by megaultraman
Well, not yet. But regional banks have a serious cash flow problem. Regardless of the safety of treasuries, if you are paying 5% interest against $70+ billion (deposit outflows from FRB) which is money you no longer have, you need money. Actually, around $5 billion dollars a year, roughly equivalent to 100% of First Republic’s profit last year when they had tens of billions more in loan leverage. While I use First Republic as an example, most regional banks have experienced high deposit outflows due to a flight to safety and the allure of money markets’ high(er) yields.
So how to both pay the massive interest bill while still staying profitable? Two possible ways: putting existing money to harder work and luring back deposits.
Specifically, even if the prime rate is 8.25%, that would only allow for 3.25% on deposit accounts which is still below MMAs and they would still only break even in that scenario. Besides, there’s not enough prime loan demand to cover it all anyway. So you need something with higher yields that does have a lot of demand.
Everybody is saying that the banking crisis will cause a tightening of credit, which I agree with. In the short term. In less than a quarter banks are going to be strapped for cash and the discount window is only open for a year, two at most. My point is they can’t afford to keep credit tight for too long.
Enter subprime loans. And maybe an attempt to eat private credit’s lunch? By giving out more loans at 15%, they could offer over 5% on deposits, pay the man and still have money left over. Obviously the numbers are a little fuzzy but there had been something bothering me about this whole situation kind of stinking despite the Fed’s backstop.
tl;dr Regional banks going to actually LOOSEN credit requirements to make up for the massive holes in their balance sheets and cash flow?