Corner of Berkshire & Fairfax Message Board

General Category => Strategies => Topic started by: Spekulatius on October 04, 2019, 05:21:29 PM

Title: Are big banks value traps ?
Post by: Spekulatius on October 04, 2019, 05:21:29 PM
I had some thoughts on big banks (and small local ones) after selling my WFC position. My near term concern on WFC is NIM compression due to interest rates, but another thought that occurred to me, partly due to trains of thoughts from other boards here and on Twitter is that the big banks may be the department store equivalent of the financial industry.

With that, I mean a company that does a bit of everything, but nothing particularly well. This applies to many business lines like mortgages (in about 80% of the cases, one is better off with a good broker), payments (a lot tech companies here start to dis-mediate and Visa/ MC go after b2b payments), wealth management/ Broker (banks offer discounted trades as a bundle, but who cares when trades at a brokerage firm are free), Credit cards  and possible other things.

So it seems to me that big banks will be losing market share to innovators and smaller banks may be worse off, since they don’t have IT heft. I am no sure how long takes, but it seems like one can see that over time nimble competitors take more and more share away from what once considered core bank business.

I would welcome thoughts here. I have personally decided to ditch my Wells Fargo brokerage and checking accounts (I got a package with 100 free trades annually) that I had since 2006 and use Schwab instead for cash management/checking and brokerage accounts.
Title: Re: Are big banks value traps
Post by: TwoCitiesCapital on October 04, 2019, 06:13:27 PM
I don't see a natural replacement for them yet, so m not terribly concerned. They'll just roll-up the innovators in the field and then the tech will become commodities over time.

Banks are hard to supplant because of the network effects. Where else do millions of borrowers and savers come together for mutual benefit and limited effort?
Title: Re: Are big banks value traps
Post by: LC on October 04, 2019, 06:32:14 PM
Also, who has billions/trillions on hand to lend out to massive companies and massive populations?

And, who has the institutional know-how to effectively risk manage that entire operation?

The barriers to entry to banking are immense. This is why we haven't seen a new big bank in a looooong time.
Title: Re: Are big banks value traps
Post by: no_free_lunch on October 04, 2019, 07:32:59 PM
Also, who has billions/trillions on hand to lend out to massive companies and massive populations?

And, who has the institutional know-how to effectively risk manage that entire operation?

The barriers to entry to banking are immense. This is why we haven't seen a new big bank in a looooong time.

I have large positions in banks so I am really arguing with myself here.

Who has billions in cash?  Apple, Google, Facebook.  Even without taking in deposits they have huge reserves. 

Who has institution mal knowledge?  Not them but they probably know more about us than our banks do.  Maybe they could carve out niches by building internal credit models and expand from there.

I think big tech will come for banks but I think it will take time.  You can see it happening with things like Apple pay and maybe libra.  You definitely have to be vigilant with the banks.
Title: Re: Are big banks value traps
Post by: sleepydragon on October 04, 2019, 07:34:43 PM
Banks, prostitutes, and weapon making have existed for hundreds of years.
Not going away
Title: Re: Are big banks value traps
Post by: villainx on October 04, 2019, 07:51:10 PM
Also, who has billions/trillions on hand to lend out to massive companies and massive populations?

And, who has the institutional know-how to effectively risk manage that entire operation?

The barriers to entry to banking are immense. This is why we haven't seen a new big bank in a looooong time.

I have large positions in banks so I am really arguing with myself here.

Who has billions in cash?  Apple, Google, Facebook.  Even without taking in deposits they have huge reserves. 

Who has institution mal knowledge?  Not them but they probably know more about us than our banks do.  Maybe they could carve out niches by building internal credit models and expand from there.

I think big tech will come for banks but I think it will take time.  You can see it happening with things like Apple pay and maybe libra.  You definitely have to be vigilant with the banks.

Great point.

And players coming in from the side.  Thinking mostly Square, but if Square can do it, why not Apple.  Or Costco or Amazon.  Not necessarily a threat, maybe a shakeup?  Where players with imagination/innovation/capital/captured clients can do something unexpected.
Title: Re: Are big banks value traps
Post by: Spekulatius on October 04, 2019, 08:41:25 PM
Also, who has billions/trillions on hand to lend out to massive companies and massive populations?

And, who has the institutional know-how to effectively risk manage that entire operation?

The barriers to entry to banking are immense. This is why we haven't seen a new big bank in a looooong time.

Competitors will go after the higher ROI business first and then try to make run them better. Think, Credit cards, loan generation, mortgages, payment, wealth management. Lending itself is harder to dis-intermediate, but Even if that were all that is left, banks would be much worse business than they are now. In the longer run, crypto solutions could put a dent into this business too and basically make the banks redundant as loans would go peer to peer. We are a long way off, but this doesn’t mean it won’t happen.

The problem is that banks are stodgy and not tech savvy in general and that will probably be the most important factor going forward, not balance sheet strength or branch networks. JPM probably looks best here, Wells Fargo the worst from then it banks.
Title: Re: Are big banks value traps
Post by: LC on October 04, 2019, 10:02:47 PM
I'm playing devils advocate here but I think you guys underestimate the banking business, particularly in today's world.

Calling the banks stodgy or tech-averse is superficial IMHO. Banks are not tech averse, they are incredibly financially disciplined (it's their raison d'etre!). These are not VC shops looking to cash in by inventing the next best tech.

Additionally you are ignoring the regulatory component. The FRB will be so far up a new bank's colon that it's too painful to think of. The large banks took 10 years to comply with FRB/OCC matters. And they are still not done.

Citi, Wells, JPM all have over 200,000 employees, each. Google and apple have half that. Simply to bring on the kind of manpower needed will be a billion dollar endeavor.

It is not just 'lets build some credit models and start slingin' cards". On the models side, these banks have 2, 3, 4 thousand models each. Who is going to build these? Who is going to validate them? How long is that going to take? It is not feasible. And the people building these models - they are not cheap. We billed out at 600, 700 an hour for regulatory models, not even valuation models which are much more important. And then you need a validation group which again, is incredibly not cheap.

Then you need to integrate into the markets. On the consumer side, now you need instantaneous scoring services at a massive scale and you need retail partners to integrate it. Retail partners who are already being serviced by these large banks and at a lower cost than you can provide. And these banks and policy teams who know these business better than you (and they) do. This is not just incredibly expensive but a hell of an endeavor to start from scratch. Systems migrations take two years - and that's a migration.

On the institutional side, it's even more opaque. First you have no idea what these product which are being traded. Show me anyone at Apple or Google who can explain why Kirk's spread option model is conceptually unsound but under what circumstances it is still acceptable to use. Nobody. Now tell me who is going to figure that out and then design a systems application to price certain products with certain models under specific circumstances. Of course you can use vendors to tap into the market in this way but the regulators will destroy you. And they're expensive as hell and there's a reason all the banks have migrated to in-house solutions. So unless you want to lose money on every trade for 4-5 years until you can build your own system to migrate over from a vendor platform, you're out of luck.

This article: https://seekingalpha.com/article/2561895-apple-pay-has-long-term-implications-for-visa-mastercard-and-retail-banks
postulates that Apple is entering the retail payments sphere as a means to enter the financial industry at a whole.
Well look at the payments - has Apple or Stripe built their own systems? No, they are playing on top of the established rails. Maybe this will change but it is difficult to see why. To build out such a system is incredibly expensive and the payoff is very uncertain. Expected ROI today is almost certainly very negative. And V/MC and the banks are expected to sit tight while this happens? I think not. Even if Apple or Google does go down this road they are opening themselves up to so many costs it will be absolutely brutal and the banks will slaughter them on the institutional side.

Anyways take it with a grain of salt because predicting the future is a foggy endeavor but if I had to wager I would say the odds are with the status quo.
Title: Re: Are big banks value traps
Post by: Gregmal on October 04, 2019, 10:07:18 PM
I'm playing devils advocate here but I think you guys underestimate the banking business, particularly in today's world.

Calling the banks stodgy or tech-averse is superficial IMHO. Banks are not tech averse, they are incredibly financially disciplined (it's their raison d'etre!). These are not VC shops looking to cash in by inventing the next best tech.

Additionally you are ignoring the regulatory component. The FRB will be so far up a new bank's colon that it's too painful to think of. The large banks took 10 years to comply with FRB/OCC matters. And they are still not done.

Citi, Wells, JPM all have over 200,000 employees, each. Google and apple have half that. Simply to bring on the kind of manpower needed will be a billion dollar endeavor.

It is not just 'lets build some credit models and start slingin' cards". On the models side, these banks have 2, 3, 4 thousand models each. Who is going to build these? Who is going to validate them? How long is that going to take? It is not feasible. And the people building these models - they are not cheap. We billed out at 600, 700 an hour for regulatory models, not even valuation models which are much more important. And then you need a validation group which again, is incredibly not cheap.

Then you need to integrate into the markets. On the consumer side, now you need instantaneous scoring services at a massive scale and you need retail partners to integrate it. Retail partners who are already being serviced by these large banks and at a lower cost than you can provide. And these banks and policy teams who know these business better than you (and they) do. This is not just incredibly expensive but a hell of an endeavor to start from scratch. Systems migrations take two years - and that's a migration.

On the institutional side, it's even more opaque. First you have no idea what these product which are being traded. Show me anyone at Apple or Google who can explain why Kirk's spread option model is conceptually unsound but under what circumstances it is still acceptable to use. Nobody. Now tell me who is going to figure that out and then design a systems application to price certain products with certain models under specific circumstances. Of course you can use vendors to tap into the market in this way but the regulators will destroy you. And they're expensive as hell and there's a reason all the banks have migrated to in-house solutions. So unless you want to lose money on every trade for 4-5 years until you can build your own system to migrate over from a vendor platform, you're out of luck.

This article: https://seekingalpha.com/article/2561895-apple-pay-has-long-term-implications-for-visa-mastercard-and-retail-banks
postulates that Apple is entering the retail payments sphere as a means to enter the financial industry at a whole.
Well look at the payments - has Apple or Stripe built their own systems? No, they are playing on top of the established rails. Maybe this will change but it is difficult to see why. To build out such a system is incredibly expensive and the payoff is very uncertain. Expected ROI today is almost certainly very negative. And V/MC and the banks are expected to sit tight while this happens? I think not. Even if Apple or Google does go down this road they are opening themselves up to so many costs it will be absolutely brutal and the banks will slaughter them on the institutional side.

Anyways take it with a grain of salt because predicting the future is a foggy endeavor but if I had to wager I would say the odds are with the status quo.

I typically like to bust your balls; so I will. Congrats on your first useful investment related post.

On a serious note, you are 1,000% right here.
Title: Re: Are big banks value traps ?
Post by: LC on October 04, 2019, 10:22:11 PM
It's like Phil Fisher said...invest in what you know. Explains your portfolio of weed stocks and roadside greek diners   ;D
Title: Re: Are big banks value traps ?
Post by: writser on October 05, 2019, 02:00:32 AM
It's like Phil Fisher said...invest in what you know. Explains your portfolio of weed stocks and roadside greek diners   ;D

And divorce litigation (https://www.bloomberg.com/news/articles/2019-08-09/oligarch-s-yacht-leaves-questions-about-burford-in-its-wake).
Title: Re: Are big banks value traps ?
Post by: SharperDingaan on October 05, 2019, 06:29:31 AM
It's like Phil Fisher said...invest in what you know. Explains your portfolio of weed stocks and roadside greek diners   ;D

Finally .... my kind of portfolio!

Couple of add-on's ...

Banks aren't going away, it's just the form that is changing. Brick/mortar branches exist because a lot of product requires a physical facility (sales force, ATM cash dispenser, etc,). There is only so much that you can do via the on-line channel; and any material change in your employment mix will typically require some kind of regulatory approval. Try dropping 10,000 bodies at once, and see what happens.

An Apple Pay, Google Pay, etc has clear cost/tech payment advantages over any nations banking industry payment rails. But, the reality is that their global competitiveness is meaningless in a environment of separate local regulatory regimes. You may process differently, but it's our sand-box, and our rules.

