YouSaid · the spoken record

Steven Kelly

lines on the record: 95
first: 2023-07-11
most recent: 2023-07-11
sittings or episodes: 1
sources: podcast

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“Right, right. So, yeah, that's exactly right, Jack. I mean, the 2008 story, I mean, Warren Buffett comes along and makes an investment in Goldman. And yeah, like stockholders are not making out great at that time, but the business survives. And, you know, that's a huge endorsement. And you can look at the same story with Credit Suisse, right? Credit Swiss is basically dragging along at stock price four bucks, three bucks, whatever for months and months from October until it fails ultimately in March. And what sets off the final, what's the final death knell in March? Well, its biggest shareholder, the last one who was putting capital in, goes on the news and says absolutely not when asked if he would put in, if he would ever put in more capital and cred Swiss. And like that, the business goes away. So, you know, it kind of goes back to our discussion of capital. If you have no one willing to equitize the business, to put in new capital,”
2023-07-11 · Forward Guidance · The Basel III Endgame: Bank Regulation In A Post-SVB World | Steven Kelly · IDENTIFIED FROM THE TRANSCRIPT
“This would be very bad for the stock price. I mean, I think it's what happened to Citigroup in 2008, 2009. If you have to, the time at which you need equity funding is when your stock price is in the tank. So you really don't have a lot of control. So very bad for stockholders, but you remind you of your title. You're at the Yale Financial Program for Financial Stability. You're thinking about financial stability, not equity investors and stocks.”
2023-07-11 · Forward Guidance · The Basel III Endgame: Bank Regulation In A Post-SVB World | Steven Kelly · IDENTIFIED FROM THE TRANSCRIPT
“That's an important part of the story can you recapitalize the business. So we can talk about like, you know, losses at Bank of America, for instance. Let's, you know, let's say the losses at Bank of America were even bigger. Let's say they were the exact size of their equity, which is roughly what the situation is for BB. Someone's going to come along and capitalize Bank of America, right? That's a great business. They'll get some capital from Warren Buffett or from somebody who wants to come along and equitize the business.”
2023-07-11 · Forward Guidance · The Basel III Endgame: Bank Regulation In A Post-SVB World | Steven Kelly · IDENTIFIED FROM THE TRANSCRIPT
“So the loss on their bond portfolio peaked in Q3 of 2022, and it was actually lower in Q1, or sorry, in Q4 of 2022, which they reported in February of this year. And after that, their stock traded at $280 for weeks and weeks. The idea there is like, okay, in theory, well, not in theory, equity investors have for sure read the 10K. They're valuing this bank at $280 a share. And it's not until SVB goes out secretly and says, look, we need to raise capital. We need to sell these assets. We're getting way bigger runoff on the deposit side than we've expected than we've previously forecast that suddenly there's a problem in nobody wants to recapitalize the business at that point stock price goes to zero”
2023-07-11 · Forward Guidance · The Basel III Endgame: Bank Regulation In A Post-SVB World | Steven Kelly · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, I really don't. And, you know, I think it's important to remember too that really it wasn't a problem for the banks that failed until we saw this deposit attrition. So, you know, I've sort of been, you know, yelling till I'm blue in the face that the story that it's unrealized bond losses that set off SVB is just not true. It's a classic thing that happens in bank crises where you have a crisis. And you go back and look at the balance sheet and you go, what went wrong? And if that's not what happened in real time, that's not what you can do ex post. And the reason I say that is SVB was reporting these bond losses very publicly for quarters and quarters. And the loss was actually falling. And, you know,”
2023-07-11 · Forward Guidance · The Basel III Endgame: Bank Regulation In A Post-SVB World | Steven Kelly · IDENTIFIED FROM THE TRANSCRIPT
“If there's no bank run, and really if deposits aren't leaving the banks at all, let's say the large bank, JPMorgan, which by the way, J.P. Morgan did an exquisite job of, quote, hedging their interest rate risk. And the reason how they hedged that is not taking a lot of interest rate risk in the first place, not by buying agency mortgage-backed securities and then entering in some huge swap position. I think their duration of their held maturing securities was a lot, a lot quite low, definitely single digits. Anyway, Is there any way you see unrealized losses at large banks becoming a problem in the absence of bank runs from them? And obviously this is a telltale risk scenario.”
