wabuffo

Yeah - that & I sometimes think as he donates his shares to charity, he keeps an eye on his voting control percentage too. Bill

It does seem like Buffett's buyback threshold on the A-shares is persistently higher than on the B-shares. Looks to me to an average of around 10% or so. There could be some non-economic reasons for that, but who knows for sure. Bill

All that to say that 'we' ended up with private participants becoming owners of zero-earning deposits looking to chase yields in related and other investing asset classes, contributing to lowering yields elsewhere and contributing to asset inflation (and also although hard to quantify to main street inflation through the wealth effect). This discussion brings a tear to my eye as I watch COBF participants become savvy monetary plumbers.... I would add that 2021 also brought the US Treasury into the equation because of the debt ceiling toggling back on on August 1st of that year. It had to get back to its TGA balance extant at the time of the suspension of the debt ceiling in 2019, which was $100b or so. The issue was that the US Treasury's TGA balance stood at ~$1.7t in Feb 2021. For the rest of 2021, the US Treasury spent down its TGA balance while keeping net new issuance of Treasury securities to an absolute minimum (ie creating deposits/reserves and basically not withdrawing them with securities for the rest of 2021 as the debt ceiling battle stretched into Dec with a minor bump up in Oct). Add in the Fed continuing with its monstrous QE balance sheet expansion, and interest rates were threatening to go negative by Apr-May of that year. Which is why the Fed out of necessity had to open the spigots on its reverse repo operation and let it grow to over $2t. Bill

I once got a loan from Toyota to buy a car. the loan was “immediately” issued through Wells Fargo. I doubt Toyota of Springfield originated the loan and immediately sold it to WFC. As a matter of fact, the Toyota of Springfield probably did originate the loan through Toyota's finance subsidiary -- Toyota Motor Credit Corporation (10-K here): https://www.sec.gov/ix?doc=/Archives/edgar/data/834071/000095017023026012/ck0000834071-20230331.htm Your loan is technically called a retail installment sales contract and is financed by TMCC on behalf of the dealership. It's why its called an indirect loan or finance receivable. Continuing through this process, Toyota Motor Credit Corporation then probably packages your loan in one of its Toyota Auto Receivables Trusts like this one: https://www.sec.gov/Archives/edgar/data/1131131/000092963817000824/a71121_424h.htm The servicer of this Trust is Wells Fargo who services these installment contracts and is the "face" to the borrower in terms of payment of principal and interest. Wells Fargo does not own the loan of course, they merely service it and administer the securitization trust. Its one long sequence of lend-recycle capital-lend-recycle-capital-lend where pieces of your auto loan are held by the asset-backed security holders of the Toyota Auto Receivables Trust. Financial innovation and risk management at its finest! Perhaps your situation was different but the process I'm laying out is pretty standard for the industry. Bill

I only listened to the beginning of the interview and then kinda gave up. The issue is that banks generate deposits when they originate a loan BUT NOT when they buy it from someone else. Part of the reason I quit the interview is that both subjects kept saying banks need to obtain deposits before they can lend. (which makes sense in this market of wholesale loans but not in the origination of loans) That's a red flag for me that perhaps they either misspoke (or I misheard them) or they may not grasp how the plumbing actually works. The subject of the interview sells whole loans from one bank to another. So in an environment like this, I think banks prioritize origination of loans vs buying them at wholesale. This is why for example, you are seeing some banks exiting indirect auto lending (bank buys the auto loan rather than originates it) even as overall auto lending/origination/securitization is pretty strong. We came from an environment where banks were overflowing with deposits and had the balance sheet capacity to buy loans during the pandemic. Perhaps I'm being nit-picky here. Is this a sign of lending contraction? Or maybe this interview might overstate the specific niche of this area of banking as representative of overall credit extension at the moment. Just my 2-cents and I could be wrong. Bill

I think some large tech companies with their consumer dominance (AAPL, GOOG, META, MSFT, AMZN) have the cash flows and networks to start offering services very much in line with banking...savings, loans, credit cards, mortgages, investments lol - which all have a federally-chartered bank behind the scenes actually holding the deposits, offering the payment cards, & providing access to the payment rails (V/MC & even Fedwire). Anyone can lend - but they have to borrow first. When federally-chartered banks lend, they create deposits from thin air (non-banks can't do that). Also when you need a payment to clear - you need a federally-chartered bank. Only they have access to settlement balances at the Fed and payment clearing capabilities at Fedwire. Disrupt that! Bill

My question is - Treasury issuing new bonds takes away from the banking sector but that money returns right back when the Treasury spends, so what really changes? Basically nothing. But lately the Tsy is spending w/o issuing Tsy securities (net of redemptions) - so it is currently adding to deposits (and reserves). That'll change obviously when a new debt ceiling level gets set in July-Sept. But in the meantime, half a trillion+ of spending is adding to deposits (and reserves). Of course, QE just adds to deposits (reserves) by the Fed's buying. Bill