The Apple Pay, Google Pay, etc, bring networking power to the table, and it is clearly advantageous - but it's not enough.
Far better for everyone if Apple Pay, Google Pay, etc were replaced by Central Bank Pay - and payments were made in Central Bank token, automatically exchanging into local currencies whenever there is a cross-border payment. And better still; if all participants had to have a digital wallet at their home Central Bank; and all transactions were using blockchain/smart-contracts on a 'private' central bank network. Ruins your day if you're trying to money-launder.

Just like the prostitution, arms-dealing, and drug trades - the product may change, but the industry stays.

SD



Title: Re: Are big banks value traps
Post by: CorpRaider on October 05, 2019, 07:50:01 AM
I don't see a natural replacement for them yet, so m not terribly concerned. They'll just roll-up the innovators in the field and then the tech will become commodities over time.

Banks are hard to supplant because of the network effects. Where else do millions of borrowers and savers come together for mutual benefit and limited effort?

Network effects + regulatory capture imop.
Title: Re: Are big banks value traps
Post by: Jurgis on October 05, 2019, 08:36:44 AM
Credit cards

You said "credit cards" twice now. Please tell what non-big-bank CCs have any penetration. That Goldman Sachs Apple card does not count really.  8)
Title: Re: Are big banks value traps ?
Post by: John Hjorth on October 05, 2019, 10:03:34 AM
... There is only so much that you can do via the on-line chanel; and any material change in your employment mix wii typically require some kind of regulatory approval. Try dropping 10,000 bodies at once, and see what happens. ...

Just like the prostitution, arms-dealing, and drug trades - the product may change, but the industry stays.

SD

SharperDingaan,

SAN [relatively] did exactly that (https://uk.reuters.com/article/uk-santander-branches/santander-wants-to-cut-11-percent-of-total-workforce-in-spain-idUKKCN1SK1IF) in May this year.

In Europe there's no way around this ... - only the way through it - by doing it - because of relatively more intense pressure on European earnings margins compared to in the US.

Head count reductions goes hand in hand with digitalization.
Title: Re: Are big banks value traps ?
Post by: sundin on October 05, 2019, 11:14:32 AM
When ATM's had large growth in the 90's - some thought that the ATM was the "future bank" and would be a big disruptor, instead it lowered costs and made retail banking more operationally efficient. The banks forecast this same cost savings with digital technology.   

As mentioned here, the banking business is complex and protected by a moat of regulation when it comes to actual lending and deposits. The regulation + large amount of capital required to actually compete with the banks is enormous. Mobile/online banking is still largely a transactional medium (mobile remote deposit/e-transfers/bill payment etc vs. savings/ direct deposits/mtgs/helocs etc)
 
To protect their moat in the brokerage business - Jamie Dimon preemptively took away brokerage fees earlier this year and Schwab/AMTD did the same this past week. This ultimately makes ROI on this business a lot lower but at the same time protects cash deposits in the brokerage accounts (obviously declining NIMs don't help here either).

The payments business for the banks vs tech will be an interesting space. I see this playing out similar to ATMs.  Ie. Cardtronics/Diebold will partner w/ big banks via their large distribution network and reach rather than having their own payment businesses - which is a win/win for both.
Title: Re: Are big banks value traps ?
Post by: SharperDingaan on October 05, 2019, 12:11:30 PM
... There is only so much that you can do via the on-line chanel; and any material change in your employment mix wii typically require some kind of regulatory approval. Try dropping 10,000 bodies at once, and see what happens. ...

Just like the prostitution, arms-dealing, and drug trades - the product may change, but the industry stays.

SD

SharperDingaan,

SAN [relatively] did exactly that (https://uk.reuters.com/article/uk-santander-branches/santander-wants-to-cut-11-percent-of-total-workforce-in-spain-idUKKCN1SK1IF) in May this year.

In Europe there's no way around this ... - only the way through it - by doing it - because of relatively more intense pressure on European earnings margins compared to in the US.

Head count reductions goes hand in hand with digitalization.

Fully agree.
But I would also add that in most cases - the employee mix should be no more than 40/60 permanent versus contract staff (measured on total cost, not head-count). To compete effectively, a bank has to be able to rapidly adapt cost structures to meet current (& projected) conditions.

The reality however is that the banking sector has material Corporate Social Responsibility (CSR) restraints, and national regulators/unions enforce them; any individual banker who doesn't 'get' this - is just quietly replaced. Banks are allowed to drop large numbers of permanent staff, but they have to pay severances well above the going rate, and wherever practical - execute the redundancy over an extended period vs all at once. There is more flexibility with contractors, subject to bleeding them off (not renewing contracts) at a reasonable rate.

And then there are the 'trading banks'.
If you think your trading job is at risk, the bank takes on your 'agency' risk. But if entire risk 'divisions' are on-the-bubble - isn't the 'collectively' smart thing to do, to just bet the bank?, then keep the positions from blowing up until after bonuses and severances have been paid? Following which you would just short the bank as soon as you're on the street - in anticipation of a blow-up, and a second pay-day ;)

Understand the cycle, and you can position yourself accordingly. 

SD
Title: Re: Are big banks value traps
Post by: gfp on October 05, 2019, 12:21:06 PM
Didn't ask me, but depending on your definition of "big banks" (I think of this being JPM, BAC, C and WFC) the names that come to mind are Capital One, American Express and Discover Financial.

Credit cards

You said "credit cards" twice now. Please tell what non-big-bank CCs have any penetration. That Goldman Sachs Apple card does not count really.  8)
Title: Re: Are big banks value traps
Post by: Jurgis on October 05, 2019, 02:23:15 PM
Didn't ask me, but depending on your definition of "big banks" (I think of this being JPM, BAC, C and WFC) the names that come to mind are Capital One, American Express and Discover Financial.

Credit cards

You said "credit cards" twice now. Please tell what non-big-bank CCs have any penetration. That Goldman Sachs Apple card does not count really.  8)

These all are "big banks" for me.

Edit: but you are right, this thread is not very well defined. Spek starts with talking about both big banks and small banks. He also talks about brokers taking bank business, but some of the banks own brokers and some of the brokers are banks more or less. So it's not clear if the claims are that just big banks will lose market X (mortgages, CCs, whatever) or whether both big and small banks will lose it, or whether "lose it" is overall applicable if business goes from a bank to a bank-like company like Cap One or AmEx or DFS or Schwab or E-Trade or ???. Is it about "classic" banks losing to really-not-bank-fintech companies?
Or Spek's "mortgage broker" example - that example is mostly broken, since "mortgage broker" mostly sells the mortgages to big - or not so big - banks. My mortgages were sold to Chase, BAC, Webster, but also the "not-very-bank-but-also-not-new-fintech" companies like Nationstar.

So overall, I think claims in the thread are pretty washed out and not consistent. 8)

If the thread is just about the SuperBig (JPM, BAC, C and WFC) losing to any-other-companies (smaller banks, broker-banks, non-banks, techs, etc), then I don't see that either. I can argue that SuperBig won't grow very fast, but that's kinda tautology because they are so big and their growth is mostly limited by size and regulations. I don't think they are melting ice cubes though. So unlikely to be value traps based on that. Unless you'd call anything that returns a single digit return a value trap.  8)
Title: Re: Are big banks value traps ?
Post by: wabuffo on October 05, 2019, 05:22:36 PM
I think the banking sector isn't going anywhere and will consolidate more and more towards the bigger banks.  All depository institutions are agents of the Federal Reserve.  That is why their deposits (up to a certain amount) are guaranteed by the Fed (and US Treasury).   You have to think of the banking sector as a vital connector of the US Treasury/Federal Reserve on one side and the private sector on the other.   There are two things that create deposits in the banking sector.  The first is lending - a new loan creates a new deposit (reserves aren't as necessary anymore).  The second factor that creates deposits in the banking sector is net deficit spending by the US Treasury.  When the US Treasury spends, it credits an account at a bank via the Federal Reserve.  These two factors create an ever growing deposit base in the US banking sector.

These are irreversible trends IMO (my data goes back til 2003).

1) Deposits in the US banking sector continue to grow year-after-year.  By my calculations, deposits have grown +5.6% per year since 2003 to today.  Total US banking deposits were $5.7 T USD in 2003, they are over $14.0 T USD today.

2) The market share of the biggest banks in terms of share of total US banking sector deposits continues to grow year-in-year out at the expense of small banks.  The Big 3 deposit banks (JPM, WFC, BAC) had 14% share of total deposits in 2003, they are at over 32% in 2019.  Over and above the normal growth of deposits in the US banking sector, deposit growth at the big 3 has been +9.1% per year since 2003.   The big 3 have grown deposits by 4.25X in 16+ years.

In addition, one of the keys is that the big banks are central to the payments system through which the economy operates.  This payments system is in turn tied to the US Federal Reserve.  Banks clear payments with each other every day in the tens of trillions of dollars.  They often need overdrafts with the Fed while they wait for clearing.  I've seen stats that show that reserves at the Fed swell intra-day by a factor of 10-15x until they are netted and cleared at the end of each 24 hour period.  We're talking $10T per day or more.  This is not going to get replaced by Apple or Bitcoin, IMHO. 

I don't think banks are going anywhere nor does the central bank want to eliminate them.  I also think that the big banks will get bigger over time despite the charm of the local community bank. 

wabuffo
Title: Re: Are big banks value traps ?
Post by: LC on October 05, 2019, 07:39:51 PM
Quote
You have to think of the banking sector as a vital connector of the US Treasury/Federal Reserve on one side and the private sector on the other. 
Bingo. In terms of the Charlie Munger generalized mental models - this is one of the top models you should have in your mind when thinking of the banks. They do "the dirty work" of the central bank.
Title: Re: Are big banks value traps
Post by: Spekulatius on October 06, 2019, 07:56:07 AM
Credit cards

You said "credit cards" twice now. Please tell what non-big-bank CCs have any penetration. That Goldman Sachs Apple card does not count really.  8)

Discover, Amex are non- bank offerings. To be fair, this one went more towards the banks, because CC vendors benefit from cheap and stable funding. Whether this remains this way, is another question.
Title: Re: Are big banks value traps
Post by: Jurgis on October 06, 2019, 09:26:36 AM
Credit cards

You said "credit cards" twice now. Please tell what non-big-bank CCs have any penetration. That Goldman Sachs Apple card does not count really.  8)

Discover, Amex are non- bank offerings. To be fair, this one went more towards the banks, because CC vendors benefit from cheap and stable funding. Whether this remains this way, is another question.

Actually, they are both bank offerings ( https://en.wikipedia.org/wiki/Discover_Financial https://en.wikipedia.org/wiki/American_Express#Individual_banking ). But I've answered similar comment above.
Title: Re: Are big banks value traps
Post by: TwoCitiesCapital on October 06, 2019, 12:42:40 PM
Also, who has billions/trillions on hand to lend out to massive companies and massive populations?

And, who has the institutional know-how to effectively risk manage that entire operation?

The barriers to entry to banking are immense. This is why we haven't seen a new big bank in a looooong time.

Competitors will go after the higher ROI business first and then try to make run them better. Think, Credit cards, loan generation, mortgages, payment, wealth management. Lending itself is harder to dis-intermediate, but Even if that were all that is left, banks would be much worse business than they are now. In the longer run, crypto solutions could put a dent into this business too and basically make the banks redundant as loans would go peer to peer. We are a long way off, but this doesn’t mean it won’t happen.

The problem is that banks are stodgy and not tech savvy in general and that will probably be the most important factor going forward, not balance sheet strength or branch networks. JPM probably looks best here, Wells Fargo the worst from then it banks.

Crypto markets don't make credit analysis unnecessary. They'll make the banks record keeping cheaper via block chain technology, but won't make individuals any more savvy or willing to do credit analysis for such a small pay-back.

I, personally, have no desire to do credit research on an individual to loan them money for 30 years to finance their mortgage so I can make 3.75%.

I'd much rather sit on my ass and earn 2.25% for doing nothing, and have access to the money any time I need, and let the bank collect the spread from my deposits vs their loans and deal with the liquidity management.

Crypto currency isn't going to change this dynamic one iota IMO.
Title: Re: Are big banks value traps
Post by: DooDiligence on October 06, 2019, 03:50:50 PM
Also, who has billions/trillions on hand to lend out to massive companies and massive populations?