2023-07-11 · Forward Guidance · The Basel III Endgame: Bank Regulation In A Post-SVB World | Steven Kelly · IDENTIFIED FROM THE TRANSCRIPT
“And if you're worried about those big banks, inflation is not no longer a concern when you're looking down the barrel of a financial crisis. So that was always sort of in the background of this. SVB wasn't important enough in itself, but if you're talking about the system going down, the Fed's going to cut interest rates. And in this situation where the losses were so driven by just interest rates, it wasn't toxic, uncertain, credit assets, whatever. The Fed has a really easy solution to that that it did not have in the GFC, in COVID to just cut the Fed funds rate.”
2023-07-11 · Forward Guidance · The Basel III Endgame: Bank Regulation In A Post-SVB World | Steven Kelly · IDENTIFIED FROM THE TRANSCRIPT
“Right, right. That was always in the background of this story is if you want to worry about basically unrealized losses on treasury securities, taking down the system, you have to tell a story where the Fed doesn't cut interest rates as we start to worry about the Bank of Americas and JP Morgan's of the world. If you have a crisis, if you have a systemic financial crisis because treasury securities are yielding too much, I mean, the Fed has to literally be asleep. You can cut rates, recapitalize the whole system. Obviously, the Fed doesn't want to do that while inflation is still high. But if you're living in a world where Bank of America, JP Morgan, Citigroup, where these banks are in trouble because of unrealized losses on Treasury security or on all securities just because of the Fed's raped, if it's not credit risk, it's just about rates. The Fed has a nuclear option.”
2023-07-11 · Forward Guidance · The Basel III Endgame: Bank Regulation In A Post-SVB World | Steven Kelly · IDENTIFIED FROM THE TRANSCRIPT
“Absolutely bank. You said Citigroup had 30 billion. I think Bank of America has over 100 billion of unrealized losses on their securities book for held to maturity. And they make so much money just on paying their depositors zero for the case of individual depositors and then making loans at higher think that they can afford that. And I mean, Bank of America goes down. We're going to have, you know, we're going to be talking a lot, Stephen. Right.”
2023-07-11 · Forward Guidance · The Basel III Endgame: Bank Regulation In A Post-SVB World | Steven Kelly · IDENTIFIED FROM THE TRANSCRIPT
“Unrealized losses, but they're never going to realize that because they have a deposit franchise, that marking to market is based on market rates that they're not going to pay. So it's just a different story. And to me, that's the real interest rate risk is on the quantity of liabilities more than the price.”
2023-07-11 · Forward Guidance · The Basel III Endgame: Bank Regulation In A Post-SVB World | Steven Kelly · IDENTIFIED FROM THE TRANSCRIPT
“Senior liabilities, namely your deposit franchise, on really interest rate sensitive sectors. And you could see how that story gets short-circuited when the Fed goes from 0 to 5% in a year. It's like if you were exclusively funding loans from oil producers and oil goes from $100 to $20 in a year, right? I mean, the deposits are just going to get run down and you're going to get squeezed on your liability side, have to go to market, have to pay the new rates, the new higher rates. And, you know, the bank's over at that point. So to me, that's the real interest rate risk is in the clientele, in the industry focus, in the regional focus, in each of these cases. And that's sort of why we saw which banks we saw get really squeezed and put under pressure by this. Citigroup had $30 billion.”
2023-07-11 · Forward Guidance · The Basel III Endgame: Bank Regulation In A Post-SVB World | Steven Kelly · IDENTIFIED FROM THE TRANSCRIPT
“But the interest rate risk that existed with SVB signature First Republic, all these banks that sort of got swept up, Pacquest, et cetera, is really is not in the price of their liabilities. So we're talking about it like, okay, yields went to 5%. You see the problems, but that's not really what happened. The issue is in the quantity of their liabilities. So what happened, well, I mean, what sparked this whole thing was an 8K filing by SVB. They said, look, our cash burn from our depositors is way higher than we expected. And so that, to me, is the real interest rate risk of this story. You have, in SUB's case, Silicon Valley, as your depositors. And signatures case, you know, you bet too much of the franchise on crypto. These are interest rate sensitive sectors. So to me, that's the real interest rate risk here is you've sort of bet your.”
