Rob Lutts’ Post

This is correct - but it is only one half of the story. Yes banks have significant unrealised losses - just as you would expect any holders of loans and bonds when interest rates spike. That’s hardly a surprise, though it is important to monitor the level of losses both across the entire system, and for each individual entity we may have exposure to. But there is a second effect of sharply higher rates: bank earning power has significantly increased. Traditionally banks make in only 3-and-half ways: 1) from deposits: spread between what they pay for deposits and return they get overnight/moneymarket; 2) slope of the curve: fund yourself short and lend out long; 3) credit spread: what you can charge to take credit risk across your portfolio of loans, in excess of your credit cost, and finally 3-and-half) fees: what fees you can charge for different services. Much higher rates have made deposits MASSIVELY more profitable for banks, and slope of the curve has offered some opportunities to make money (it should still be positive contribution for most banks). Credit opportunity may be slightly lower since people/biz generally borrow less at newly much higher rates, but for now that’s still making positive contribution (largely because we haven’t had spike in credit defaults - though that could get tougher in next economic downturn, whenever it comes)…. But then the last bit, fees, there seems to be a serious jump in fees charged! When money was super easy it wasn’t that easy for banks to change fees, but anyone that has been to bank recently knows that this has changed in last few years: there are now fees on everything. All-in-all, the spike in rates has dented bank capital pretty seriously, but also improved banks’ earning potential going forward. Of course there will be large differences between well managed banks (those that have stable deposit base to fund cheaply from, and have managed to prevent too much of an asset-liability mismatch), and the crappy ones that “were skinny dipping” (to use Warren’s expression) by failing to control these issues. Because of this banking system is not at risk of collapse, but individual banks will see hardships - just like SVB, First Republic Bank, Signature Bank did…. It is the banks that drank their own koolaid too much, and listened to their own propaganda about great markets they served (startup and private equity complex??) while failing to monitor their own existential risks that are now going bust. As they should. My guess is we will see more distress in banking space, with higher borrower defaults and bankruptcies (which raises credit cost for banks), but overall banking system in western countries is just not levered enough to face systemic difficulties. Despite some stupid risks that few bank managers have taken, the regulatory tightening in bank leverage after Lehman crisis is working as intended.

And more banks will follow this path 

Hot off the press🚨 The Major Australian banks report stable first half 2024 results with a reported combined profit after tax of over $15 billion. We've built an interactive dashboard that allows you to dive deeper in the analysis 💡

Six months after bank runs and historic bank failures, how is the banking sector today? Our expert panel discussed systemic risks, mark-to-market losses, and reform proposals. Watch: https://lnkd.in/eDywD4Nc

Six months after bank runs and historic bank failures, how is the banking sector today? Our expert panel discussed systemic risks, mark-to-market losses, and reform proposals. Watch: https://lnkd.in/eDywD4Nc

The economic and market landscape for regional banks has not been easy in recent years and the challenges are expected to continue. This new blog by Lily Isham looks at key strategic advantages outsourcing can provide to help regional banks thrive. #regionalbanksolutions Read more here: https://bit.ly/3VBsn9I

U.S. Banks are facing roughly $600 billion of unrealized losses which accounts for roughly 25% of total banking capital, near the highest levels in history. but as per Fed, banks are well capitalized and safe

[#EuropeanBanking] What do the 2023 year-end reports indicate about the consequences of the perceived reduction in risk for European banks? Discover in our new report: https://lnkd.in/eycTi2Cv #IFRS9 #CreditRisk #ECL

The economic and market landscape for regional banks has not been easy in recent years and the challenges are expected to continue. This new blog by Lily Isham looks at key strategic advantages outsourcing can provide to help regional banks thrive. #regionalbanksolutions Read more here: https://bit.ly/45oQM6D