And, who has the institutional know-how to effectively risk manage that entire operation?

The barriers to entry to banking are immense. This is why we haven't seen a new big bank in a looooong time.

Competitors will go after the higher ROI business first and then try to make run them better. Think, Credit cards, loan generation, mortgages, payment, wealth management. Lending itself is harder to dis-intermediate, but Even if that were all that is left, banks would be much worse business than they are now. In the longer run, crypto solutions could put a dent into this business too and basically make the banks redundant as loans would go peer to peer. We are a long way off, but this doesn’t mean it won’t happen.

The problem is that banks are stodgy and not tech savvy in general and that will probably be the most important factor going forward, not balance sheet strength or branch networks. JPM probably looks best here, Wells Fargo the worst from then it banks.

Crypto markets don't make credit analysis unnecessary. They'll make the banks record keeping cheaper via block chain technology, but won't make individuals any more savvy or willing to do credit analysis for such a small pay-back.

I, personally, have no desire to do credit research on an individual to loan them money for 30 years to finance their mortgage so I can make 3.75%.

I'd much rather sit on my ass and earn 2.25% for doing nothing, and have access to the money any time I need, and let the bank collect the spread from my deposits vs their loans and deal with the liquidity management.

Crypto currency isn't going to change this dynamic one iota IMO.

Yep & yep.

Crypto will be useful for frictionless internal transaction, though.

https://www.forbes.com/sites/korihale/2019/09/25/wells-fargo-co-signs-cryptocurrencies-with-new-digital-cash-product/#1ea26319363f
Title: Re: Are big banks value traps ?
Post by: Viking on October 06, 2019, 11:17:53 PM
“...big banks may be the department store equivalent of the financial industry.”

Spekulatius, thanks for posing the question as it has been rattling around in my mind as well.

The banks in Europe look to be value traps. In my mind this is driven primarily by their economy and the ECB response/policies (negative interest rates).  A secondary reason is their inability to achieve greater scale as there is no appetite or synergies with cross-border mergers.

I really like the US big banks. The industry is undergoing dramatic change and I think these are benefitting the very big banks as scale seems to be very important.  My primary concern with the US big banks is trying to understand if negative interest rates are coming to the US.   If the US, in response to economic weakness and potential deflation, resorts to European style monetary policy (negative interest rates) then this will be negative for earnings for the big US banks. This could play out over many years and result in poor earnings growth and flat stock price (value trap). You are already seeing slowing earnings (as NIM falls); the big banks are relying more and more on share buy backs to show growth in earnings per share. And times are very good for the big US banks right now... what happens when times are not good (lower NIM and higher credit costs)?
Title: Re: Are big banks value traps ?
Post by: Spekulatius on October 07, 2019, 05:28:59 PM
Pretty timely interview with Mike Mayo regarding banks and technology:
 https://finance.yahoo.com/video/wells-fargos-mike-mayo-banking-152840836.html (https://finance.yahoo.com/video/wells-fargos-mike-mayo-banking-152840836.html)

Sounds like he is reasonably optimistic on banks.
Title: Re: Are big banks value traps ?
Post by: Viking on October 07, 2019, 11:42:09 PM
Pretty timely interview with Mike Mayo regarding banks and technology:
 https://finance.yahoo.com/video/wells-fargos-mike-mayo-banking-152840836.html (https://finance.yahoo.com/video/wells-fargos-mike-mayo-banking-152840836.html)

Sounds like he is reasonably optimistic on banks.

Great video. I liked his comment that, yes, revenue growth was slowing but as long as expense growth was lower the big banks would continue to post solid earnings. And it was their massive investmemts in technology that would allow them to continue to bring down expenses.

I think he said 200,000 jobs to come out of the financial industry in the next 10 years (right timeframe)? Expect bank expense ratios to continue falling for many years.
Title: Re: Are big banks value traps ?
Post by: JEast on October 08, 2019, 06:19:29 AM
From about 1986 thru to 1992, US banks in general had a tough time with the S&L crisis where over 1,000 banks were closed and that also included a nice recession in ’90-‘91.  Near the end of this terrible period, you could buy banks for 60-80% of TBV and all paying a healthy dividend.  Then, coming out of that period the banks had a long runway for 10 years only culminating at the end of the dot-com era.  Then low interest rate gave them another run until the ’07 crisis.  It took nearly six years to clean up the mess the first time and appears that it has taken about 8 years to clean up the mess second time.  What’s different now versus the ’86-’92 period?  A lot. 
There used to be a metric in the cellphone industry that each customer was worth $1,200 (if memory serves) for the life of a customer, usually less than 5-years.  For a bank, what is the customer life?  If you open a checking account and keep it for two-years, you are a probably with that bank for 30+ years! Even with all the baggage of bad press, etc… WFC opened up over 500k new checking accounts in the first six-months of 2019, and other big banks were positive too.  What are those customers worth?

Big banks may not perform for innings 6-9, but they do not appear to be value traps as they are adding value by capturing more of the pie.  We just need to figure out how much pie there will be in five years.
Title: Re: Are big banks value traps ?
Post by: wabuffo on October 08, 2019, 09:21:04 AM
If you open a checking account and keep it for two-years, you are a probably with that bank for 30+ years! Even with all the baggage of bad press, etc… WFC opened up over 500k new checking accounts in the first six-months of 2019, and other big banks were positive too.  What are those customers worth?

I think even more than deposits, the big banks dominate credit card usage.   The most important asset for a bank is the front-of-wallet credit card.  It has most of the spend and the least amount of losses.  The second and third cards in the wallet are statistical losers - they only get used when no 1 card is maxed out and therefore have a higher loss rate. 

In addition to being super-profitable for the banks, the front-of-wallet credit card tends to be very sticky and usually ties the user to other bank services.  If you look at what is happening in the loyalty business with airline frequent flyer miles and what airlines/banks are paying to repatriate them you can tell just how important to the big banks credit cards are (the banks often pay upfront large payments to continue to tie their credit cards to the airline loyalty program).

Having said that - I think deposits continue to grow 3-4% per year for the US banking industry with continued consolidation allowing the big 3 banks (WFC, BAC, JPM) to grow deposits even faster.  Its why Buffett loves the big three banks as investments - they have a big tailwind.

wabuffo

Title: Re: Are big banks value traps ?
Post by: scorpioncapital on October 10, 2019, 09:00:59 AM
I have a feeling brokerage firms are at intersection of payment services and banking. In fact if banks ever go negative in rates brokerage firms may offer lower borrow costs and higher interest rates. If this is so I think brokerage firms may be able to substitute a vast amount of function of the bank at the consumer level.
Title: Re: Are big banks value traps ?
Post by: TwoCitiesCapital on October 10, 2019, 09:38:35 AM
I have a feeling brokerage firms are at intersection of payment services and banking. In fact if banks ever go negative in rates brokerage firms may offer lower borrow costs and higher interest rates. If this is so I think brokerage firms may be able to substitute a vast amount of function of the bank at the consumer level.

I disagree. Brokerages can certainly collect deposits - but they've shown an unwillingness to pay decent returns on it by moving from money markets to bank deposit sweeps as the default options.

In other words, brokerages have obviously expressed a preference to move deposits held BACK to banks in exchange for fees for those banks.

Further, there is limited lending brokerages can engage in outside of securities Based lending. Mortgages/personal loans/auto loans/etc for those who don't have the cash/securities to cover those expenses would be non-existent.

Banks still win here and brokerages are demonstrating that by sending current deposits straight back to banks.
Title: Re: Are big banks value traps ?
Post by: John Hjorth on October 10, 2019, 12:19:22 PM
Natural Park Service - Gates of the Arctic - Muskox: Circle Defense (https://www.nps.gov/gaar/learn/nature/muskox-circle-defense.htm).
Title: Re: Are big banks value traps ?
Post by: John Hjorth on October 10, 2019, 12:42:13 PM
Mastercard [June 25th 2015: Press Releases - Mastercard and P27 Nordic Payments Platform to build a world first real-time payments system across the region (https://newsroom.mastercard.com/press-releases/mastercard-and-p27-nordic-payments-platform-to-build-a-world-first-real-time-payments-system-across-the-region/).

Now exactly that press release made me relate to what has been posted here on CoBF by Spekulatius earlier. [No link here, but i'll dig it up, if needed]. In short : Wake up, [not as a an investor, more like as a citizen] or you're destined to fall behind.

There are no cheques bouncing around here in Denmark, now for years. Simply because the whole chequing account system was put into run-off YE2016 [If IRC, with a 3 months run-off period.]. Pretty much the most cost intensive and the most cumbersome system - ever - to carry cash from A to B.
Title: Re: Are big banks value traps ?
Post by: Spekulatius on October 10, 2019, 02:43:29 PM
I think one takeaway from this is that technological prowess matter more so in the past for banks. In the US, I consider BAC and JPM the leader followed by WFC. WFC really was the best bank in terms of how they managed their branches, but I think this is now much less and advantage than it has been in the last. A lot of regional and small banks are going to be in trouble.

A lot of the larger credit unions are doing well. I am member with a few and many have grown their balance sheet organically by ~10% annually since the Great Recession. They have certainly taken market share, probably from smaller banks. Credit unions tend to have very few, but larger branches, which plays well into going online and doing just doing the transactions requiring consulting in the branches.
Title: Re: Are big banks value traps ?
Post by: JEast on October 18, 2019, 07:53:39 AM
The big banks reported this week and nearly all exceeded expectations and reported that the consumer is strong with exceptional credit. 

The big banks indicated they will continue to gather more deposits (market share) in a low rate environment and appears to be true as BAC opened up 700k (net) checking accounts so far this year.
Title: Re: Are big banks value traps ?
Post by: wabuffo on October 18, 2019, 08:55:00 AM
The big banks indicated they will continue to gather more deposits (market share) in a low rate environment

It also appears that the big banks (led by Jamie Dimon) used the September repo melt-down to get the bank regulators to loosen up on what the preferred collateral for meeting the new Liquidity Coverage Ratio regs will be allowed.  They will be freer to use the cash they have on deposit at the Fed in order to provide liquidity to repo markets (and who knows where else). 

Bank regulators were leaning on the banks to use reserves only (and not other zero-credit risk assets like Treasuries) to meet the LCR stress test regulations.  While both cash on deposit at the Fed (reserves) and Treasuries are zero credit risk, regulators worried that in a crisis, Treasuries had some price risk - ie, a stressed bank would not be able to sell them at 100-cents on the dollar.  Cash on deposit at the Fed has no price risk - its cash!.   That's why once reserves dropped to a certain lower level from the Fed's Quantitative Tightening, the banks could only sit on their hands and watch while repo rates spiked to almost 10% in mid-Sept.  They believed that the regulators wanted this cash to stay at the Fed.

An article in Reuters today says that bank regulators are loosening up and permitting Treasuries (in addition to reserves) in meeting LCR.  This frees up the big banks to deploy more of their cash excess reserves.  This is probably positive for big bank earnings.  They will continue to see rising deposits and it looks like they will be allowed to hold a lower percentage of their assets as cash deposited at the Fed earning a low return.

https://www.reuters.com/article/us-usa-banks-rates-exclusive/exclusive-wall-street-banks-see-green-light-from-fed-on-reserves-sources-idUSKBN1WW2T6 (https://www.reuters.com/article/us-usa-banks-rates-exclusive/exclusive-wall-street-banks-see-green-light-from-fed-on-reserves-sources-idUSKBN1WW2T6)

wabuffo
Title: Re: Are big banks value traps ?
Post by: cameronfen on October 18, 2019, 12:51:55 PM
So I think I argued in the WFC thread a while ago that big banks are at risk of losing their moat because there is so much fintech that is basically modularizing everything that big banks do.  For example if you want a loan you can now go to Quicken, or Lending Tree.  If you want to buy stocks, discount broker (or even a safe place to deposit money).  You want to perform an electronic payment transaction you can now work around banks with things like Paypal, venmo, Alipay.  If you want deposits, there are challenger banks going all electronic that have no branches willing to give you higher interest deposits and lower interest loans.  I think I made a big point on challenger banks. 