2023-07-11 · Forward Guidance · The Basel III Endgame: Bank Regulation In A Post-SVB World | Steven Kelly · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, yeah. And the way I think about interest rate risk with 2023 is, again, not, I don't think this textbook definition of how you'd apply to a hedge fund is useful.”
2023-07-11 · Forward Guidance · The Basel III Endgame: Bank Regulation In A Post-SVB World | Steven Kelly · IDENTIFIED FROM THE TRANSCRIPT
“That's a solid in interest margin. And yeah, market rates are 5%, but who's that for? I mean, that had very little bearing on First Republic's business. But once the run showed up, you can see how the problem would occur. But again, now these assets live inside JPMorgan. JP Morgan's not paying 5% on its liabilities. It has an amazing deposit franchise that yields next to nothing. So the story of, you know, that this is a straightforward interest rate risk story is just not accurate. I mean, these aren't market funded market assets. It's a deposit franchise.”
2023-07-11 · Forward Guidance · The Basel III Endgame: Bank Regulation In A Post-SVB World | Steven Kelly · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, yeah, absolutely. And you can look at, like, take First Republic. You know, part of the story that's being told about First Republic is, look, they had this loan book and the yield is 3.7%, but they had to go to the FHLB, the Federal Home Loan Bank system. They had to go to the Fed and borrow at 5% to the extent you lose depositors. You're going to market. You're going to the repo market, the Fed funds market, commercial paper market, and paying 5%. You can see you don't have a profitable bank at that point. But it was bought out by JP Morgan. JP Morgan is not paying more than 3.7% on its deposits. I mean, straight up. So that's the story of if you have a bank, like if First Republic didn't have a run, it has no solvency issue. Like its depositors were accepting less than 1%. It was yielding 3.”
2023-07-11 · Forward Guidance · The Basel III Endgame: Bank Regulation In A Post-SVB World | Steven Kelly · IDENTIFIED FROM THE TRANSCRIPT
“It's just not accurate. If you look at even the large regional, excuse even the large GSIV banks, they have huge swap positions on, but they're not hedging, they're held maturity securities or loan portfolio because they're its held maturity. They don't do that at all. What I said reasonably accurate.”
2023-07-11 · Forward Guidance · The Basel III Endgame: Bank Regulation In A Post-SVB World | Steven Kelly · IDENTIFIED FROM THE TRANSCRIPT
“Actually, like, I mean, there are bank deposits right now that have been there for 50 years. So the weighted average life of banks is not one day just because it has the option of being one day does not mean it's one day. So if bank deposits stay at the bank and pay a very low amount, then the bank can have a natural hedge by, as you say, just earning the higher yields on the new loans that it makes. So the real hedge is based for banks is the assumption of like the weighted average deposit life and then that in combination with the deposit beta, how much banks are going to have to increase deposit costs for every 100 basis points increase in rates for the risk rate of treasuries. And what are those assumptions and how much does the reality differ from those assumptions? The notion that banks are hedging their assets with swaps.”
2023-07-11 · Forward Guidance · The Basel III Endgame: Bank Regulation In A Post-SVB World | Steven Kelly · IDENTIFIED FROM THE TRANSCRIPT
“Right, and on your sub stack without warning, you write, you reference a paper citing that only 6% of aggregate assets in the US banking system are hedged by interest rate swaps. And that just question, what are you hedging? Are you hedging the securities? Are you hedging the loans? Are you hedging both? Are you hedging only in the available for sale? Are you hedging them only in the held to maturity category as well? I think it's common bank practice to explicitly not hedge held to maturity assets. And Silicon Valley, I think, had over 200 billion in the held to maturity category, by the way. And then it's so important that the notion that banks borrow short and lend long is not really true because banks have the option to, you have the option to withdraw money from your bank on a callable CD, but you callable demand deposit, but you don't.”
