AMERICA’S “POTTERSVILLE” NEARLY 80 YEARS LATER!

In 1947 the classic Christmas movie “It’s A Wonderful Life” was released. The depiction of the banking turmoils of George Bailey fighting rival small town banker “Old Man Potter” warm the hearts of all Americans at Christmas. The movie’s message is clear: doing the right thing for people over the evils of being solely driven by profit is the morally right and human thing to do. Oh, if only bankers hadn’t forgotten that their core business is about the well being of their depositors!

Today’s banking crisis is an embodiment of this movie where small town Savings & Loans banks are dependent on local depositors and their success, versus larger banks where depositors are paid nothing for their deposits and charged for fees for anything they bother the bank with. This has lead to yet another banking crisis.

n 2008 it was about banks being “Too Big To Fail”.

Today it is about “Too Many To Fail”!

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WHAT YOU NEED TO KNOW

US regulators focused on making the big banks safer but forgot that the smaller banks – which have been responsible for much of the credit creation of the past decade – could pose systemic risks, at least in aggregate. What initially was a liquidity crisis risk is becoming a credit crisis, which will likely soon become a commercial property sector debacle. 

NOW THE BANKS EXPECT TO BE BAILED OUT: Yet Another Every Decade Government Transfer Process?

• • For much of my career I have witnessed that every decade or so we can count on the US banking sector to require another government bailout or major regulatory risk giveaway.
  • Between decades the business plan of larger banks is to steadily rob savers to lend to those increasingly requiring debt to simply survive.
  • The current crisis however is more than just another bank bailout. It is additionally about further predatory banking sector consolidation.
  • The larger banks now require the smaller bank deposits and small business collateral assets, ideally without the risk.

BANK DEPOSIT RATES: Reverse Bank Robbery! 

• • Banks have been paying depositors almost nothing for their deposits for so long that many younger people no longer see banks as a facility where you keep your saving. (Of course this is if you actually have any savings?)
  • Today you pay the bank, the bank doesn’t pay you!
  • Because Credit Card bills must be paid, your bank account is solely a cash transfer mechanism between your income and credit card balances.
  • On credit cards you pay exorbitant credit card fees if your bank cash balances don’t allow a monthly “zeroing out”.
  • On Debit Cards you better have sufficient none yielding cash balances.
  • Everything you might bother a bank for such as a money transfer, overdue needs, currency exchanges etc., the bank charges a fee for.

THE MONEY MARKET GAME: When Deposits Are Not Deposits

• • Banks seldom remind depositors that Bank Deposits versus Bank Money Market Funds come with differing risk.
  • Deposits are insured by FDIC up to an account limit of $250,000.
  • Money Markets are considered an investment and therefore are uninsured!
  • Both however have become today equivalent bank assets.

BANK DEPOSIT INSURANCE: FDIC’s $250K Limit

• • The FDIC’s guarantee to reimburse all the rich uninsured depositors at the two failed institutions, making an exception to its $250,000 cap, and no matter how big the depositors’ accounts, is more alarming.
  • Such measures take the United States down a road toward total nationalization of the banking system and removes the indispensable elements of accountability and discipline all businesses need: certainty that misjudgment and irresponsibility must come with a cost.
  • When Washington bails that out, America turns into Potterville.

CONCLUSION

RISK TRANSFER:

• • • Banks Get the Profits, Public Assumes the Risk

A CONSOLIDATION:

• • • Just More Money to Support the Derivative Monster!

COMMERCIAL REAL ESTATE:

• • • There is a high probability of a coming Crisis in Commercial Real Estate as a direct result of this Banking Crisis.
    • The last Banking Crisis only impacted Residential Real Estate.

THE CURRENT ACTIONS ARE RESULTING IN EFFECTIVELY CHOKING SMALL BUSINESS AMERICA,

THE LIFE BLOOD OF THE NATION, ALREADY REELING FROM COVID-19.

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NOW THE BANKS EXPECT TO BE BAILED OUT: Yet Another Every Decade Government Transfer Process?

It is becoming almost assured that every decade (or sooner) we have a financial crisis centered on the banking industry and driven by the US central bank rate increases. (See milestone chart to the right tracking both.)

