Banking Confidence: Is Everything Really Going to Be Alright?

Overview

It’s natural for business owners – especially leaders of small and regional banks right now – to hum Bob Marley’s “Every Little Thing Gonna Be Alright.” After all, leaders want to reassure stakeholders that they have everything under control. I wasn’t surprised when CEOs of multiple banks claimed that the issues that started with the spring collapse of Silicon Valley Bank are in the rear-view mirror.

But I think it’s naïve for anyone to say the contagion is contained. Economic losses are still on their books. Just the presence of economic loss creates a constriction in capital availability, and whether you force banks to recognize it in one day, over a period of years or you let them pretend it doesn’t exist, it still exists. If a bank is insolvent, it’s not creditworthy. That snowballs and gets out of control.

All these talking heads on TV say everything is fine, the banks are fine. But if enough people in the market believe they’re not, it will become a self-fulfilling prophecy. That’s what a run on a bank is. It’s not necessarily about not having enough cash in the vault. It’s the belief there won’t be enough cash in the vault, and you don’t want to be the guy that finds out.

Our history for the last two decades is that we socialize losses to protect the system. All that does is kick the can down the road. If somebody starts taking some losses in the private sector, that of course would be painful in the short term. But in the long term, I think it would be very helpful.

I doubt that will happen. More than likely, regulators will bring smaller banks with assets between $100 billion and $250 billion back in line with larger financial institutions. These small banks could face capital, liquidity and stress-testing requirements. They could be forced to report unrealized losses on securities, too, but the risk is that this could force numerous banks to raise capital at the same time.

Instead of the government bailing out banks and putting its thumb down harder on these financial institutions, maybe it would be better to allow market dynamics to play out. The banks that took a holistic approach to their investment strategy would thrive, while others who took a gamble that interest rates would stay low forever might fail. At Bonaventure, we work with the same set of information that banks do. Our strategy, to buy assets with fixed-rate long term debt and hold them for decades, works to manage risk in any environment. Maybe if the banks followed our conservative approach, they really could sing a Bob Marley tune.