2023-07-11 · Forward Guidance · The Basel III Endgame: Bank Regulation In A Post-SVB World | Steven Kelly · IDENTIFIED FROM THE TRANSCRIPT
“Contract, they have a bunch of low quality corn they can't sell. All of a sudden, they have a huge financial. The same is true of a bank, right? So you're hedged by taking care of your deposits, tending to your deposit franchise. If you don't take care of it and your depositors run or walk, all of a sudden you have a huge exposed financial position on the asset side. And so that's really the same story. So asking banks to put on hedges is really double hedging if they're taking care of their depositors.”
2023-07-11 · Forward Guidance · The Basel III Endgame: Bank Regulation In A Post-SVB World | Steven Kelly · IDENTIFIED FROM THE TRANSCRIPT
“Right, exactly, exactly, or you just yield assets. And as they mature, you put more money, like you said, into new loans. And that's sort of the business of how banks hedge. In my most recent piece, I sort of give an analogy of a corn producer. And you can think about if a corn producer goes out and buys a bunch of short futures contracts because they're going to sell their corn into the market and they want to lock in the price. Financially speaking, they have one contract, right? They have an exposed futures position and they have a bunch of corn in the ground. I mean, they don't have any, they're not hedged from a financial perspective, but they're hedged because they have this literal product. But if they don't tend to their field, if they ignore their corn, if they ignore their production, and at the time of the maturity of the future,”
2023-07-11 · Forward Guidance · The Basel III Endgame: Bank Regulation In A Post-SVB World | Steven Kelly · IDENTIFIED FROM THE TRANSCRIPT
“Get squeezed on your long term assets, which don't change because they have a fixed interest rate. So that's true in like a hedge fundy sense. It's not really true of banks. Banks hedge by basically taking care of their depositors. So when rates go up, we don't all go change our bank accounts. When rates go up 100 basis points, we don't see any difference in our checking account. We see probably nothing in our savings account at that point too. And we don't rush to change that necessarily because banks offer us services. We keep our money with our banker. We have various payments that come out of our accounts and things like that. They have some fancy app or we're doing this and that, or money management, whatever else it may be. So that's sort of bank's hedge. If you maintain the deposit franchise, if you take care of your depositors, you don't get squeezed on that funding and you're not paying out purely with interest.”
2023-07-11 · Forward Guidance · The Basel III Endgame: Bank Regulation In A Post-SVB World | Steven Kelly · IDENTIFIED FROM THE TRANSCRIPT
“And if you look at the banking system as a whole, particularly with respect to swaps, I mean, that's where most of the research has been done because that's the one that leaves banks without liquidity risk. If you put on hedges in the futures market or elsewhere, you can really get pinched in the short term with collateral calls and things like that. Swaps, in theory, you've hedged your liquidity risk. But anyways, if you look at the data, banks aren't really hedging away their interest rate risk. In fact, banks are sort of where we rely on interest rate risk to live. That being said, we're talking about interest rate risk like it's talked about in textbooks, which is this idea that, okay, if you borrow short and lend long, you're exposed to some interest rate risk in the interim. So that's exactly banks, right? You have short-term deposits and you buy long-term assets. So if the yield goes up on your short-term borrowing,”
2023-07-11 · Forward Guidance · The Basel III Endgame: Bank Regulation In A Post-SVB World | Steven Kelly · IDENTIFIED FROM THE TRANSCRIPT
“What affected SVB, nor is it a contrast with any banking competitors. So, broadly speaking, hedging interest rate risk in the way we talk about it, like with literal hedges, is not a description, not really a true description of the banking system. We talk about SVB's hedges in 2021. They hedged 12% of their interest rate risk. That's 88% on hedge.”
2023-07-11 · Forward Guidance · The Basel III Endgame: Bank Regulation In A Post-SVB World | Steven Kelly · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, so there's really not really written into the capital rules to talk about interest rate risk. We can talk about hedging and this has really gotten a lot of congressional fuh because there's sort of this story about how SVB had some interest rate hedges in 2021 and they progressively dropped them over 2022. And so this has basically been characterized as a bet that interest rates were going to come down. The SV was going to be able to cash in on basically some naked interest rate exposure. And of course, that didn't happen, right? Rates went higher and higher. Fed is still going higher. And SUV doesn't exist anymore. So that's, I mean, that's true. It's also not really to a first approximation.”