I wanted to point out that it looks like challenger banks and other fintech looking to disrupt how banks do business are running into more difficulty overcoming the regulation that big banks use as moats.  For example, see here:

https://www.ft.com/content/77ef93ec-e100-11e9-9743-db5a370481bc

Goldman Sach's Marcus is also having trouble:

https://www.pymnts.com/earnings/2019/red-ink-marks-marcus-and-goldmans-risky-consumer-bet/

As is Facebook's Libra which is well known. 

Anyway, my point is that my position on this whole thing has evolved as I got more information (as well as discussions on the WFC thread).  I think modularization is still a thing, and it will take big banks like ten years to have an as efficient cost structure as these challenger banks (as they have to close down branches and build up an entirely online deposit base) and other non-bank entities.  But thus far, it seems like the big bank moats are holding up and preventing even the low-cost producers from taking significant share.  I still wouldn't be long WFC though, as a lot of other big banks are further along in closing branches than WFC and will have a cost advantage for the foreseeable feature. 
Title: Re: Are big banks value traps ?
Post by: plato1976 on October 18, 2019, 09:48:02 PM
It will take decades to disrupt the current bank business model;
so a bank like BAC still has time to grow through share buy back, and then begin to issue fat div when the valuation is high;
I think they have enough time to generate shareholder value before the business model goes obsolete

Also, we cannot exclude the possibility that the transition is so slow that those big banks adapt to the new world successfully

So I think I argued in the WFC thread a while ago that big banks are at risk of losing their moat because there is so much fintech that is basically modularizing everything that big banks do.  For example if you want a loan you can now go to Quicken, or Lending Tree.  If you want to buy stocks, discount broker (or even a safe place to deposit money).  You want to perform an electronic payment transaction you can now work around banks with things like Paypal, venmo, Alipay.  If you want deposits, there are challenger banks going all electronic that have no branches willing to give you higher interest deposits and lower interest loans.  I think I made a big point on challenger banks. 

I wanted to point out that it looks like challenger banks and other fintech looking to disrupt how banks do business are running into more difficulty overcoming the regulation that big banks use as moats.  For example, see here:

https://www.ft.com/content/77ef93ec-e100-11e9-9743-db5a370481bc

Goldman Sach's Marcus is also having trouble:

https://www.pymnts.com/earnings/2019/red-ink-marks-marcus-and-goldmans-risky-consumer-bet/

As is Facebook's Libra which is well known. 

Anyway, my point is that my position on this whole thing has evolved as I got more information (as well as discussions on the WFC thread).  I think modularization is still a thing, and it will take big banks like ten years to have an as efficient cost structure as these challenger banks (as they have to close down branches and build up an entirely online deposit base) and other non-bank entities.  But thus far, it seems like the big bank moats are holding up and preventing even the low-cost producers from taking significant share.  I still wouldn't be long WFC though, as a lot of other big banks are further along in closing branches than WFC and will have a cost advantage for the foreseeable feature.
Title: Re: Are big banks value traps ?
Post by: cameronfen on October 18, 2019, 10:25:58 PM
It will take decades to disrupt the current bank business model;
so a bank like BAC still has time to grow through share buy back, and then begin to issue fat div when the valuation is high;
I think they have enough time to generate shareholder value before the business model goes obsolete

Also, we cannot exclude the possibility that the transition is so slow that those big banks adapt to the new world successfully

So I think I argued in the WFC thread a while ago that big banks are at risk of losing their moat because there is so much fintech that is basically modularizing everything that big banks do.  For example if you want a loan you can now go to Quicken, or Lending Tree.  If you want to buy stocks, discount broker (or even a safe place to deposit money).  You want to perform an electronic payment transaction you can now work around banks with things like Paypal, venmo, Alipay.  If you want deposits, there are challenger banks going all electronic that have no branches willing to give you higher interest deposits and lower interest loans.  I think I made a big point on challenger banks. 

I wanted to point out that it looks like challenger banks and other fintech looking to disrupt how banks do business are running into more difficulty overcoming the regulation that big banks use as moats.  For example, see here:

https://www.ft.com/content/77ef93ec-e100-11e9-9743-db5a370481bc

Goldman Sach's Marcus is also having trouble:

https://www.pymnts.com/earnings/2019/red-ink-marks-marcus-and-goldmans-risky-consumer-bet/

As is Facebook's Libra which is well known. 

Anyway, my point is that my position on this whole thing has evolved as I got more information (as well as discussions on the WFC thread).  I think modularization is still a thing, and it will take big banks like ten years to have an as efficient cost structure as these challenger banks (as they have to close down branches and build up an entirely online deposit base) and other non-bank entities.  But thus far, it seems like the big bank moats are holding up and preventing even the low-cost producers from taking significant share.  I still wouldn't be long WFC though, as a lot of other big banks are further along in closing branches than WFC and will have a cost advantage for the foreseeable feature.

Yes that is generally the conclusion I was trying to convey.  Its a threat to the moat, but likely the big banks will be okay especially BAC that is ahead of the curve on branch closings.  I think the problem is WFC which has the most branches per $deposit by a decent margin compared to the other banks which means even if they close at the same rate as other banks they are likely to be the high cost provider in what is generally a commodity business where the main advantage is cost (through historically economies of scale but branchesless bank is a different advantage).  My 2 cents.  I don't really invest in banks so weigh my opinions however you want. 
Title: Re: Are big banks value traps ?
Post by: sleepydragon on October 19, 2019, 01:36:44 AM
So I think I argued in the WFC thread a while ago that big banks are at risk of losing their moat because there is so much fintech that is basically modularizing everything that big banks do.  For example if you want a loan you can now go to Quicken, or Lending Tree.  If you want to buy stocks, discount broker (or even a safe place to deposit money).  You want to perform an electronic payment transaction you can now work around banks with things like Paypal, venmo, Alipay.  If you want deposits, there are challenger banks going all electronic that have no branches willing to give you higher interest deposits and lower interest loans.  I think I made a big point on challenger banks. 

I wanted to point out that it looks like challenger banks and other fintech looking to disrupt how banks do business are running into more difficulty overcoming the regulation that big banks use as moats.  For example, see here:

https://www.ft.com/content/77ef93ec-e100-11e9-9743-db5a370481bc

Goldman Sach's Marcus is also having trouble:

https://www.pymnts.com/earnings/2019/red-ink-marks-marcus-and-goldmans-risky-consumer-bet/

As is Facebook's Libra which is well known. 

Anyway, my point is that my position on this whole thing has evolved as I got more information (as well as discussions on the WFC thread).  I think modularization is still a thing, and it will take big banks like ten years to have an as efficient cost structure as these challenger banks (as they have to close down branches and build up an entirely online deposit base) and other non-bank entities.  But thus far, it seems like the big bank moats are holding up and preventing even the low-cost producers from taking significant share.  I still wouldn't be long WFC though, as a lot of other big banks are further along in closing branches than WFC and will have a cost advantage for the foreseeable feature.

To me, all these thoughts about what future will looks like are speculations.  It’s same as speculating Tesla or beyond burger will take over the world. What matters now is banks are generating huge amount of cash, well managed, and valuation is cheap. It’s a good investment.
Title: Re: Are big banks value traps ?
Post by: wabuffo on October 19, 2019, 09:34:36 AM
The current US monetary system is a closed loop system between the Federal Reserve and the Chartered banks.  This closed loop involves banks transacting amongst themselves in reserve funds which are deposit accounts at the Fed and are used for clearing all bank payment transactions vital to US commerce.  Your deposits at a bank get a guarantee by the US Treasury and in return the banks accept the rules and regulations of the US Treasury via the 12 Federal Reserve banks. 

The federally chartered banks are agents of the US Treasury and the Federal Reserve and are the most important transmission mechanism of monetary policy.  This system will never be disrupted unless the US Treasury allows it to be disrupted.  Which it will never do. 

If any technological changes happen to money, payments, etc - this will be the same group of institutions managing it in a closed loop system.

The big banks are here to stay and will only get bigger, IMO.   

wabuffo
Title: Re: Are big banks value traps ?
Post by: Spekulatius on October 20, 2019, 05:37:06 AM
 I don’t think it’s quite as simple. Look for example at mortgage origination. WFC  had a huge part of the market - ~27%. I think right now they have 10-11%. Focused players ate their lunch. I think asset management will go down the same route. Why hold assets at JPM, Merrilledge (BAC), JPM, when Fidelity, Schwab etc offer zero commissions and more interest on cash and a better platform. I personally just moved my assets from WFC to Fidelity and I don’t think I am the only one. Payment is another one, where Visa, Mastercard and other tech savvy players take. It’s and pieces from the banks.
Mortgage market shares for mortgage origination (PFSI long thesis):
 https://www.valueinvestorsclub.com/idea/PENNYMAC_FINANCIAL_SERVICES/6907838692 (https://www.valueinvestorsclub.com/idea/PENNYMAC_FINANCIAL_SERVICES/6907838692)

The advantage of the big banks is that they can win share from smaller players, who have are much less tech savvy. I do agree it will be a slow bleed, but I think the banks will lose large parts of ancillary business over time.

I do think the process is slow enough that it does not negate an investment thesis is the large bank stocks, especially given the current low valuations.

<typing corrected>
Title: Re: Are big banks value traps ?
Post by: wabuffo on October 20, 2019, 06:20:16 AM
I don’t think it’s quite as simple. Look for example at mortgage origination.
Sure.  Mortgage origination is a large and complex market. 

Extending credit can be done by anyone - I can give you an IOU and you just extended credit to me.  Loan creation!  ;D  If my credit rating is superb, you can even sell that IOU piece of paper (chit) to someone else at 100-cents on the dollar.  Even better - Money creation!   ;D  You are now a bank!   8)  Only problem is that this chit is not 100% guaranteed by the US Treasury - so not a bank! :-[  Probably not going to get 100-cents on the dollar - so real banks win!

But take a look at your example of PennyMac.  Who funds their origination and loan purchases with wholesale financing?:
Quote
We maintain multiple master repurchase agreements and mortgage loan participation and sale agreements with money center banks to fund newly originated prime mortgage loans purchased from correspondent sellers. The total unpaid principal balance (“UPB”) outstanding under the facilities in existence as of December 31, 2018 was $1.5 billion.
The banks may not want to take every credit risk out there - but they are happy to fund those who do for a price.

The big banks have huge funding advantages and while they may not play in every part of the financial services business, their central role in deposit gathering and payment clearing as well as their integration with the transmission of interest rates to the broader economy makes them pretty bullet-proof.  Does that make them great investments relative to every other stock, I'm agnostic about that.  But they are not "melting ice cubes".  I'm pretty sure about that.

wabuffo
Title: Re: Are big banks value traps ?
Post by: cameronfen on October 20, 2019, 08:00:50 AM
I don’t think it’s quite as simple. Look for example at mortgage origination.
Sure.  Mortgage origination is a large and complex market. 

Extending credit can be done by anyone - I can give you an IOU and you just extended credit to me.  Loan creation!  ;D  If my credit rating is superb, you can even sell that IOU piece of paper (chit) to someone else at 100-cents on the dollar.  Even better - Money creation!   ;D  You are now a bank!   8)  Only problem is that this chit is not 100% guaranteed by the US Treasury - so not a bank! :-[  Probably not going to get 100-cents on the dollar - so real banks win!

But take a look at your example of PennyMac.  Who funds their origination and loan purchases with wholesale financing?:
Quote
We maintain multiple master repurchase agreements and mortgage loan participation and sale agreements with money center banks to fund newly originated prime mortgage loans purchased from correspondent sellers. The total unpaid principal balance (“UPB”) outstanding under the facilities in existence as of December 31, 2018 was $1.5 billion.
The banks may not want to take every credit risk out there - but they are happy to fund those who do for a price.

The big banks have huge funding advantages and while they may not play in every part of the financial services business, their central role in deposit gathering and payment clearing as well as their integration with the transmission of interest rates to the broader economy makes them pretty bullet-proof.  Does that make them great investments relative to every other stock, I'm agnostic about that.  But they are not "melting ice cubes".  I'm pretty sure about that.

wabuffo

If you look at branchless banks, it is obvious that big banks with branches are at a severe cost disadvantage and that shows in Roe/RoA numbers dispite having much smaller scale. But one big problem with modularization is that matters less and less. If I can originate a loan and sell the securitized loan on the public market, it doesnt matter if I have lowest cost of funds.  All that matters is there is someone in the market that has low cost of funds. 
Title: Re: Are big banks value traps ?
Post by: KJP on October 20, 2019, 08:48:38 AM
I don’t think it’s quite as simple. Look for example at mortgage origination.
Sure.  Mortgage origination is a large and complex market. 