Well that was a lot of rambling without probably answering your specific question... I forgot to add another important point. The problem of uninsured deposits can't be solved (at least in aggregate) for the private sector. There isn't enough FDIC insurance nor enough T-Bills. Someone, somewhere, will always have to deal with where to put cash & cash equivalents while taking some counter-party risk (where the counter-party is neither the Fed nor the US Treasury). The reason for this is just math: 1) The US banking sector has (round numbers) 17 trillion in deposits - of which $9 trillion are FDIC-insured. That leaves $8 trillion of uninsured deposits. Given that this is cash that someone has to hold - the alternative if one wants a zero-risk counterparty is T-Bills. 2) Total US Treasury bills outstanding is around $4 trillion. The Fed holds about $1 trillion of them & isn't including them in its QT (the Fed prefers to let mature its longer-duration notes/bonds while continually rolling over its T-Bills). That leaves around $3 trillion of T-bills circulating in private sector hands. Adding it up, I get $11 trillion of private sector cash & cash equivalents total (8 trillion of non-FDIC insured + $3 trillion of T-Bills) vs $3 trillion of T-Bills available. Reverse repo solves a bit of that problem ($2 trillion) - but it is an issue that $6 trillion in cash can't find a "safe" place to park itself. My math and analysis could be wrong here - so please feel free to critique my theories here. Bill

i woundn't mind if wabuffo would contribute here (to tear apart my perspective). In the old days (ie, pre-GFC), the monetary plumbing was simple. The Fed ran with a small balance sheet (tiny amount of total reserves in the banking system). The US Treasury also ran with a small balance in its TGA (so that its spending matched its security issuance). Deposits grew in line with bank lending. This makes sense because bank lending creates deposits. The deposit may move from the lending bank to another bank, but the deposit just created stays in the aggregate banking system. But notice the two lines (deposits - red, bank loans - blue) start to separate after 2008. This is also around the time that traditional monetary measures like M2 & velocity of money start to break down & emit weird results (confusing their adherents). The reason is that the monetary regime changed. The Fed began to expand its balance sheet with numerous rounds of QE and the US Treasury also started to run with large, but highly volatile TGA balances. This is a long way around of saying that deposit balances now also reflect things like QE, QT and times when the US Treasury is flushing its TGA due to smacking up to its debt ceiling (like in 2021 and today). I would add that the Fed has expanded its balance sheet to such an immense size that the banking sector can no longer handle the deposit creation of QE and so The Fed had to open a second liability funding source via overnight RRPs. If the Fed hadn't done that in 2021, we would have gone negative rates in the US. So what's happening today? Well - the principal driver of deposit reduction in the banking sector in 2022 was QT. QE/QT change the composition of private sector holdings from Treasury securities to reserves/deposits and vice versa. But I think the recent double-whammy of the Fed's response to the SVB FUBAR is that it is once again flooding the zone with reserves at the same time that the US Treasury is drawing down its TGA. Both of these will have a tendency to stop the deposit decline & start to increase it again, IMHO, for the short-term. At least until both the banking crisis and the debt ceiling issues are solved. Well that was a lot of rambling without probably answering your specific question... Bill

then its as was mentioned above a maybe 0.2% negative carry that provides a lot of liquidity support to banks. It can even turn into positive carry if the loan term is locked in for the year at the current BTFP rate but the Fed keeps raising the rate it pays on reserves. Sweet! Bill

it’s cash that’s being drawn down as a liquidity comfort blanket…..it’s a destroyer of NIM’s But is it a "destroyer of NIMs"? Leaving aside the FHLB's, lending from the Fed delivers reserve balances as an asset to the bank (along with a loan from the discount window as a matching liability). So its not really cash in the way you and I think about cash. Take the BTFP as an example. Current interest rate on a BTFP loan is 4.85% for a period of up to a one-year term. https://www.frbdiscountwindow.org/ But the bank that is using the program receives reserves from the Fed that currently earn 4.83%. It's not such a bad deal - 2bps net while getting par value (instead of the lower fair market value of the underlying collateral) while pledging some Treasury securities or Agency MBS. And if rates move against the bank, they can cancel the loan at anytime without penalty. Bill

Interesting. I appreciate your digging into the regulatory filings. Its funny because Zions is classified as one of the domestic US SIFI banks - so I am totally confused now. Bill

You might be right Spek - it seems regulatory rules were loosened in 2019 for banks with under $10b in assets which includes this opt-out rule for AFS. I'm reading up on these new rules now. It doesn't apply to bigger banks (>$10b in assets). Bill

For regulatory capital purposes, both AFS and HTM get treated the same though and they do not take a hit to regulatory capital if they put it in AFS or the HTM bucket. Regulatory capital is what should matter here. I think AFS securities (if they have shifts in values) do affect the measurement of regulatory capital. https://libertystreeteconomics.newyorkfed.org/2018/10/what-happens-when-regulatory-capital-is-marked-to-market/ Bill

AFS mark-to-market losses are taken to AOCI & shareholder equity as well as regulatory equity as they happen. It is the HTM losses that are not. It is these mark-to-market losses that created the issue for SVB & other banks. SVB faced the issue that they would have to begin to sell their HTM securities to meet deposit flight but which would unlock the losses and immediately flow them to regulatory equity rendering the bank insolvent. Bill