2023-07-11 · Forward Guidance · The Basel III Endgame: Bank Regulation In A Post-SVB World | Steven Kelly · IDENTIFIED FROM THE TRANSCRIPT
“Got it. And in retrospect, holding a lot of treasuries and agency mortgage-backed securities with very little interest rate hedges, doing so is very risky at a period when interest rates go from 0% to 5%. But I guess, you know, it only will be as bad again if interest rates go from 5% to 10%, which in my personal opinion doesn't seem super likely, at least over the next year. So they don't really make any changes on interest rate risk, right? And can you speak to how you perceive interest rate risk within the banking system and perhaps what the recent rule changes suggest about how the Federal Reserve sees them?”
2023-07-11 · Forward Guidance · The Basel III Endgame: Bank Regulation In A Post-SVB World | Steven Kelly · IDENTIFIED FROM THE TRANSCRIPT
“Basically, because the treasury market was going haywire during COVID. So it was exempted for a year. They said Treasuries and reserves, that expired after a year. I think it's reasonable to reconsider reserves because of what I've been saying about them. But some banks have even pushed like, okay, keep Treasuries exempt forever too. If you want us to step in, they're credit risk-free, right? The Fed's behind them, right? I mean, the Fed's going to step in if the market goes haywire, right? Right, right. You can see the argument, and SVB sort of paints that picture of like, you don't want a bank to essentially be levered up treasury hedge fund, not holding any capital against that. That's different than reserves at the central bank.”
2023-07-11 · Forward Guidance · The Basel III Endgame: Bank Regulation In A Post-SVB World | Steven Kelly · IDENTIFIED FROM THE TRANSCRIPT
“And your point about what we've seen in treasuries over the recent year, recent few years in both directions is exactly distinct from reserves, which have no price or credit risk, right? The price of a dollar on deposit at the Fed does not change with interest rates. And that's part of why that really could easily be carved out from the calculation. Some banks have argued that treasury should be too. They said, look, we'll intervene. We'll support the Treasury market a lot more if you don't count Treasuries and even our non-risk weighted ratios. I mean, you guys are going to pay them back, right? So why are we even including this in our capital ratio?”
2023-07-11 · Forward Guidance · The Basel III Endgame: Bank Regulation In A Post-SVB World | Steven Kelly · IDENTIFIED FROM THE TRANSCRIPT
“So not on the autonomous vehicles, they're definitely having banks sort of reconsider and standardize in some cases how they're accounting for their specific assets, their trading assets and things like that. Having banks rely less on their own model. So to keep with your analogy, you have a Ferrari dealership and a Corvette dealership. Previously, the Fed was more willing to let the Corvette dealership say this is how risky Corvette is, and the Ferrari dealership say this is how risky a Ferrari is. And Barr wants to come in and standardize that where it's really not modelable or not reliable models anyways. And the idea internationally is let's put a floor under this. So, okay, you can model some of your own risk, but if the number you come up with falls below.”
2023-07-11 · Forward Guidance · The Basel III Endgame: Bank Regulation In A Post-SVB World | Steven Kelly · IDENTIFIED FROM THE TRANSCRIPT
“Or in case of treasuries, I think any capital against those assets. But then total leverage is like ignore any risk weighting. We're just looking at the total leverage of the bank. And that's what the supplementary leverage ratio is. So they're not raising the supplementary leverage ratio. They are raising the risk weighting one, but are they changing the definitions of risk weighting or they say, hey, actually, maybe these autonomous vehicles, maybe we're seeing pile-ups on the interstate. Maybe it's time to actually require drivers to hold some insurance against this. Are they saying, hey, let's take it to 10% or 30% of capital or no?”
