How're the banks?

Daily Data: Life after the interest rate rug pull, what does the present say about the future of banks?

In today’s dispatch, strong opinions, weakly held:

• one year after the interest-rate rug-pull, how’re banks doing?

• they’re conquering new lands, but how much runway is there (and at what cost)?

• what if banks are making a bet, not because it’s the best bet, but because there is no other bet?

---

👉👉👉Reminder to sign up for the Weekly Recap only, if daily emails is too much. Find me on twitter, for more fun. 

---

Daily Data: How’re the banks?

Banks were (and are) the primary victim of the Fed’s interest rate rug-pull.¹

To recap (or just skip to the next section):

First, the Fed said “lend long, cheap and plentifully, just like us.”

Shortly thereafter, the Fed said “actually no, that was stupid, we shouldn’t have done that, and you shouldn’t have either. From this point on, we will lend not that long, not that cheap, and not that much, and neither should you.”

That was the rug-pull.

For anyone in the business of borrowing short to lend long, which is all banks, changing the rules in the middle like that, is a pretty devastating thing to do.

It’s like increasing the price of materials, after you’ve already agreed to make something. All those projects are going to be money-losers, but you’re still going to have to go through with them.

For the Fed, it was a pretty big oopsie, but the Fed is huge, has lots of money, and no “shareholders” (or has all the shareholders), so it can afford big oopsies.²

Banks, however, don’t have the same oopsie-cushion. They are humble retailers to the Fed’s wholesale emporium, and if they’re locked into low-interest, long-term commitments, with suddenly high fulfillment costs, they are toast.

And the banks nearly were toast, until the Fed magnanimously stepped in, having recognized its error, scolded everyone for being reckless, and then offered a lifeline: “we shall lend you money against your now worthless assets (that are the same as our worthless assets, because you were following our lead, but hey, who’s counting?).

Go now, and make new, more expensive loans, which will make you healthy and profitable!”

Life after rug-pull

So that was about a year ago.

The mission for banks was to figure out how to borrow higher, and lend even higher, without losing too much money, of course.

How are they doing?

The answer, to be honest, is not great. Not terrible, but not great.

Random Walk is no expert, but did read the FDIC report pretty closely (and here), and Random Walk is excellent at reading. Perhaps more importantly, RW also sanity-checked with a senior banker who is an expert, and lives and breathes this stuff, so the things I will tell you are not crazy.

They might not be right, but they are not crazy.³

The tl;dr is that banks are hanging in there for now, much to their credit, but the longer-term prognosis in a higher rate environment doesn’t seem very compelling. It’s not terrible either—and making banks boring may well be the point—but unless rates come down, it just seems like a long, downward slog.

The interesting thing is perhaps the banks know it, which is why (maybe) they’re so confident rates must come down.⁴

Let me explain.

Income flat

The first thing you notice is that banking net-revenue has gone flat.

Technically, income fell off a cliff, but that’s a one-time FDIC charge for covering the initial cost of the Fed’s rug pull, but if you net that out, revenues are basically flat.

It looks like this, broken-down by credits and debits:

Net interest and non-interest incomes are both negative, and the big non-interest expense is the one-time charge.

So flat.

OK, well flat revenues aren’t terrible.

I mean, remember the challenge: banks need to figure out how to lend at interest rates that the market hasn’t been willing to bear in decades.

From that perspective, flat net revenues are kind of impressive, actually.

That is true.

Growth via Credit Card

But look how they’re doing it.

Revenue growth comes from lending growth, hurrah!

See! Credit is growing! What tightening?!

But what kinds of loans, specifically?