Extending credit can be done by anyone - I can give you an IOU and you just extended credit to me.  Loan creation!  ;D  If my credit rating is superb, you can even sell that IOU piece of paper (chit) to someone else at 100-cents on the dollar.  Even better - Money creation!   ;D  You are now a bank!   8)  Only problem is that this chit is not 100% guaranteed by the US Treasury - so not a bank! :-[  Probably not going to get 100-cents on the dollar - so real banks win!

But take a look at your example of PennyMac.  Who funds their origination and loan purchases with wholesale financing?:
Quote
We maintain multiple master repurchase agreements and mortgage loan participation and sale agreements with money center banks to fund newly originated prime mortgage loans purchased from correspondent sellers. The total unpaid principal balance (“UPB”) outstanding under the facilities in existence as of December 31, 2018 was $1.5 billion.
The banks may not want to take every credit risk out there - but they are happy to fund those who do for a price.

The big banks have huge funding advantages and while they may not play in every part of the financial services business, their central role in deposit gathering and payment clearing as well as their integration with the transmission of interest rates to the broader economy makes them pretty bullet-proof.  Does that make them great investments relative to every other stock, I'm agnostic about that.  But they are not "melting ice cubes".  I'm pretty sure about that.

wabuffo

If you look at branchless banks, it is obvious that big banks with branches are at a severe cost disadvantage and that shows in Roe/RoA numbers dispite having much smaller scale. But one big problem with modularization is that matters less and less. If I can originate a loan and sell the securitized loan on the public market, it doesnt matter if I have lowest cost of funds.  All that matters is there is someone in the market that has low cost of funds.

Aren't there two different activities going on here?  Activity 1 is the identifying borrowers and underwriting loans ("origination") and Activity 2 is earning an investment return by owning the loan ("providing capital").  So long as there is a pool of capital available to purchase loans originated by third parties and the transaction costs of doing that are relatively low, the two activities can be separated.  Once separated, Activity 2 becomes supplying a commodity -- money. The greater the supply of capital, the less profitable that activity is likely to be.   

Cost of funds certainly matters for the profitability of Activity 2, just as costs of production matter to the profitability of a seller of commodities. I agree that you have to look at the true cost of funds (including the cost to gather), rather than just interest paid on your funds.

 
Title: Re: Are big banks value traps ?
Post by: wabuffo on October 20, 2019, 09:11:25 AM
Aren't there two different activities going on here? 

I think Activity 1 is a commodity.  But specifically related to Activity 2:

1) Where does a non-bank (e.g. PennyMac) get the money to originate loans?  - the non-bank needs to find it.  In their case a warehouse line from JPM, BAC, WFC, etc.
2) Where does a bank (JPM, BAC, WFC) get the money to originate loans? - the bank just creates it.  In their case, loans create new deposits out of thin air, literally.

Who do you think has the real advantage for Activity 2?

wabuffo
Title: Re: Are big banks value traps ?
Post by: JEast on October 20, 2019, 09:29:44 AM
Since 2010, there have been 100+ challenger banks and fintech start-ups in the UK.  The results to date are not very encouraging as most have closed their doors or still trying to launch officially.  The ones that have opened only scratched the mostly cash only and less than $1,000 dollar accounts (e.g. basically non-accretive accounts that change after the next best deal comes along). The poster child of challenger banks is/was Metro Bank, but that now seems to have imploded on aggressive marketing to attract the wrong customers. In conjunction with UK government support for challenger banks along with attempting to punish/destroy the top 5 banks all the while the top 5 just got bigger over these years since 2010!

Quote
Why hold assets at JPM, Merrilledge (BAC), JPM, when Fidelity, Schwab etc offer zero commissions and more interest on cash and a better platform.
I guess that question is answered by where one looks.  JPM (You Invest) and BAC (Merrill Edge) have offered zero commissions with research for sometime but just don't advertise it. Were these folks gaining share and reason Fidelity/Schwab had to react??
Title: Re: Are big banks value traps ?
Post by: KJP on October 20, 2019, 10:02:08 AM
Aren't there two different activities going on here? 

I think Activity 1 is a commodity.  But specifically related to Activity 2:

1) Where does a non-bank (e.g. PennyMac) get the money to originate loans?  - the non-bank needs to find it.  In their case a warehouse line from JPM, BAC, WFC, etc.
2) Where does a bank (JPM, BAC, WFC) get the money to originate loans? - the bank just creates it.  In their case, loans create new deposits out of thin air, literally.

Who do you think has the real advantage for Activity 2?

wabuffo

If Activity 1 is a commodity, then the only potential advantage is lowest cost, with the costs being the SG&A associated with identifying borrowers and underwriting their loans, the capital cost of temporarily warehousing loans prior to selling them on and any transaction costs in doing so.  In my mind, a huge funding advantage for money center banks over other capital providers doesn't necessarily mean third parties can't have lower origination costs, which are largely SG&A, rather than capital costs.  If money-center banks have a clear lower cost for origination activity, why do third-party originators exist?  Are they really only flex capacity that picks up marginal business during good times and collapses during bad times when access to third-party capital dries up? 

Regarding Activity 2, I agree that non-bank originators are dependent on third-party capital, both temporary (warehouse lines) and permanent (whoever ultimately holds the loan on their books).  That is why I don't think they are even really involved in Activity 2.  Instead, their business model is dependent upon the existence of someone else willing to engage in Activity 2.  Because Activity 2 is the provision of money, I think whoever has the lowest cost of money would have the biggest advantage in Activity 2, just as the person who operates the lowest cost coal mine typically has the biggest advantage in market for supplying coal.  Your view, I take it, is that money-center banks have the lowest costs because of their ability to gather deposits at low cost. 

Another poster has opined that branchless banks can gather deposits at even lower costs, and thus represent a long-term threat to money-center banks.  In other words, that poster is challenging your statement that money-center banks have "huge funding advantages."  I don't know if that's true or not. 

 
Title: Re: Are big banks value traps ?
Post by: wabuffo on October 20, 2019, 10:17:40 AM
Another poster has opined that branchless banks can gather deposits at even lower costs

I don't think you understand what I am saying.  I believe you have the causation backwards for the banks.  You seem to be assuming that banks must (1) gather deposits, before (2) creating loans. 

That is not how the current monetary system works.   The order is (1) banks create a loan, which (2) creates a deposit. Sure a few deposits switch from one bank to another but on the whole its not a big factor.  This is because banks are federally chartered by the US Treasury and the Federal Reserve.  They don't need to gather deposits - for the most part they create them.   Branch operations are not an input cost for deposits when you are talking banks.

The only thing that limits their deposit (and credit creation) is regulations and capital.  It isn't even reserves (never was).  There is no relation between credit creation/deposits and reserves.  Anyone who quotes you the old chestnut of the banks "gather $10 of deposits, loan out $9 and must keep $1 of reserves" from the textbooks is wrong and you should immediately stop listening to them.

Non-banks can't do that.  They actually have to find money since they can't create it like the big banks can.

Didn't mean to turn this into a macroeconomics and monetary theory thread.  But there's a lot of misunderstanding of how banks work.

wabuffo
Title: Re: Are big banks value traps ?
Post by: benhacker on October 20, 2019, 10:26:09 AM
Another poster has opined that branchless banks can gather deposits at even lower costs

I don't think you understand what I am saying.  I believe you have the causation backwards for the banks.  You seem to be assuming that banks must (1) gather deposits, before (2) creating loans. 

That is not how the current monetary system works.   The order is (1) banks create a loan, which (2) creates a deposit. Sure a few deposits switch from one bank to another but on the whole its not a big factor.  This is because banks are federally chartered by the US Treasury and the Federal Reserve.  They don't need to gather deposits - for the most part they create them.   Branch operations are not an input cost for deposits when you are talking banks.

The only thing that limits their deposit (and credit creation) is regulations and capital.  It isn't even reserves (never was).  There is no relation between credit creation/deposits and reserves.  Anyone who quotes you the old chestnut of the banks "gather $10 of deposits, loan out $9 and must keep $1 of reserves" from the textbooks is wrong and you should immediately stop listening to them.

Non-banks can't do that.  They actually have to find money since they can't create it like the big banks can.

Didn't mean to turn this into a macroeconomics and monetary theory thread.  But there's a lot of misunderstanding of how banks work.

wabuffo

+1
Title: Re: Are big banks value traps ?
Post by: reader on October 20, 2019, 10:32:37 AM

Aren't there two different activities going on here? 

I think Activity 1 is a commodity.  But specifically related to Activity 2:

1) Where does a non-bank (e.g. PennyMac) get the money to originate loans?  - the non-bank needs to find it.  In their case a warehouse line from JPM, BAC, WFC, etc.
2) Where does a bank (JPM, BAC, WFC) get the money to originate loans? - the bank just creates it.  In their case, loans create new deposits out of thin air, literally.

Who do you think has the real advantage for Activity 2?

wabuffo

If Activity 1 is a commodity, then the only potential advantage is lowest cost, with the costs being the SG&A associated with identifying borrowers and underwriting their loans, the capital cost of temporarily warehousing loans prior to selling them on and any transaction costs in doing so.  In my mind, a huge funding advantage for money center banks over other capital providers doesn't necessarily mean third parties can't have lower origination costs, which are largely SG&A, rather than capital costs.  If money-center banks have a clear lower cost for origination activity, why do third-party originators exist?  Are they really only flex capacity that picks up marginal business during good times and collapses during bad times when access to third-party capital dries up? 


AFAIK BAC doesn't want to originate mortgages to none BAC customers.
Money center banks paid tens of billions of dollars in fines and settlements. they simply have too deep of a pocket to make originating mortgages or student loans on a mass scale, lucrative. they know that there'll be a huge price to pay, and it's not priced into the origination margin because they're the designated fall guys.
So better not fight for market share and just provide a service to their customers.
In some cases keep the loans on BAC's books.
 
Title: Re: Are big banks value traps ?
Post by: Cigarbutt on October 20, 2019, 10:56:58 AM
^Since 1984 when Continental Illinois was ‘saved’, the implicit support of government has increased steadily, in this closed loop environment, and, since the GFC, has moved into higher gear.

Since the GFC, the ‘deal’ between the big banks and their symbiotic public partners has been to improve capital ratios and to endure more intense regulatory scrutiny in exchange for even more concentration of assets (and matching liabilities) among the dominating players at the core of the center. Size has compensated for lower NIMs. Contrary to what Mr. Powell suggested in 2013 (speech) and what Mr. Dimon mentioned in 2016, TBTF has not been resolved. This growing implicit support associated with the TBTF label has meant lower funding costs and cost of capital, irrespective of the scale effect brought by size alone. This closed loop has become a self-feeding loop.

This competitive advantage for big banks is now entrenched and would only grow in a deleveraging environment, implying support for decent results in the new normal environment and a temporary floor on perceived value in downturns as the big becomes bigger. Not a value trap if you are enduring and can enjoy a backstop and if you agree that breaking up big banks has become next to impossible . This is not what creative destruction was meant to be but it is what it is.
Title: Re: Are big banks value traps ?
Post by: KJP on October 20, 2019, 11:13:39 AM

I don't think you understand what I am saying.  I believe you have the causation backwards for the banks. 

That is not how the current monetary system works.   The order is (1) banks create a loan, which (2) creates a deposit. Sure a few deposits switch from one bank to another but on the whole its not a big factor.  This is because banks are federally chartered by the US Treasury and the Federal Reserve.  They don't need to gather deposits - for the most part they create them.   Branch operations are not an input cost for deposits when you are talking banks.


Yes, I did not understand what you were saying. Thanks for explaining your point further. 

I understand that a bank making a loan (a bank asset) creates a deposit (a bank liability) somewhere in the banking system. I also understand that banks makes loans first and independently manages its capital requirements later.