2023-07-11 · Forward Guidance · The Basel III Endgame: Bank Regulation In A Post-SVB World | Steven Kelly · IDENTIFIED FROM THE TRANSCRIPT
“From 2008, and that, and that makes a lot of sense. However, there are in the risk-weighted model. The autonomous fleet are the basically the equivalent of risk free stuff like treasuries and agency mortgage back securities, not private label, but agency mortgage-backed securities. And I think, I don't know if this is true, but I think that at the time it was accurate that the risk weighting for treasuries was literally 0% and for agency mortgage-backed securities, I think it was 20%, which is quite low. And the last year, we've seen a lot of autonomous vehicle accidents, let's put it that way, because interest rates went up from 0% to 5%. And if you had a 10-year treasury, I don't know what you're down, 15% on agency mortgage-backed security, you're down, you know, in some cases over 20%. So what is a quote, risk-free security is not risk-free. Of course, very little credit risk, but there's interest rate risk, as everyone knows. So the first risk weighting did not require banks to hold a lot of capital.”
2023-07-11 · Forward Guidance · The Basel III Endgame: Bank Regulation In A Post-SVB World | Steven Kelly · IDENTIFIED FROM THE TRANSCRIPT
“So there are two types of capital requirements. One is risk-based and the other is non-risk based. So I think the main one common equity tier one, that's like if you have a fleet of vehicles and the government requires you to buy insurance on vehicles, which actually in reality they do, or liabilities insurance. If you have, you know, a motorbike that's in disrepair, you're probably going to have, it's a little bit more risky than, let's say, a purely autonomous fleet that never gets in an accident, right? So they say, oh, you don't have to hold that much insurance or capital against your autonomous fleet. But if you're going to ride your motorbike, you're going to have to take a ridiculous amount of insurance. And that is appropriate. So a lot of credit products, banks have to hold an enormous amount of capital against very risky loans because the regulars learn their lesson.”
2023-07-11 · Forward Guidance · The Basel III Endgame: Bank Regulation In A Post-SVB World | Steven Kelly · IDENTIFIED FROM THE TRANSCRIPT
“Overnight with equity. You got to do a capital raise. You got to wait a few quarters to retain some earnings, right? So that's a whole process. And so that's where the distinction becomes important. This is not just a different way to fund yourselves. I mean, the main thing that we rely on banks for is to give us deposit services, is to be a place for our money, right? To think about the funding side as sort of a secondary effect of the lending side is, I think, not correct before anybody wants a loan, they want a place to store their checking account. And that's what happens when the bank makes loan, right? If they write you a mortgage, they create a checking account for you, put the money in it. So it's sort of the sequence of events sort of gets reversed sometimes.”
2023-07-11 · Forward Guidance · The Basel III Endgame: Bank Regulation In A Post-SVB World | Steven Kelly · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, that's absolutely true. So, I mean, what we're really talking about here is at the margin, if you want to expand and grow your balance sheet, certainly a bank that's bleeding deposits is going to be worried about that and not in a hurry to make more loans. But it's at the margin, this ability to intervene and step in in the way we want banks to do can be limited by capital rules and leverage rules, which sort of limit their ability to lever up. So the point just being that you can write a capital story that sort of works over time, right? So retain some more capital, raise equity. But if a market breaks today and you want Goldman Sachs to put a floor under the market because it can do that faster than the Fed or you want Morgan Stanley to or whomever, it's not going to be able to raise equity by tomorrow, right? It's not like it can just choose to fund itself.”
2023-07-11 · Forward Guidance · The Basel III Endgame: Bank Regulation In A Post-SVB World | Steven Kelly · IDENTIFIED FROM THE TRANSCRIPT
“Yes. So banks create deposits when they make loans. And that is an accurate description of the technicals of banks. However, banks need capital because they're required to have capital, either from governments or from depositors who just want a little bit of protection. And I don't think bankers think of, oh, yeah, deposits are leaving our bank, but it's no problem because we can just make loans. Like if they make loans to people, then those deposits will leave as well and then their capitals gets even worse, right?”
