit outflows that began on March 9 and became acute on Friday, March 10, with the announcement of SVB’s failure. On March 10, Signature Bank lost 20 percent of its total deposits in a matter of hours, depleting its cash position and leaving it with a negative balance with the Federal Reserve as of close of business. Bank management could not provide accurate data regarding the amount of the deficit, and resolution of the negative balance required a prolonged joint effort among Signature Bank, regulators, and the Federal Home Loan Bank of New York to pledge collateral and obtain the necessary funding from the Federal Reserve’s Discount Window to cover the negative outflows. This was accomplished with minutes to spare before the Federal Reserve’s wire room closed.
Over the weekend, liquidity risk at the bank rose to a critical level as withdrawal requests mounted, along with uncertainties about meeting those requests, and potentially others in light of the high level of uninsured deposits, raised doubts about the bank’s continued viability.
…
A significant number of the uninsured depositors at SVB and Signature Bank were small and medium-sized businesses. As a result, there were concerns that losses to these depositors would put them at risk of not being able to make payroll and pay suppliers. Moreover, with the liquidity of banking organizations further reduced and their funding costs increased, banking organizations could become even less willing to lend to businesses and households. These effects would contribute to weaker economic performance, further damage financial markets, and have other material negative effects.
Faced with these risks, the FDIC Board voted unanimously on March 12, to recommend that the Secretary of the Treasury, in consultation with the President, make a systemic risk determination under the FDI Act with regard to the resolution of SVB and Signature Bank.28 That same day, the Federal Reserve Board unanimously made a similar recommendation, and the Secretary of the Treasury determined that complying with the least-cost provisions in Section 13(c)(4) of the FDI Act would have serious adverse effects on economic conditions or financial stability, and any action or assistance taken under the systemic risk exception would avoid or mitigate such adverse effects.
The systemic risk determination enabled the FDIC to extend deposit insurance protection to all of the depositors of SVB and Signature Bank, including uninsured depositors, in winding down the two failed banks. At SVB, the depositors protected by the guarantee of uninsured depositors included not only small and mid-size business customers but also customers with very large account balances. The ten largest deposit accounts at SVB held $ 13.3 billion, in the aggregate.
…
The FDIC estimates that the cost to the DIF [Deposit Insurance Fund] of resolving SVB to be $20 billion. The FDIC estimates the cost of resolving Signature Bank to be $2.5 billion. Of the estimated loss amounts, approximately 88 percent, or $18 billion, is attributable to the cost of covering uninsured deposits at SVB while approximately two-thirds, or $1.6 billion, is attributable to the cost of covering uninsured deposits at Signature Bank. I would emphasize that these estimates are subject to significant uncertainty and are likely to change, depending on the ultimate value realized from each receivership.
…
One clear takeaway from recent events is that heavy reliance on uninsured deposits creates liquidity risks that are extremely difficult to manage, particularly in today’s environment where money can flow out of institutions with incredible speed in response to news amplified through social media channels.
And finally, the Cleveland Fed has released a working paper by Ina Hajdini, Edward S. Knotek II, John Leer, Mathieu Pedemonte, Robert W. Rich and Raphael S. Schoenle titled Low Passthrough from Inflation Expectations to Income Growth Expectations: Why People Dislike Inflation:
We implement a novel methodology to disentangle two-way causality in inflation and income expectations in a large, nationally representative survey of US consumers. We find a 20 percent passthrough from expected inflation to expected income growth, but no statistically significant effect in the other direction. Passthrough is higher for higher-income individuals and men. Higher inflation expectations increase consumers’ likelihood to search for higher-paying new jobs. In a calibrated search-and-matching model, dampened responses of wages to demand and supply shocks translate into greater output fluctuations. The survey results and model analysis provide a labor market channel for why people dislike inflation.
…
In a seminal paper, Shiller (1997) argued that consumers associate higher inflation with a reduction in their purchasing power. We find that this negative relationship between inflation and consumers’ earning prospects holds causally based on our experimental setup. We also explore the consequences of these results. Respondents appear to perceive that their nominal incomes are very rigid with their current employers, as higher inflation expectations only make them more willing to look for another job in order to improve their wages rather than asking for a raise. The implication from these results is that consumers associate inflationary shocks with a reduction in welfare, which can explain why consumers more generally associate higher inflation expectations with worse economic outcomes, as shown by Candia, Coibion, and Gorodnichenko (2020)). Overall, our empirical findings and our theoretical model provide evidence of a labor market channel that can explain why people dislike inflation.
