Turmoil in the banking sector


“You’re happiest while you’re making the greatest contribution.” – Robert F. Kennedy


I want to review what has happened recently in the banking sector. What we had was a combination of volatile assets and fickle funding of customer deposits. The volatile assets the failed banks bought on their balance sheets were long duration U.S. Treasuries. U.S. Treasuries don’t have a credit risk issue but they do have a rate sensitivity risk issue. Remember when interest rates go up bond prices go down, especially if the bonds are of a long duration.

The failed banks bought those long duration Treasuries when interest rates were low. Then the Fed started raising rates thereby driving down the value of the Treasuries. In fact, the Fed was so late in raising interest rates as inflation was spiking, that they have raised interest rates at a higher and faster rate than any time in history. This caught the banks with a rapid decline in the value of their balance sheet assets.

Now, combine that with fickle bank depositors who are able to move money with their cell phones and you had a classic “run on the bank”. Silicon Valley Bank (SVL) had 95% of its customer’s deposits in the uninsured category, meaning above the $250,000 FDIC guaranteed insured limit amount. If I too had uninsured deposits in a bank that was in trouble, I would move the money as fast as possible. The banks couldn’t meet the depositors demands for liquidity and the banks went under.

This is all old news which I have discussed in the last two letters. The real issue is what this means for the economy and it is not good.

With all of this turmoil in the banking sector, the implications for bank lending going forward are severe. Banks, seeing what happened to SVL and Signature Bank, are concerned that they might be next with depositors causing a “classic run on their bank”. What this means is the smaller and regional banks (less than 250 billion in assets) will want to keep assets on their balance sheet rather than make loans.

What are the implications of this? The answer is a contraction of bank lending.

Small and mid-sized banks (less than $250 billion in assets) which are most likely to be subjected to a “run on the bank” if some rumor gets out, are watching out to protect themselves. These banks provide the following percentages of loans:

50% of all Commercial and Industrial lending

80% of all Commercial Real Estate lending  

60% of all Non-Agency Residential Real Estate lending

45% of all Consumer lending

Just think of it this way, lending is the oil in the engine of the economy. If lending greatly declines, the economy will directly decline. This process feeds on itself in a downward spiral. For example, if a business has an outstanding variable loan to fund operations and the loan is called by the bank, that could put the company out of business. What if a business has a mortgage on a commercial property that is coming due and they can’t roll that loan over to a new loan?  You can get the picture.

I don’t and no one really knows what will happen going forward. We have had a huge runup in real estate and stock market values since the end of the Great Recession of 2008. We have seen that appreciation end starting at the beginning of 2002. Since then, the stock market has sold off over 20% and real estate prices especially commercial real estate have also dropped. Is this the beginning or the end of the decline? This could be just the start.

We are currently being ultra safe in a U.S. Government Money Market for now.

If you have friends or family in need of financial life planning services,

It would be the honor of Laurence Lof Financial Advisors to assist them.

We value your referrals!

These are Larry Lof’s opinions and not necessarily those of Cambridge, are for informational purposes only and should not be construed or acted upon as individualized investment advice. Past performance is not indicative of future results. Due to our compliance review process, delayed dissemination of this commentary occurs.

The S&P 500 index of stocks compiled by Standard & Poor’s, a division of The McGraw-Hill Companies, Inc. The Index includes a representative sample of 500 leading companies in leading industries of the U.S. economy. Indices mentioned are unmanaged and cannot be invested into directly.

Technical analysis represents an observation of past performance and trend, and past performance and trend are no guarantee of future performance, price, or trend. The price movements within capital markets cannot be guaranteed and always remain uncertain. The allocation discussed herein is not designed based on the individual needs of any one specific client or investor. In other words, it is not a customized strategy designed on the specific financial circumstances of the client. Please consult an advisor to discuss your individual situation before making any investments decision. Investing in securities involves risk of loss. Further, depending on the different types of investments, there may be varying degrees of risk including loss of original principal.

Securities offered through Cambridge Investment Research, Inc., a Broker/Dealer, Member FINRA/SIPC. Investment advisory services offered through Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Cambridge and Laurence Lof Financial Advisors, LLC are not affiliated. Laurence Lof Financial Advisors 4757 E Camp Lowell Drive Tucson AZ 85712 info@lofadvisors.com

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