What I don't follow is why making a loan necessarily creates a deposit on the lending bank's balance sheet.  For example, if a bank loans me money to buy a house, it will have that loan on its balance sheet as an asset.  But the deposit will be on the balance sheet of the seller's bank, wouldn't it?  Or am I missing something.



Title: Re: Are big banks value traps ?
Post by: cameronfen on October 20, 2019, 12:31:27 PM
Another poster has opined that branchless banks can gather deposits at even lower costs

I don't think you understand what I am saying.  I believe you have the causation backwards for the banks.  You seem to be assuming that banks must (1) gather deposits, before (2) creating loans. 

That is not how the current monetary system works.   The order is (1) banks create a loan, which (2) creates a deposit. Sure a few deposits switch from one bank to another but on the whole its not a big factor.  This is because banks are federally chartered by the US Treasury and the Federal Reserve.  They don't need to gather deposits - for the most part they create them.   Branch operations are not an input cost for deposits when you are talking banks.

The only thing that limits their deposit (and credit creation) is regulations and capital.  It isn't even reserves (never was).  There is no relation between credit creation/deposits and reserves.  Anyone who quotes you the old chestnut of the banks "gather $10 of deposits, loan out $9 and must keep $1 of reserves" from the textbooks is wrong and you should immediately stop listening to them.

Non-banks can't do that.  They actually have to find money since they can't create it like the big banks can.

Didn't mean to turn this into a macroeconomics and monetary theory thread.  But there's a lot of misunderstanding of how banks work.

wabuffo

Sure but how do deposits flow bank to a bank, through deposits gathered by the branch (or if you prefer the bank makes the loan through the branch). The point is even if you are saying branches are useless, which I don't think you are,  most of the big banks have large branch structures that they are paying to run.  If you are being more reasonable and argue that branches are the marketing tool for writing loans and taking deposits, this is where the bank structure runs into trouble.  Big banks have a cost disavantage to challeger banks (yes challengers are having trouble--we discussed this upthread--but they are here to stay, gaining significant share who knows), but they can't close all their branches at once because the type of customer they have are ones that use branches.  The only way they can cut costs is to slowly migrate people online while closing branches as they become less useful.  Thus challenger banks and big banks that did this early (ie BAC) will have this advantage for a long time. 

Edit: To claify even if its a closed loop, and deposits/loans are zero sum, banks have branches to take a bigger piece of the pie from other banks or whoever (local loan shark?) and use it as a marketing tool.
Title: Re: Are big banks value traps ?
Post by: Spekulatius on October 20, 2019, 02:34:52 PM
I don’t think it’s quite as simple. Look for example at mortgage origination.
Sure.  Mortgage origination is a large and complex market. 

Extending credit can be done by anyone - I can give you an IOU and you just extended credit to me.  Loan creation!  ;D  If my credit rating is superb, you can even sell that IOU piece of paper (chit) to someone else at 100-cents on the dollar.  Even better - Money creation!   ;D  You are now a bank!   8)  Only problem is that this chit is not 100% guaranteed by the US Treasury - so not a bank! :-[  Probably not going to get 100-cents on the dollar - so real banks win!

But take a look at your example of PennyMac.  Who funds their origination and loan purchases with wholesale financing?:
Quote
We maintain multiple master repurchase agreements and mortgage loan participation and sale agreements with money center banks to fund newly originated prime mortgage loans purchased from correspondent sellers. The total unpaid principal balance (“UPB”) outstanding under the facilities in existence as of December 31, 2018 was $1.5 billion.
The banks may not want to take every credit risk out there - but they are happy to fund those who do for a price.

The big banks have huge funding advantages and while they may not play in every part of the financial services business, their central role in deposit gathering and payment clearing as well as their integration with the transmission of interest rates to the broader economy makes them pretty bullet-proof.  Does that make them great investments relative to every other stock, I'm agnostic about that.  But they are not "melting ice cubes".  I'm pretty sure about that.

wabuffo

The problem with abandoning mortgage origination (and servicing) is that banks are not customer facing any more and provide a commodity service to those that are. I am sure providing wholesale financing is profitable, but at that point, they lost part of their brand and data/knowledge about customers.
Brokerage (at zero commissions ) is a service banks provided to increase customer engagement and as a path to upsell wealth Management services etc. They were never good at it and if the Wells Fargo advisor GUI is an indicator for industry standards (that’s the only one I know), it was functional but bare bones. The zero commission trend for the brokerage become an issue with Robinhood and perhaps IBKR announcing lite with zero commissions. Now that you can have zero commission with all the main brokerages with much better service and GUI’s, I think the banks will be having a hard time keeping assets and hence lose another way to acquire and cross sell to customers.

It’s not going to kill them but things like this are slowly chipping away at their franchise.
Title: Re: Are big banks value traps ?
Post by: Cigarbutt on October 21, 2019, 06:52:57 AM
I don't think you understand what I am saying.  I believe you have the causation backwards for the banks. 

That is not how the current monetary system works.   The order is (1) banks create a loan, which (2) creates a deposit. Sure a few deposits switch from one bank to another but on the whole its not a big factor.  This is because banks are federally chartered by the US Treasury and the Federal Reserve.  They don't need to gather deposits - for the most part they create them.   Branch operations are not an input cost for deposits when you are talking banks.
Yes, I did not understand what you were saying. Thanks for explaining your point further. 

I understand that a bank making a loan (a bank asset) creates a deposit (a bank liability) somewhere in the banking system. I also understand that banks makes loans first and independently manages its capital requirements later.

What I don't follow is why making a loan necessarily creates a deposit on the lending bank's balance sheet.  For example, if a bank loans me money to buy a house, it will have that loan on its balance sheet as an asset.  But the deposit will be on the balance sheet of the seller's bank, wouldn't it?  Or am I missing something.
Wabuffo has a better grasp and you would get a shorter and more illuminating answer form him but here's goes a too long attempt. The following may appear simplistic but I also find that the basics of the banking system are not well understood, perhaps at all levels of the hierarchy and sophistication.

First, it is a chicken and egg type of question to a certain degree and your example of bank A ending up with a leaving deposit created from the loan to bank B, given the circularity of the circulation within a relatively closed and steady-state fractional reserve loop, could be imagined to be matched by a scenario where a reciprocal and matching series of transactions from bank B to bank A occur, negating the money creation effect by allowing banks to do their basic mission: act as an intermediary for a profit.

But it is useful to apply the concept explained by wabuffo without the matching transactions because it fits better with the real world, it helps to understand what central banks are trying to do and because it underlines, conceptually, that money creation essentially happens when a loan is agreed upon at a bank (not the classic definition of banks looking for a use for their deposits).

So, bank A, seen in isolation, makes a loan, creates a deposit and then looks for reserves and capital. When this occurs and money is created, there a four accounting entries (all increase) for the bank and the client. As trees don't grow to the sky (unless you're a central bank), restraints have been put in place to keep this powerful process under (relative) control so that the bank, in substance, also is required two more accounting entry-equivalent 'liabilities': a reserve requirement related to the deposit and a capital requirement related to the loan. If the deposit liability remains at the bank, the requirement can be satisfied many ways including borrowing reserves in the Fed Funds Market (a hot topic these days). To meet the capital requirement, the bank can raise capital many ways (raise equity or equivalent and/or use retained earnings, some of it potentially coming from fees related to the loan made).

Linking with the non-bank lending part, to raise capital for liquidity purposes (deposit leaving to bank B), bank A has many options, many of which have to do with a regulatory moat nature, including using its loan asset as collateral, with a tiny haircut. Non-bank lenders have expanded in the mortgage market due to the big banks' reluctance with lower credit scores and have espoused technology related to the origination process, which has been equated to perceive them as fintech entrants but non-bank lenders rely, for funding, on the wholesale short-term market, do not have access to the Federal Reserve System or the FHLBS and rely on the big banks for much of the direct and indirect funding. See below, if interested, for the funding profile of various non-bank lenders according to size. I would say this is a relevant exercise because of the way we've come out of the GFC since business cycles have inevitably become more like credit cycles.
https://www2.deloitte.com/us/en/insights/industry/financial-services/cost-of-funding-survey-nonbank-online-lenders.html

A feature that needs to be incorporated in the non-bank lender analysis is that they operate, to some degree, in the 'shadow', have grown market share ++ in the lower credit scores space (will tend to show higher realized and perceived credit losses when applicable), will see higher losses while relying on funding whose cost will rise concurrently and in a context where big banks have built a regulatory safety net that is much less robust for non-bank lenders as it only percolated to the securitization space.

Non-bank lenders can be good investments (case by case and given certain holding periods) and the mortgage sector is in a better shape compared to the subprime epoch but it seems to me that non-bank lenders are the ones trapped in a situation where the big banks will relatively benefit from the asset-liability mismatch that is bound to happen over the whole cycle and that mismatch will be magnified by the regulatory closed loop that has developed. It seems to me that big banks will be there, with assistance, to pick up the pieces, including the technology related to the origination process and all the advantages that come with that.
Title: Re: Are big banks value traps ?
Post by: KJP on October 21, 2019, 07:15:04 AM
I don't think you understand what I am saying.  I believe you have the causation backwards for the banks. 

That is not how the current monetary system works.   The order is (1) banks create a loan, which (2) creates a deposit. Sure a few deposits switch from one bank to another but on the whole its not a big factor.  This is because banks are federally chartered by the US Treasury and the Federal Reserve.  They don't need to gather deposits - for the most part they create them.   Branch operations are not an input cost for deposits when you are talking banks.
Yes, I did not understand what you were saying. Thanks for explaining your point further. 

I understand that a bank making a loan (a bank asset) creates a deposit (a bank liability) somewhere in the banking system. I also understand that banks makes loans first and independently manages its capital requirements later.

What I don't follow is why making a loan necessarily creates a deposit on the lending bank's balance sheet.  For example, if a bank loans me money to buy a house, it will have that loan on its balance sheet as an asset.  But the deposit will be on the balance sheet of the seller's bank, wouldn't it?  Or am I missing something.
Wabuffo has a better grasp and you would get a shorter and more illuminating answer form him but here's goes a too long attempt. The following may appear simplistic but I also find that the basics of the banking system are not well understood, perhaps at all levels of the hierarchy and sophistication.

First, it is a chicken and egg type of question to a certain degree and your example of bank A ending up with a leaving deposit created from the loan to bank B, given the circularity of the circulation within a relatively closed and steady-state fractional reserve loop, could be imagined to be matched by a scenario where a reciprocal and matching series of transactions from bank B to bank A occur, negating the money creation effect by allowing banks to do their basic mission: act as an intermediary for a profit.

But it is useful to apply the concept explained by wabuffo without the matching transactions because it fits better with the real world, it helps to understand what central banks are trying to do and because it underlines, conceptually, that money creation essentially happens when a loan is agreed upon at a bank (not the classic definition of banks looking for a use for their deposits).

So, bank A, seen in isolation, makes a loan, creates a deposit and then looks for reserves and capital. When this occurs and money is created, there a four accounting entries (all increase) for the bank and the client. As trees don't grow to the sky (unless you're a central bank), restraints have been put in place to keep this powerful process under (relative) control so that the bank, in substance, also is required two more accounting entry-equivalent 'liabilities': a reserve requirement related to the deposit and a capital requirement related to the loan. If the deposit liability remains at the bank, the requirement can be satisfied many ways including borrowing reserves in the Fed Funds Market (a hot topic these days). To meet the capital requirement, the bank can raise capital many ways (raise equity or equivalent and/or use retained earnings, some of it potentially coming from fees related to the loan made).

Linking with the non-bank lending part, to raise capital for liquidity purposes (deposit leaving to bank B), bank A has many options, many of which have to do with a regulatory moat nature, including using its loan asset as collateral, with a tiny haircut. Non-bank lenders have expanded in the mortgage market due to the big banks' reluctance with lower credit scores and have espoused technology related to the origination process, which has been equated to perceive them as fintech entrants but non-bank lenders rely, for funding, on the wholesale short-term market, do not have access to the Federal Reserve System or the FHLBS and rely on the big banks for much of the direct and indirect funding. See below, if interested, for the funding profile of various non-bank lenders according to size. I would say this is a relevant exercise because of the way we've come out of the GFC since business cycles have inevitably become more like credit cycles.
https://www2.deloitte.com/us/en/insights/industry/financial-services/cost-of-funding-survey-nonbank-online-lenders.html

A feature that needs to be incorporated in the non-bank lender analysis is that they operate, to some degree, in the 'shadow', have grown market share ++ in the lower credit scores space (will tend to show higher realized and perceived credit losses when applicable), will see higher losses while relying on funding whose cost will rise concurrently and in a context where big banks have built a regulatory safety net that is much less robust for non-bank lenders as it only percolated to the securitization space.