| HIMIPref™ Preferred Indices These values reflect the December 2008 revision of the HIMIPref™ Indices Values are provisional and are finalized monthly |
|||||||
| Index | Mean Current Yield (at bid) |
Median YTW |
Median Average Trading Value |
Median Mod Dur (YTW) |
Issues | Day’s Perf. | Index Value |
| Ratchet | 0.00 % | 0.00 % | 0 | 0.00 | 0 | -0.5988 % | 2,393.0 |
| FixedFloater | 0.00 % | 0.00 % | 0 | 0.00 | 0 | -0.5988 % | 4,589.7 |
| Floater | 9.42 % | 9.43 % | 49,462 | 10.04 | 2 | -0.5988 % | 2,645.1 |
| OpRet | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 0.0864 % | 3,324.6 |
| SplitShare | 5.06 % | 7.29 % | 54,053 | 2.68 | 7 | 0.0864 % | 3,970.3 |
| Interest-Bearing | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 0.0864 % | 3,097.8 |
| Perpetual-Premium | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 0.1034 % | 2,763.0 |
| Perpetual-Discount | 6.17 % | 6.26 % | 56,463 | 13.52 | 35 | 0.1034 % | 3,012.9 |
| FixedReset Disc | 5.72 % | 7.44 % | 93,721 | 12.29 | 61 | 0.3023 % | 2,148.9 |
| Insurance Straight | 6.08 % | 6.13 % | 72,726 | 13.76 | 20 | 0.1799 % | 2,953.0 |
| FloatingReset | 10.27 % | 10.60 % | 29,622 | 9.11 | 2 | -0.3020 % | 2,411.4 |
| FixedReset Prem | 6.59 % | 6.41 % | 241,425 | 12.82 | 2 | 0.0000 % | 2,345.1 |
| FixedReset Bank Non | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 0.3023 % | 2,196.7 |
| FixedReset Ins Non | 5.63 % | 7.03 % | 76,477 | 12.45 | 13 | -0.0731 % | 2,340.6 |
| Performance Highlights | |||
| Issue | Index | Change | Notes |
| POW.PR.B | Perpetual-Discount | -11.21 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-27 Maturity Price : 19.00 Evaluated at bid price : 19.00 Bid-YTW : 7.07 % |
| CU.PR.F | Perpetual-Discount | -4.05 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-27 Maturity Price : 17.99 Evaluated at bid price : 17.99 Bid-YTW : 6.33 % |
| BIP.PR.F | FixedReset Disc | -3.26 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-27 Maturity Price : 19.01 Evaluated at bid price : 19.01 Bid-YTW : 7.71 % |
| IAF.PR.B | Insurance Straight | -1.91 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-27 Maturity Price : 19.00 Evaluated at bid price : 19.00 Bid-YTW : 6.09 % |
| MFC.PR.L | FixedReset Ins Non | -1.62 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-27 Maturity Price : 16.39 Evaluated at bid price : 16.39 Bid-YTW : 7.69 % |
| MFC.PR.M | FixedReset Ins Non | -1.42 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-27 Maturity Price : 16.66 Evaluated at bid price : 16.66 Bid-YTW : 7.76 % |
| IFC.PR.C | FixedReset Disc | -1.42 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-27 Maturity Price : 17.40 Evaluated at bid price : 17.40 Bid-YTW : 7.36 % |
| BN.PR.B | Floater | -1.20 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-27 Maturity Price : 12.35 Evaluated at bid price : 12.35 Bid-YTW : 9.58 % |
| SLF.PR.J | FloatingReset | -1.02 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-27 Maturity Price : 14.55 Evaluated at bid price : 14.55 Bid-YTW : 10.15 % |
| CM.PR.S | FixedReset Disc | 1.00 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-27 Maturity Price : 21.55 Evaluated at bid price : 21.55 Bid-YTW : 6.43 % |
| BN.PF.D | Perpetual-Discount | 1.01 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-27 Maturity Price : 19.00 Evaluated at bid price : 19.00 Bid-YTW : 6.49 % |
| BMO.PR.T | FixedReset Disc | 1.02 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-27 Maturity Price : 16.88 Evaluated at bid price : 16.88 Bid-YTW : 7.55 % |
| BMO.PR.Y | FixedReset Disc | 1.06 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-27 Maturity Price : 18.18 Evaluated at bid price : 18.18 Bid-YTW : 7.27 % |
| BN.PR.M | Perpetual-Discount | 1.10 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-27 Maturity Price : 18.45 Evaluated at bid price : 18.45 Bid-YTW : 6.48 % |
| CM.PR.P | FixedReset Disc | 1.10 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-27 Maturity Price : 16.63 Evaluated at bid price : 16.63 Bid-YTW : 7.53 % |
| BMO.PR.S | FixedReset Disc | 1.13 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-27 Maturity Price : 17.85 Evaluated at bid price : 17.85 Bid-YTW : 7.33 % |
| IFC.PR.G | FixedReset Ins Non | 1.22 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-27 Maturity Price : 19.90 Evaluated at bid price : 19.90 Bid-YTW : 6.93 % |