2023-07-11 · Forward Guidance · The Basel III Endgame: Bank Regulation In A Post-SVB World | Steven Kelly · IDENTIFIED FROM THE TRANSCRIPT
“All builds into your equity. But in the short term, it's important that capital is flexible and capital is just a really scarce resource. So sometimes it just gets mixed characterized as, oh, it's just a different way for banks to fund themselves. But you can't be a bank that's exclusively capital because you have no deposits then. So it gets tricky the higher and higher you take the requirements if you don't build in the flexibility. It's harder for banks to be banks when you serve raise and raise and raise capital requirements.”
2023-07-11 · Forward Guidance · The Basel III Endgame: Bank Regulation In A Post-SVB World | Steven Kelly · IDENTIFIED FROM THE TRANSCRIPT
“Well, a couple things here. I mean, banks fund banks create deposits when they make loans, right? And when you make a loan overnight, you create a deposit. So if I take my deposit from one bank, if I take my deposit from JPMorgan and bring it over to Citigroup, I've just increased Citigroup's leverage, right? I mean, I gave them more deposits. So if they take it from me, their leverage goes up. That's sort of an inconvenient truth for folks who want really high capital levels because you can think about, oh, you have a crisis in the treasury market. You have a crisis in small businesses during COVID. Then you loan a lot of loans all of a sudden. Well, when you issue those loans, you create the deposit on the liability side and your leverage goes up. So it's really hard. You can't fund the marginal loan, the marginal intervention with capital. You can raise capital over time and you can retain your earnings.”
2023-07-11 · Forward Guidance · The Basel III Endgame: Bank Regulation In A Post-SVB World | Steven Kelly · IDENTIFIED FROM THE TRANSCRIPT
“Here that really come out tough, and like I said, you know, it's two percentage points of capital, and just to go back to your sort of definition of capital, Jack, I think it's worth noting, you know, we talk about capital as like it's a way that banks fund themselves, right? So it's available to take losses before the depositors take losses. It's equity funding. You know, it's meant to represent that banks aren't risky. And that's all true. And like you said, Barr says capital is beautiful. You know, he really talks about how this is just a different kind of way for banks to fund themselves. Necessarily, as some sort of thing other than that. But the important thing to remember is”
2023-07-11 · Forward Guidance · The Basel III Endgame: Bank Regulation In A Post-SVB World | Steven Kelly · IDENTIFIED FROM THE TRANSCRIPT
“When the Fed does QE and it shoves trillions and trillions of dollars of reserves into the banking system, banks leverage goes up, even though it's the safest asset in the world with literally no liquidity or capital risk. So you don't have to be soft on that ratio. You can raise, you can go from 5% to 7% or whatever you want to do, but you carve out reserves. And I think that was expected as part of, you know, maybe as a carrot to the rest of these changes. Barr said he had no interest in it and he sort of mentioned like, okay, we'll wait and see if a treasury market breaks again like it did in 2020 when the Fed basically gave an exemption to this rule. And he sort of said, all right, well, we'll keep watching the Treasury market. And if something happens, we'll reconsider, but I'm not going to make any changes. So he really came out tough. And there's a number of things.”
2023-07-11 · Forward Guidance · The Basel III Endgame: Bank Regulation In A Post-SVB World | Steven Kelly · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, so it's just enhanced, and that's just for the biggest banks. The biggest banks have to hold. So the SLR is 3% capital to assets, all assets, non-risk weighted. ESLR is 5% for G-SIBs. So they just have a higher threshold to meet. And actually their depository has to hold 6%. But at the holding company level, they have to hold 5%. What was expected or what was hoped for, I think, was that in doing this calculation, the Fed would exclude reserves at the Fed because it's sort of goofy to include reserves of the Fed, which are infinitely liquid and have zero credit risk in some sort of calculation of capital. And the problem with it is, you know, you could build it into the calculation, but the problem is this number changes a lot when you have a crisis, right?”
2023-07-11 · Forward Guidance · The Basel III Endgame: Bank Regulation In A Post-SVB World | Steven Kelly · IDENTIFIED FROM THE TRANSCRIPT
“But sometimes we get it wrong, so we have these backup capital ratios to say, okay, let's just look at all the assets. Let's not wait them at all. Let's just say how much capital do you have against all your assets. Sometimes in the case of what's called the supplementary leverage ratio or the enhanced supplementary leverage ratio, in the case of the biggest banks, we say let's include even your off-balance sheet assets. So your derivative exposures and things like things you may, you know, that were previously hidden off balance sheet. Let's get all that into one calculation and look at your capital against it. And one particularly notable thing from Barr's speech was that he is not going to amend this ESLR for the biggest banks. And there was a big expectation that there was going to be some.”
