Below are articles from our "Is Your Bank Safe?" series examining banks with issues
of which depositors should be aware. Banks that we consider safest for depositors in terms of
our stress test criteria are highlighted in our
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Last week, the Fed released the hypothetical scenarios for its 2024 annual stress test. The assumptions for the 2024 stress test have changed very little compared to last year's ones. With that being said, this year's test will include an additional exploratory analysis that will assess the resilience of the banking system to four major risks.
We have been warning our readers of various issues in the U.S. banking sector for almost two years. In this article, we highlight a lending segment that looks like a major concern for the largest U.S. banks. Importantly, this issue is being discussed rarely because it is a black box for analysts, investors, and depositors. We're talking about so-called shadow banking loans.
In our banking articles, we have been discussing issues in the CRE loan space for more than 18 months, warning readers that this lending segment could likely lead to a major crisis in the U.S. banking system. Several important events that occurred last week have further confirmed our view that a CRE-induced crisis is likely inevitable.
Bank of America (BAC) has recently published its 4Q23 results. In the presentation deck, there was a slide on which the bank was showing that it had significantly improved its balance sheet since 4Q09. While some areas were indeed improved, there are a lot of issues that could lead to much worse consequences for BAC, compared to the Great Recession, should a major crisis arise.
Three months ago, we published an article on Wells Fargo (WFC) in which we discussed the bank's Q3 numbers. In particular, we highlighted a massive spike in the bank's non-performing CRE loans. We also noted that the situation with the bank's CRE lending book was very likely to deteriorate further as this is just the beginning of massive issues with WFC's CRE portfolio. The bank's Q4 results and the commentary from WFC's management confirmed our views. Moreover, in addition to bad results in the CRE space, WFC's Q4 numbers revealed concerning trends in its credit card business.
If you follow our banking work, you have probably noticed that we have published quite a lot of articles on commercial real estate lending. In fact, this segment is in such bad shape now that it could likely trigger a major financial crisis, which could be worse than the Great Recession.
Over-the-counter (OTC) derivatives are derivatives executed and settled bilaterally with counterparties without the use of an organized exchange or central clearing house. OTC contracts are the riskiest type of derivatives.
JPM had $603B in total gross derivate payables as of the end of 3Q, of which around 76% were OTC derivatives.
The Fed has recently published the October 2023 Senior Loan Officer Opinion Survey on Bank Lending Practices. This is a quarterly survey conducted by the Fed, which provides insights into the largest U.S. banks' lending practices. We have been discussing various issues in the U.S. banking system for more than 18 months now, and we expect that those issues are likely to lead to a major crisis in the sector. Notably, the October 2023 survey shows that the system is currently facing the issues of which we have been warning.
It would seem that people do not want to hear that their banks have any issues. This tells me that most market participants are still quite oblivious to the issues we see in the bank balance sheets or are simply choosing to ignore them. Therefore, it seems that there are very few who are preparing for what can be the worst banking crisis seen since the 2008 financial crisis or even the Great Depression.
More than a year ago, we published an article on Bank of America (NYSE:BAC), in which we highlighted some of the bank's issues. In particular, we said that a massive increase in BAC's commercial loan book looked like a major concern to us, although BAC's management named this significant growth in its commercial credit portfolio as a "de-risking of the bank's balance sheet." In this article, we would like to show some recent data suggesting that BAC's decision to massively increase its commercial loan book could turn out to be a major strategic mistake.
The recent data published by the St. Louis Fed shows that even the U.S. banking regulator itself is completely unprepared for a rising rate environment. The chart below shows that the Fed has posted a loss of almost $100B since the beginning of the year, and its total loss since September 2022 has reached $113B. Importantly, these are not paper losses but real losses to the U.S. Treasury and, hence, a part of the U.S. budget deficit. In this article, we would like to take a deeper look at this quite extraordinary event.
A month ago, we published an article titled "Commercial Real Estate May Cause The Next Financial Crisis," in which we mentioned that CRE lending is one of the major issues for the stability of the U.S. banking system, and, importantly, this issue is often underestimated by mainstream financial media, rating agencies, and research departments of large banks. We said that CRE lending, together with consumer loans and C&I credit, would be in the spotlight when banks start reporting their 3Q numbers.
In this article, we would like to discuss Wells Fargo's (NYSE:WFC) Q3 numbers.
If you follow mainstream financial media, you have probably noticed that most of them are saying that the liquidity crisis in the U.S. banking system has ended and is unlikely to repeat. In fact, Jerome Powell just that "banks are generally well capitalized and highly liquid in our country." However, a deeper look at the latest sector data published by the FDIC suggests that the liquidity position in the country's banking system remains challenging, and a potential sharp increase in policy rates could very likely lead to major issues and bank failures.
In the first article in our series, we discussed consumer lending and its potentially significant negative impact on the stability of the banking sector. In our second article, we discussed CRE (commercial real estate) lending, which also is a major threat to the stability of the banking system, in our view. In this article, we would like to discuss commercial & industrial (C&I) lending.