Non-bank lenders can be good investments (case by case and given certain holding periods) and the mortgage sector is in a better shape compared to the subprime epoch but it seems to me that non-bank lenders are the ones trapped in a situation where the big banks will relatively benefit from the asset-liability mismatch that is bound to happen over the whole cycle and that mismatch will be magnified by the regulatory closed loop that has developed. It seems to me that big banks will be there, with assistance, to pick up the pieces, including the technology related to the origination process and all the advantages that come with that.

Thanks to you and Wabuffo for posting your thoughts.  Does a bank ("Bank A") gain any benefit from attracting existing depositors to move their deposits (which you can assume are paid very little in interest) to Bank A from other banks?  I believe the branchless banking argument assumes that there is a significant benefit from having a large deposit base on which costs you very little to attract.  Is that correct?  If so, what is the benefit?
Title: Re: Are big banks value traps ?
Post by: wabuffo on October 21, 2019, 07:56:01 AM
KJP - I think Cigarbutt is a better writer than I am so he probably explains things better than I can...

Here's how I think about banks (and non-banks) within our current monetary and credit creation system.  You need to think of the US monetary system as two closed-loops:

1) Bank Reserves:  as we discussed upthread this is a closed loop in which only the Federal Reserve and the federally-chartered banks play.  The currency here is reserves which are deposits at accounts at the Federal Reserve and can only be traded between the banks and the Fed. 

It has two purposes - the accounts are used to clear the bank payment system which is run by the Federal Reserve.  Reserves look stable but they fluctuate wildly intra-day as the US banking system processes billions (sometimes trillions) in bank payments between US banks on behalf of private sector commercial activity.  Its other purpose is that it acts as a policy lever for the Federal Reserve to manage short-term interest rates.  The way the Fed does this was through a "corridor" system before the GFC.  Today, the Fed manages interest rates through a "floor system" where it forces the banks to hold excess reserves at the Fed and pays them an interest rate on those reserves.  The amount of reserves are a policy variable that depends on the interest rate management mechanism being used by the Fed.  The size of the reserve isn't for the payment system volatility as banks like JPM used to manage their payments with just $2B in reserves at the Fed before the GFC and now they've had to hold as much as $500B in recently quarters.

2) Credit Creation:  again, as discussed banks and non-banks both create credit though as we've seen they do it differently.   The most important drivers of credit creation besides regulations and capital are: collateral and risk-appetite.   The one thing that doesn't regulate lending is the level of reserves.  This is what people misunderstand. 

All of these requirements fluctuate and lead to boom and bust.  Twas ever thus.   Collateral is the underappreciated aspect to our modern credit system.  Borrowing and lending is based on collateral.  Sometimes when risk appetite is low - what will be accepted as collateral is strict (eg. only risk-free Treasuries in an extreme case like the GFC).  At other times - even subprime mortgages are accepted with very little haircut.

I think the recent example of the overnight repo blow-up in mid-Sept shows the intersection between system 1 (reserves) and system 2 (credit creation) and how they can interact in unintended ways.  It was head-scratching that the big banks with trillions in excess reserves (cash on deposit at the Federal Reserve) couldn't/wouldn't take a few billion and lend it overnight at close to 10% in exchange for risk-free collateral (Treasuries).   I think this is why people get confused with reserves and lending.   I could go more into detail on this example if you're interested - but this post is already long and rambling.

As to deposits and branch economics - I remember when ATM's came out in the 1970s and 80s - everyone forecast that bank branches would be obsolete.  That was a major technological advance and yet branches are still ubiquitous.  I think its because branches serve an evolving and different purpose than deposit-gathering.  The banking industry employs more people now than it did in the 1970s despite less banks and more automation and technology.

wabuffo
Title: Re: Are big banks value traps ?
Post by: KJP on October 21, 2019, 08:26:46 AM
KJP - I think Cigarbutt is a better writer than I am so he probably explains things better than I can...

Here's how I think about banks (and non-banks) within our current monetary and credit creation system.  You need to think of the US monetary system as two closed-loops:

1) Bank Reserves:  as we discussed upthread this is a closed loop in which only the Federal Reserve and the federally-chartered banks play.  The currency here is reserves which are deposits at accounts at the Federal Reserve and can only be traded between the banks and the Fed. 

It has two purposes - the accounts are used to clear the bank payment system which is run by the Federal Reserve.  Reserves look stable but they fluctuate wildly intra-day as the US banking system processes billions (sometimes trillions) in bank payments between US banks on behalf of private sector commercial activity.  Its other purpose is that it acts as a policy lever for the Federal Reserve to manage short-term interest rates.  The way the Fed does this was through a "corridor" system before the GFC.  Today, the Fed manages interest rates through a "floor system" where it forces the banks to hold excess reserves at the Fed and pays them an interest rate on those reserves.  The amount of reserves are a policy variable that depends on the interest rate management mechanism by the Fed.  It isn't for the payment system as banks like JPM used to manage their payments with just $2B in reserves at the Fed before the GFC and now they've held as much as $500B in reserves at the Fed recently.

2) Credit Creation:  again, as discussed banks and non-banks both create credit though as we've seen they do it differently.   The most important drivers of credit creation besides regulations and capital are: collateral and risk-appetite.   All of these requirements fluctuate and lead to boom and bust.  Twas ever thus.   Collateral is the underappreciated aspect to our modern credit system.  Borrowing and lending is based on collateral.  Sometimes when risk appetite is low - what will be accepted as collateral is strict (eg. only risk-free Treasuries in an extreme case like the GFC).  At other times - even subprime mortgages are accepted with very little haircut.

I think the recent example of the overnight repo blow-up in mid-Sept shows the intersection between system 1 (reserves) and system 2 (credit creation) and how they can interact in unintended ways.  It was head-scratching that the big banks with trillions in excess reserves (cash on deposit at the Federal Reserve) couldn't/wouldn't take a few billion and lend it overnight at close to 10% in exchange for risk-free collateral (Treasuries).   I think this is why people get confused with reserves and lending.   I could go more into detail on this example if you're interested - but this post is already long and rambling.

As to deposits and branch economics - I remember when ATM's came out in the 1970s and 80s - everyone forecast that bank branches would be obsolete.  That was a major technological advance and yet branches are still ubiquitous.  I think its because branches serve an evolving and different purpose than deposit-gathering.  The banking industry employs more people now than it did in the 1970s despite less banks and more automation and technology.

wabuffo

Thanks for the additional thoughts.  I understand the point about federally-chartered banks having an advantage over non-banks.  What I'm still unclear about is the benefit, if any, of a large deposit base.  I've always assumed (without much thought) that a bank's deposit base was cheap capital, and the larger its (cheap) deposit base, the better its NIM (and ultimately profitability) would be, holding the yield on its assets constant.  So, a large deposit franchise would be a significant advantage (i.e., lead to a more profitable bank than one that relied more on, for example, brokered CDs) that could be eroded by people taking their deposits elsewhere (e.g., federally-chartered branchless banks).

This potential risk might not be significant because (1) a large cheap deposit base isn't actually an advantage, or (2) depositors aren't likely to move to branchless banks, even assuming they can offer higher interest rates (I realize this is pushing back somewhat about the closed-loop point that moving deposits around isn't a big deal and will come out in the wash, but I ask that you indulge me).  I'd like to put (2) aside for a moment and just try to understand (1) -- is a cheap deposit base an advantage and, if so, why? 
Title: Re: Are big banks value traps ?
Post by: wabuffo on October 21, 2019, 08:45:59 AM
This potential risk might not be significant because (1) a large cheap deposit base isn't actually an advantage, or (2) depositors aren't likely to move to branchless banks, even assuming they can offer higher interest rates.  I'd to put (2) aside for a moment and just try to understand (1) -- is a cheap deposit base an advantage and, if so, why? 

I only own one small bank (CASH) - but when I was investing in the banks I always thought that the four most important management levers were:

a) low-cost or zero cost deposits
b) high non-interest (or fee) income
c) low non-interest expense management (ie, overhead)
d) credit risk management - though being good at a), b), and c) helps in signing up the best borrowers from a low-credit-risk POV, because the well-managed bank can shave a few bps to attract the best borrowers vs its less well-run competitors (a little bit of a flywheel model for banking).

I always thought US Bancorp (USB) was exemplary in these four metrics.  Back when I was studying the banks more intently, I posted this post over at the Motley Fool's BRK board explaining what I thought were USB's competitive advantages.  (hopefully Parsad is ok with a link to another board - if not he can let me know and I will delete this post).

wabuffo

https://boards.fool.com/anybody-have-any-thoughtful-or-quantitative-27826750.aspx?sort=username (https://boards.fool.com/anybody-have-any-thoughtful-or-quantitative-27826750.aspx?sort=username)
Title: Re: Are big banks value traps ?
Post by: CorpRaider on October 21, 2019, 11:34:04 AM
Good stuff.  Why don't you invest in banks anymore...because they are value traps?   ;D
Title: Re: Are big banks value traps ?
Post by: wabuffo on October 21, 2019, 12:25:40 PM
Why don't you invest in banks anymore...because they are value traps?

No - they are more like overly-regulated utilities now.  I think the problem is the Fed and its new toy, IOER (interest-on-excess-reserves).  The Fed wants to control BOTH interest rates and reserves INDEPENDENTLY.  Under its old, pre-GFC, methodology it could only control short-term interest rates and had to let the banks, in turn, determine the level of minimal reserves required to support the system.  The Fed had only one arrow and could only hit one target.  Now, they feel like they have two arrows.  Like good bureaucrats they want control and are forcing the banks to sit on trillions in reserves so that they can pay IOER in order to control short-term rates.

The result of this policy is that the big banks have to hold 10-16% of their total assets in cash (most of it on deposit at the Federal Reserve).  Because these reserves at the Fed are free of both credit and price risk, the regulators are leaning on the banks hard to use these assets as a way to meet their Liquidity Coverage Ratio (LCR) and HQLA (Hi-Quality Liquid Asset) requirements.  I'm not making a judgement that this is good or bad - in the 1950's and 60's most US banks held 10% of their assets in cash (though not at the Fed).  We've been here before.

This explains why Jamie Dimon sat on several hundred billion in cash at JPM in September during the mini-repo liquidity crash.  JPM's cash was yielding less than 2% when Dimon could've used some of it in the repo markets making 8-10% overnight with T-Bills being offered as collateral.

That's why I laugh when I hear some folks say that all those reserves will lead to a credit bubble.  If Jamie Dimon couldn't deploy JPM's excess cash when it was yielding less than 2%, into the repo markets and make a risk-free 8-10% overnight (with T-Bills were the collateral for an overnight loan), then he's not going to be using that cash to make CRE loans to WeWork landlords in Manhattan, LOL!

I own one small-cap bank that's interesting - but it's because it is a more idiosyncratic situation.

wabuffo
Title: Re: Are big banks value traps ?
Post by: sleepydragon on October 21, 2019, 12:52:54 PM
Why don't you invest in banks anymore...because they are value traps?

No - they are more like overly-regulated utilities now.  I think the problem is the Fed and its new toy, IOER (interest-on-excess-reserves).  The Fed wants to control BOTH interest rates and reserves INDEPENDENTLY.  Under its old, pre-GFC, methodology it could only control short-term interest rates and had to let the banks, in turn, determine the level of minimal reserves required to support the system.  The Fed had only one arrow and could only hit one target.  Now, they feel like they have two arrows.  Like good bureaucrats they want control and are forcing the banks to sit on trillions in reserves so that they can pay IOER in order to control short-term rates.

