“Underwater bond positions . . . have to be addressed”

It can be tough to take the pulse of the US’s regional banks even in normal times, amid the noisy turning gears of the global systemically-important banks.

But it matters because Silicon Valley was at heart a regional bank, albeit a large one. So understanding the business (and regulation) of smaller banks is an important part of the US bank-run picture.

Alphaville got hold of Tom Michaud of Keefe, Bruyette & Woods for a couple of chats. Michaud has been chief executive officer of KBW since 2011.

The specialist investment bank has had a helpful vantage point; its analysts focus on less heavily covered parts of the financial sector, and it is owned by Stifel Financial, a midsized publicly listed bank with a wealth management arm based in St Louis, Missouri.

This conversation has been edited for clarity, and to pull together two conversations from Saturday and Monday.

US regulators stepped in to backstop depositors of two failed banks on Sunday night, but bank stocks are still selling off. Why?

It was a step in the right direction, but obviously has not done enough to calm the markets.

The government made a very strong statement about Silicon Valley Bank and Signature Bank’s deposits, but still didn’t confirm they’d stand by any other banks’ deposits. My instinct is that they didn’t go far enough, there still is uncertainty for corporate treasurers around uninsured deposits . . . 

[As for the Fed’s new Bank Term Funding Program,] it’s a real positive that adds to liquidity. I’m not sure if it will be big enough, but I imagine it could be increased in size.

What do you make of Signature Bank’s closure? It sounds like investors — and even the bank’s own board members — were surprised.

I have to tell you, the speed at which that bank was closed, I think, is what’s got bank-stock investors very worried.

A rapid failure like that makes investing in bank stocks like that far more risky. That is something I’ve been hearing a lot about in the market [on Monday]. 

[That said,] I’m really pleased to see that the bank stocks have bounced off their lows. If we get some stability and orderliness, the industry is sound.

The sell-off has hit the large global banks, too. What do you make of that?

When you see even the big bank stocks trading as weak as they are [Monday], I think it tells you the market is concerned about more than just a handful of banks . . . 

The banking industry is well capitalised. It doesn’t have an issue with problem loans at the moment. It’s really more of a confidence moment for depositors.

What should the banks do to shore up confidence?  

These underwater bond positions are going to have to be addressed. That’s what the market has decided it wants to focus on. Banks who have larger [mark-to-market losses] could be candidates to raise capital.

But I also don’t think that their position is as dire as Silicon Valley’s. Remember it was an outlier, and its bond portfolio was so much bigger than a typical bank’s that it was an unusual circumstance . . . but no typical bank has anything to the degree of Silicon Valley Bank. That’s why we need orderliness, so it can get straightened out.

Most owners of bonds — whether you’re a bank or not — have a loss in your bond portfolio. Interest rates are higher, so that shouldn’t be a shocker to anybody.

But depositors are going to test the strength of the system, and that’s what’s happening now. And banks with bond losses that are not significant may still get tested because the market is nervous. That’s why we need the government, banking agencies, here to calm things down . . . 

The real issue is confidence in uninsured deposits. There are some really strong banks out there that may see some deposit outflows because of loss of confidence.

It makes a key metric, the size of your bank, the key metric.

What would that mean for the US financial system and economy?

What I worry about is that corporate depositors [with more than $250,000 in the bank] are going to believe that some banks are too big to fail. And they’re going to purely use size as a benchmark [of where to put their money] . . . 

The system is solvent, but the uncertainty is going to eventually overflow into the real economy if it doesn’t calm down. If deposits get pulled from banks, they’re going to make fewer loans.

Anything else you want to tell readers of the FT and Alphaville?

The regional banks were big support mechanisms during Covid, and for getting government assistance through the PPP program to corporate America, especially small businesses. A lot of that liquidity has still been hanging around on these bank balance sheets coming into 2023. So this moment, with these higher rates and stress, is here somewhat because of their involvement in support of the economy during Covid.

I feel like they’ve earned the chance to have a support mechanism, given the support they’ve given the economy over the past couple of years. I assume no one is going to feel bad for a bank. They were doing the role they were supposed to do . . . But one company had a bad outcome, and now that one moment is impacting the whole confidence in the system. And that’s why regulators need to step up.

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