There have been several bearish articles on Schwab lately. For our clients, we published detailed reports on almost all large brokerages that disclose their financial data publicly, and Schwab was among them. As such, we would like to address the bearish thesis on Schwab. Most importantly, please recognize that we're going to discuss the long-term financial stability of the company rather than provide a short-term view on the stock. Our focus always is on the stability of the financial institution rather than opining upon the stock valuation.
Canadian banks were among the safest in the world during the 2008–2009 crisis, but a lot has changed since then, and we believe the Canadian banking system is very likely to face major issues. One of the most significant problems that we have discussed is that, in contrast to the U.S., Canada has quite a large share of variable-rate mortgages, which are certainly a big headache for borrowers in the current rising rate environment. The latest numbers reported by the Canadian banks suggest that the situation continues to deteriorate.
In our first article, we discussed consumer lending and its significant negative impact on the stability of the banking sector.
This is the second in this series of articles within which we will discuss commercial real estate (CRE) lending.
The current rise in consumer lending will likely place greater pressure on the already weak banking system in the coming years. This is just one of the many issues we have identified, upon which very few are currently focusing.
As part of our ongoing series of articles on bank stability, and at the request of many of our clients at Saferbankingresearch.com, we wanted to address the merger between PacWest (PACW) and Banc of California (BANC).
The Big Six Canadian banks have recently reported Q2 results, and the numbers confirmed various concerns that we have discussed in our previous articles. Canadian banks are very likely to face major credit quality issues due to a combination of significant exposure to variable-rate residential mortgages, a higher-for-longer interest rate environment, and a very elevated level of household debt in Canada. Moreover, there is also pressure on the revenue side.
As part of our ongoing series of articles on bank stability, and at the request of many of our clients at Safer Banking Research, we wanted to address Ally Bank in this missive. I want to take this opportunity to remind you that we have reviewed many larger banks in our public articles. But, I must warn you. The substance of that analysis is not looking too good for the future of the larger banks in the United States.
As part of our ongoing series of articles on bank stability, we wanted to address Canadian banks in this missive. Canada did not have a banking crisis in 2008. In fact, during the Great Recession, Canadian banks, especially the so-called Big Six, were among the safest banks in the world. However, their business models have changed significantly since then. Yet, many retail depositors in both Canada and the U.S. still think that Canadian banks would be a safe haven in a major global crisis. In this article, we would like to highlight some of the issues we currently see at Canadian banks.
As part of our ongoing series of articles on bank stability, we wanted to address PNC Bank (PNC) in this missive. As you can see, PNC has a number of issues which could come to the foreground in the event the market begins to move into a difficult economic environment.
In contrast to PNC, the Top-15 U.S. banks we have found at SaferBankingResearch have low exposure to commercial lending, rely on much cheaper funding, have better operating efficiency, and have much higher capital adequacy ratios. The banks we have identified also have lower shares of longer-duration bonds.
George Santayana once wisely noted that "those who do not remember the past are condemned to repeat it." Throughout market history, market historians had many instances from which lessons in hubris should have been learned. Yet, most do not learn the lessons history has to offer.
Many depositors were shocked by the SVB collapse, which, in our opinion, demonstrates that the majority of them are ignorant of serious systemic risks in the U.S. banking system. In fact, we specifically warned about this issue residing at the major banks in an article just weeks before SVB (SIVB) collapsed.
The FDIC recently released its Quarterly Banking Profile, a publication that summarizes the financial performance of all FDIC-insured institutions. In this article, we would like to highlight the key takeaways from the publication, which, in our view, suggest that most U.S. banks are very likely to face major liquidity issues soon.
The Fed is adjusting its bank stress test, but,
unfortunately, its new testing standards leave serious holes in determining the true strength of a bank. Let's take a look at the red flags within the Fed's new testing standards.
In our view, JPMorgan is one of the best U.S. mega banks. It is a well-run institution and its business and overall fundamentals have significantly improved over the past 10 years. However, even this high-quality franchise has quite a lot of red flags, which, in our view, could lead to major issues for depositors in a bear market.
Over the last few months, we have written several articles outlining our views of banks in general. We explained the relationship that you, as a depositor, have with your bank is in line with a debtor/creditor relationship. This places you in a precarious position should the bank encounter financial or liquidity issues. Moreover, we also outlined why reliance on the FDIC may not be wholly advisable. And, finally, we explained that the next time there is a financial melt-down, your deposits may be turned into equity to assist the bank in reorganizing.
You must understand the relationship you have with your bank in order to protect your assets.What is a "bail-in?"How can a "bail-in" affect your rights as a depositor?In my last article regarding the safety of banks today, I tried to explain the legal relationship you have with your bank:"Although you may feel that you have a credit balance in your bank account, pleaserealize that your credit balance is only as safe as the underlying bank's assets. Since a bank's assets are generally the loans it owns, the underlying loans of your bank are actually your problem. In fact, most people do not realize that the bank is not a simple depository agent for money.