Every time we can count on the US banking sector to require another:

Between decades the business plan of larger banks is to steadily rob savers to lend to those increasingly requiring debt to simply survive.

ABOVE: The Federal Reserve and Regular Financial Crisis.

The current crisis however is more than just another bank bailout. It is additionally about further predatory banking sector consolidation by the large political donor money centered banks.

The larger banks now require the smaller bank deposits and small business collateral assets, ideally without the risk.

CHART RIGHT: Small & Medium sized Banks account for ~ 80% of the total Commercial Real Estate (CRE) lending in America.

CHART BELOW: Bank loans are increasingly being driven in America by the smaller banks. Larger banks increasingly make their profits through trading, M&A, international needs, derivative operations and the needs of major financial institutions and corporate America. Small business need not apply!

SOMETHING SERIOUSLY WORRYING IS ABOUT TO HAPPEN TO

SMALL BUSINESS AMERICA!

Small to Medium sized banks are the backbone of lending to small business in small town America. This is the foundation of America – not the large corporations!

The smaller banks’ customers are George Bailey’s Main Street retailers, restaurants, contractors, the trades trade, barbers, famers, ranchers, truckers etc. Their survival depends on the survival of local banks, savings & loans and credit unions.

The small to medium sized banks are in trouble because their reserves have become insufficient to meet their needs.

With reserves constrained, this almost guarantees more things are going to “break.”

Banks were already facing two major problems:

1. 1. They pay only 0.23% or so on deposits when depositors can earn 3%-4% in a Money Market Fund or Short-Term U.S. Treasuries. So money was fleeing banks for those higher yielding investments.
   2. Depositors were terrified of bank failures. And so even MORE money was fleeing.

Now after the bailout of Credit Suisse by UBS and the assistance of NSB, banks face a new issue: trying to attract investors when there’s a very real possibility that both bondholder and stockholders would get wiped out if a bank failed.

Deposits have recently been headed to higher paying Money Market Funds, which are able to capitalize on Federal Reserve facilities such as Reverse Repurchase agreements paying out advantaged rates that smaller banks don’t have direct access too without intermediation. The big banks don’t want the deposits and may, as they have done before, point larger depositors into their MMFs. They offer a higher yield, and even though they’re uninsured, they invest mostly in ultra-safe assets, so they are very low risk.

There is effectively a growing banking monopoly in American banking with “entitled access”. With the overnight RRP facility still offering ~15 bps more than a 3-month Treasury bill after Wednesday’s FOMC rate hike, there’s a strong likelihood that MMFs will continue depositing cash there.

Tighter lending standards resulting from the overall banking stress will likely subtract ¼-½pp from GDP growth in 2023, equivalent to the impact of 25-50bp of tightening in the financial conditions index or 25-50bp of Fed rate hikes. The estimated impact is relatively moderate in part, because lending standards had already tightened sharply in prior quarters due to widespread recession fears and in part because the multiplier effect should be low in an economy with excess demand for workers. However, the risks are tilted toward a larger effect and the uncertainty will likely linger for a while.

THIS IS RESULTING IN EFFECTIVELY CHOKING SMALL BUSINESS AMERICA,

THE LIFE BLOOD OF THE NATION ALREADY REELING FROM COVID-19.

BANK DEPOSIT RATES: Reverse Bank Robbery

Banks have been paying depositors almost nothing for their deposits for so long that many younger people no longer see banks as a facility where you keep your saving.

(Of course this is if you actually have any savings?)

Today you pay the bank, the bank doesn’t pay you!

Because Credit Card bills must be paid, your bank account is solely a cash transfer mechanism between your income and credit card balances. On credit cards you pay exorbitant credit card fees if your bank cash balances don’t allow a monthly “zeroing out”. On Debit Cards you has better have sufficient none yielding cash balances,

Everything you might bother a bank for such as a money transfer, overdue needs, currency exchanges etc. you pay a fee for.

CHARTS BELOW: A Major Shift to Money Markets would be sustained if rates remained elevated relative to what we have seen over the last two decades while we experience the “Beta Drought Decade” in equities.

SHORT TERM: The trend to Money Markets Funds may be overdone in the short term …..

….. but in the longer term this may be major trend in markets during what we called in this year’s Thesis paper as the “Beta Drought Decade”.