| RY.PR.M | FixedReset Disc | 1.26 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-27 Maturity Price : 17.73 Evaluated at bid price : 17.73 Bid-YTW : 7.27 % |
| BN.PR.R | FixedReset Disc | 1.26 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-27 Maturity Price : 13.67 Evaluated at bid price : 13.67 Bid-YTW : 8.75 % |
| CCS.PR.C | Insurance Straight | 1.26 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-27 Maturity Price : 20.05 Evaluated at bid price : 20.05 Bid-YTW : 6.28 % |
| PWF.PF.A | Perpetual-Discount | 1.35 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-27 Maturity Price : 18.80 Evaluated at bid price : 18.80 Bid-YTW : 6.10 % |
| CM.PR.O | FixedReset Disc | 1.36 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-27 Maturity Price : 17.05 Evaluated at bid price : 17.05 Bid-YTW : 7.49 % |
| BMO.PR.F | FixedReset Disc | 1.41 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-27 Maturity Price : 23.21 Evaluated at bid price : 23.72 Bid-YTW : 6.76 % |
| TD.PF.B | FixedReset Disc | 1.48 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-27 Maturity Price : 17.10 Evaluated at bid price : 17.10 Bid-YTW : 7.54 % |
| CM.PR.Y | FixedReset Disc | 1.57 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-27 Maturity Price : 23.31 Evaluated at bid price : 23.77 Bid-YTW : 6.74 % |
| PWF.PR.K | Perpetual-Discount | 1.69 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-27 Maturity Price : 20.50 Evaluated at bid price : 20.50 Bid-YTW : 6.15 % |
| PWF.PR.P | FixedReset Disc | 1.73 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-27 Maturity Price : 12.97 Evaluated at bid price : 12.97 Bid-YTW : 7.87 % |
| CU.PR.D | Perpetual-Discount | 1.79 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-27 Maturity Price : 19.90 Evaluated at bid price : 19.90 Bid-YTW : 6.23 % |
| NA.PR.W | FixedReset Disc | 1.91 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-27 Maturity Price : 16.57 Evaluated at bid price : 16.57 Bid-YTW : 7.68 % |
| IFC.PR.K | Perpetual-Discount | 2.12 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-27 Maturity Price : 21.38 Evaluated at bid price : 21.70 Bid-YTW : 6.07 % |
| BN.PF.I | FixedReset Disc | 2.44 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-27 Maturity Price : 20.95 Evaluated at bid price : 20.95 Bid-YTW : 7.69 % |
| TRP.PR.C | FixedReset Disc | 2.75 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-27 Maturity Price : 11.20 Evaluated at bid price : 11.20 Bid-YTW : 8.90 % |
| CM.PR.T | FixedReset Disc | 2.77 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-27 Maturity Price : 23.07 Evaluated at bid price : 23.60 Bid-YTW : 6.51 % |
| POW.PR.D | Perpetual-Discount | 7.30 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-27 Maturity Price : 20.43 Evaluated at bid price : 20.43 Bid-YTW : 6.14 % |
| Volume Highlights | |||
| Issue | Index | Shares Traded |
Notes |
| TD.PF.C | FixedReset Disc | 20,300 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-27 Maturity Price : 16.80 Evaluated at bid price : 16.80 Bid-YTW : 7.61 % |
| NA.PR.C | FixedReset Prem | 16,800 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-27 Maturity Price : 23.37 Evaluated at bid price : 25.60 Bid-YTW : 6.41 % |
| TD.PF.J | FixedReset Disc | 12,300 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-27 Maturity Price : 21.41 Evaluated at bid price : 21.69 Bid-YTW : 6.60 % |
| PWF.PR.F | Perpetual-Discount | 11,800 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-27 Maturity Price : 21.44 Evaluated at bid price : 21.70 Bid-YTW : 6.15 % |
| TD.PF.I | FixedReset Prem | 10,700 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-27 Maturity Price : 23.17 Evaluated at bid price : 24.93 Bid-YTW : 6.09 % |
| There were 0 other index-included issues trading in excess of 10,000 shares. | |||
| Wide Spread Highlights | ||
| Issue | Index | Quote Data and Yield Notes |
| BMO.PR.W | FixedReset Disc | Quote: 16.89 – 24.95 Spot Rate : 8.0600 Average : 4.7725 YTW SCENARIO |
| IAF.PR.B | Insurance Straight | Quote: 19.00 – 22.10 Spot Rate : 3.1000 Average : 1.8168 YTW SCENARIO |
| POW.PR.B | Perpetual-Discount | Quote: 19.00 – 22.04 Spot Rate : 3.0400 Average : 1.8171 YTW SCENARIO |
| TRP.PR.E | FixedReset Disc | Quote: 15.05 – 17.45 Spot Rate : 2.4000 Average : 1.7695 YTW SCENARIO |
| CM.PR.Q | FixedReset Disc | Quote: 18.30 – 20.40 Spot Rate : 2.1000 Average : 1.4843 YTW SCENARIO |
| MFC.PR.M | FixedReset Ins Non | Quote: 16.66 – 20.45 Spot Rate : 3.7900 Average : 3.1951 YTW SCENARIO |