2023-07-11 · Forward Guidance · The Basel III Endgame: Bank Regulation In A Post-SVB World | Steven Kelly · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, so this is risk weighted based capital up from the numbers depend on banks' results in the stress test. So you sort of have a minimum capital level, a four and a half percent. You'll have a GSIB surcharge if you're a GSIB. You have a minimum buffer on top of that of 2.5% plus basically any results of your stress tests that are worse than that. So it depends on the bank, but it could be 13, 14, 15% capital, the risk-weighted assets. And so this is going to top that off. Another piece is there are non-risk weighted ratios. Basically, this is meant to be a backstop. Risk weights are man-made, basically. We decide how to risk weight assets. You can see the mistakes we've made in the past, right? AAA subprime MBS seems like something you should rate pretty highly as AAA.”
2023-07-11 · Forward Guidance · The Basel III Endgame: Bank Regulation In A Post-SVB World | Steven Kelly · IDENTIFIED FROM THE TRANSCRIPT
“Right. And he was talking about the beauty of capital is that how it can absorb losses. And whenever someone from the Federal Reserve talks about how beautiful capital is, you know something's been going on in the financial system or in the banking system. So there's capital that banks hold against losses. So if a loan goes bad or they lose money, that can absorb the loss rather than the depositors taking the loss or the federal deposit insurance corporation having to pay up. And then a G-sib is the globally systemically important bank. So very, very large banks. Perhaps you can tell us what the sort of threshold is. So it's 2% extra capital for the very largest banks, which may mean 100 billion. And what is that up from? And also, is this risk-based capital, risk weighted based capital, as opposed to a total leverage ratio?”
2023-07-11 · Forward Guidance · The Basel III Endgame: Bank Regulation In A Post-SVB World | Steven Kelly · IDENTIFIED FROM THE TRANSCRIPT
“She identifies as $100 billion in assets and bigger. So this was certainly, you know, I don't know if it's an opening bid, and we'll see it get softened and watered down. But certainly this was a strong sort of warning shot or opening shot from Vice Chair Barr.”
2023-07-11 · Forward Guidance · The Basel III Endgame: Bank Regulation In A Post-SVB World | Steven Kelly · IDENTIFIED FROM THE TRANSCRIPT
“All the rest, you're all, particularly JPMorgan. They made a large deposit in a First Republic to buy it a few more weeks. J.P. Morgan ends up buying it. So we've sort of talked about the big banks as being stable and having a stronger business model. But really, they were not exempted from this. And I think that fits Barr's priors of what needed to be done to the banking system, to capital rules, as well as any analysis he did sort of before 2023. So he really mentioned some changes to basically not letting banks use their internal models as much, tightening up stress testing. He wants to tweak the way the GSIB surcharge is calculated. But he comes out with a number and says basically we're talking about two percentage points of capital increase for the largest banks.”
2023-07-11 · Forward Guidance · The Basel III Endgame: Bank Regulation In A Post-SVB World | Steven Kelly · IDENTIFIED FROM THE TRANSCRIPT
“I think the important context here is Vice Chair Barr started this review basically when he came into office, into the Vice Chair for Supervision Position in 2022. So there is some sort of pre-SVB, pre-March 2023 context to this. And I think that comes out at a few places in the proposal or again, like you said, the preview of the proposal we have. We sort of have the proposal to propose in a Michael Barr speech on July 10th. The biggest one being that really the 8G SIBs, the eight largest banks were not given any special treatment relative to other large banks. So we sort of talked about 2023 as a crisis of sort of this mid, you know, sort of the banks below the biggest banks, right? The biggest banks sort of played the white knight.”
2023-07-11 · Forward Guidance · The Basel III Endgame: Bank Regulation In A Post-SVB World | Steven Kelly · IDENTIFIED FROM THE TRANSCRIPT