The result of this policy is that the big banks have to hold 10-16% of their total assets in cash (most of it on deposit at the Federal Reserve).  Because these reserves at the Fed are free of both credit and price risk, the regulators are leaning on the banks hard to use these assets as a way to meet their Liquidity Coverage Ratio (LCR) and HQLA (Hi-Quality Liquid Asset) requirements.  I'm not making a judgement that this is good or bad - in the 1950's and 60's most US banks held 10% of their assets in cash (though not at the Fed).  We've been here before.

This explains why Jamie Dimon sat on several hundred billion in cash at JPM in September during the mini-repo liquidity crash.  JPM's cash was yielding less than 2% when Dimon could've used some of it in the repo markets making 8-10% overnight with T-Bills being offered as collateral.

That's why I laugh when I hear some folks say that all those reserves will lead to a credit bubble.  If Jamie Dimon couldn't deploy JPM's excess cash when it was yielding less than 2%, into the repo markets and make a risk-free 8-10% overnight (with T-Bills were the collateral for an overnight loan), then he's not going to be using that cash to make CRE loans to WeWork landlords in Manhattan, LOL!

I own one small-cap bank that's interesting - but it's because it is a more idiosyncratic situation.

wabuffo

But if Fed deregulate overtime, starting from reducing the reserve requirements, the banks will do well. Now seems the regulations are so tight it will only go one direction.
Title: Re: Are big banks value traps ?
Post by: Gregmal on October 21, 2019, 01:00:57 PM
Further, largely because of regulation but other reasons as well, you're swimming against the tide here. When almost every company in a sector is cheap, Ive found you're most likely going to have to put up with underperformance because the cheapness is sector wide and unless you have a very specific, company related catalyst, you'll just move with the current. I mean C is cheap. So is BAC, WFC, etc, etc. In fact the only one that isn't really cheap is JPM, and thats arguably the one you'd want to own. Theres better alpha elsewhere.
Title: Re: Are big banks value traps ?
Post by: cameronfen on October 21, 2019, 01:13:03 PM
Why don't you invest in banks anymore...because they are value traps?

No - they are more like overly-regulated utilities now.  I think the problem is the Fed and its new toy, IOER (interest-on-excess-reserves).  The Fed wants to control BOTH interest rates and reserves INDEPENDENTLY.  Under its old, pre-GFC, methodology it could only control short-term interest rates and had to let the banks, in turn, determine the level of minimal reserves required to support the system.  The Fed had only one arrow and could only hit one target.  Now, they feel like they have two arrows.  Like good bureaucrats they want control and are forcing the banks to sit on trillions in reserves so that they can pay IOER in order to control short-term rates.

The result of this policy is that the big banks have to hold 10-16% of their total assets in cash (most of it on deposit at the Federal Reserve).  Because these reserves at the Fed are free of both credit and price risk, the regulators are leaning on the banks hard to use these assets as a way to meet their Liquidity Coverage Ratio (LCR) and HQLA (Hi-Quality Liquid Asset) requirements.  I'm not making a judgement that this is good or bad - in the 1950's and 60's most US banks held 10% of their assets in cash (though not at the Fed).  We've been here before.

This explains why Jamie Dimon sat on several hundred billion in cash at JPM in September during the mini-repo liquidity crash.  JPM's cash was yielding less than 2% when Dimon could've used some of it in the repo markets making 8-10% overnight with T-Bills being offered as collateral.

That's why I laugh when I hear some folks say that all those reserves will lead to a credit bubble.  If Jamie Dimon couldn't deploy JPM's excess cash when it was yielding less than 2%, into the repo markets and make a risk-free 8-10% overnight (with T-Bills were the collateral for an overnight loan), then he's not going to be using that cash to make CRE loans to WeWork landlords in Manhattan, LOL!

I own one small-cap bank that's interesting - but it's because it is a more idiosyncratic situation.

wabuffo

Thanks for this post and the previous posts!  I learned a good deal. 
Title: Re: Are big banks value traps ?
Post by: wabuffo on October 21, 2019, 01:29:37 PM
Thanks for this post and the previous posts!  I learned a good deal.

For further reading on this subject I would steer you to JPM's Q3 conference call:
Quote
Glenn Paul Schorr, Evercore ISI Institutional Equities, Research Division - Senior MD & Senior Research Analyst:
I'm curious your take on everything that went on in the repo markets during the quarter, and I would love it if you could put it in the context of maybe the fourth quarter of last year. If I remember correctly, you stepped in, in the fourth quarter, saw higher rates, threw money at it, made some more money, and it calmed the markets down. I'm curious what's different this quarter that, that did not happen? And curious if you think we need changes in the structure of the market to function better on a go-forward basis?
 
James Dimon, JPMorgan Chase & Co. - Chairman & CEO:
So if I remember correctly, you got to look at the concept of we have a checking account at the Fed with a certain amount of cash in it. Last year, we had more cash than we needed for regulatory requirements. So the repo rates went up, we went to the checking account which was paying IOER into repo.
 
Obviously makes sense, you make more money. But now the cash in the account, which is still huge. It's $120 billion in the morning, and it goes down to $60 billion during the course of the day and back to $120 billion at the end of the day. That cash, we believe, is required under resolution and recovery and liquidity stress testing. And therefore, we could not redeploy it into repo market, which we'd have been happy to do. And I think it's up to the regulators to decide they want to recalibrate the kind of liquidity they expect us to keep in that account.
 
And again, I look at this as technical. A lot of reasons why those balances dropped to where they were. I think a lot of banks are in the same position, by the way. But I think the real issue when you think about it, is does that mean that we ever have bad markets? Because that kind of hitting a red line in that checking account, you're also going to hit a red line in LCR, like HQLA, which cannot be redeployed either. So to me, that will be the issue when the time comes.  And it's not about JPMorgan. JPMorgan decline -- in any event, it's about how do regulators want to manage the system and who they want to intermediate when the time comes.

Doesn't it sound to you like Mr. James Dimon is chafing a bit under the Fed's interest rate and regulatory regime?  He wouldn't have purposely held back liquidity by "working to rule" in order to force the Fed's hand?  I thought that his last statement: "it's about how do regulators want to manage the system and who they want to intermediate when the time comes." was verrrrrrrrrrry interesting!

Oh lookie here - some new news since the September repo market debacle.
 
https://www.reuters.com/article/us-usa-banks-rates-exclusive/exclusive-wall-street-banks-see-green-light-from-fed-on-reserves-sources-idUSKBN1WW2T6  (https://www.reuters.com/article/us-usa-banks-rates-exclusive/exclusive-wall-street-banks-see-green-light-from-fed-on-reserves-sources-idUSKBN1WW2T6)
Quote
"Wall Street banks believe they are getting a green light from supervisors to hold more Treasury debt and less cash after last month’s volatility in overnight lending markets, three industry sources told Reuters.  In private conversations with senior bankers, supervisors have attempted to make banks more comfortable with using excess reserves to lend in repo markets rather than hold onto more cash, sources familiar with the discussions said."

wabuffo
Title: Re: Are big banks value traps ?
Post by: Cigarbutt on October 21, 2019, 01:50:01 PM
@wabuffo
The comments from 2009 are appreciated. The banks I liked the most then were also USB and WFC. M&T was also up there. In retrospect, I wish I had liked USB for longer. I differ on the hyper-regulated outcome (more below) in the long run but isn't it emblematically ironic that the Fed injected a huge amount of reserves to support their theoretical transmission mechanism framework to the real world while simultaneously forcing the banks to keep the excess reserves on their balance sheet and parked at the Fed for a stipend? Quite recently, the FDIC chair (who listens to these people in good times?) quietly mentioned that the systemically regulated banks had done well (risk-wise) but that the much of the risk had been transferred and still existed somewhere. "Where did it go?" she said and wondered (from the regulatory risk management point of view):"Have we done more damage than good?" These questions are always answered retrospectively.

@KJP
Your question about the cost of brick and mortar units and the relevant deposit funding aspect is very relevant. Forgetting the chicken or egg question about money creation for a minute and looking at what happened to the loan to deposit ratios over time, overall, at the big banks, growth in deposits has followed growth in loans. Funding from deposits has relative advantages and apart from the four levers of the Holy Grail, banks want a diverse source of low cost funds and diversification as well as FDIC backstop are useful. In the loan and deposit growth however, there has been some decoupling. For the loans, shadow banks (non-bank, online alternatives etc) have gained market share in certain segments. For deposits, the same has happened to some extent but (the last time I looked) US online banks' share of total deposits has increased only from about 2 to 6% over the last 15 years or so. What is interesting is that, traditionally, the growth of deposits has been closely related to the number of physical branches for the largest banks. This link has broken since the GFC, with banks (especially the largest 5 banks decreasing the number of physical outlets by about 15%) while growing deposits by more than 250%, suggesting that they are adapting fairly well to the online threat. Because of the way banking services are bundled, physical branches should be seen as profit centers and not as cost centers and it seems that a restructuring of their physical footprint is not incompatible with significant growth of the deposits. It seems to me that they also could develop online options themselves if the threat becomes significant for some services. So, you have to make up your mind if the physical branches aspect will turn out like Sears (could not adapt), the music industry (unbundling) or something else. I offer the opinion that the big banks will behave more like the pharmaceutical industry in the 70's and 80's. They will continue to offer regulatory collaboration (capture to a large degree) while offering a non-discretionary product, play the game which may involve holding more capital than considered necessary and deal with the occasional entrants by squeezing them or buying them, building an enduring moat.
Title: Re: Are big banks value traps ?
Post by: Spekulatius on October 21, 2019, 03:42:47 PM
Quote
This link has broken since the GFC, with banks (especially the largest 5 banks decreasing the number of physical outlets by about 15%) while growing deposits by more than 250%,

Isn’t the growth in deposits for the larger banks mostly from acquisitions (during the GFC) and not organically? The organic deposit growth doesn’t look all that impressive to me.
Title: Re: Are big banks value traps ?
Post by: wabuffo on October 21, 2019, 05:54:51 PM
The organic deposit growth doesn’t look all that impressive to me.

Spek - you are very hard to please  8)

The big mergers took place in 2008-2009 (WFC/Wachovia, JPM/Bear/Wamu, BAC/Countrywide/Merrill).  If we start the meter for total deposits of the big 3 banks (WFC, BAC, JPM) at year-end 2010 vs latest Q (6/30/19) -- this is all organic growth.

WFC went from  $ 847B at y-e 2010 to $1.346T at Q2, 2019.   +59%
BAC went from $1.038T at y-e 2010 to $1.441T at Q2, 2019.   +39%
JPM went from  $1.020T at y-e 2010 to $1.606T at Q2, 2019    +58%

IMHO, deposits in the banking sector grow largely due to two major factors:
1) net credit creation
2) federal spending in excess of taxation

Both of these factors create net, new deposits in the US banking sector.  Deposits continue to grow, though they have moderated in the last 18 months or so.  The big banks continue to take deposit share from the small banks, though even the small banks are growing deposits (just not as fast).

wabuffo
Title: Re: Are big banks value traps ?
Post by: Cigarbutt on October 21, 2019, 06:45:30 PM
Quote
This link has broken since the GFC, with banks (especially the largest 5 banks decreasing the number of physical outlets by about 15%) while growing deposits by more than 250%,

Isn’t the growth in deposits for the larger banks mostly from acquisitions (during the GFC) and not organically? The organic deposit growth doesn’t look all that impressive to me.
If you want more "color" (probably more than you asked for).  :)

Like usual, you are correct and if you decompose into periods since the GFC, the early upheaval period was accompanied by a relative bump in deposits for the big boys as the FDIC margin (and patience) was wearing thin. However, deposit growth has been relatively steady overall
https://fred.stlouisfed.org/series/DPSACBW027SBOG
and increasingly (slightly) divergent versus the decreasing number of physical branches, especially for the big five.

The following shows some details related to the recent deposit growth, the competitive dynamics and how (big) banks have many internal levers to keep customers happy:
https://www.spglobal.com/marketintelligence/en/news-insights/trending/ALnK3nDipmnnl4bEkVQ96g2

So, to the question: Is the deposit growth rate impressive? I would say it depends on the perspective. If you believe wabuffo and think that the recent rise in deposits has been correlated (caused by?) rising liabilities then the answer may reside in the ability to answer the following questions: 1-Deleveraging, what deleveraging? and 2-Where are we in the cycle?

For question #1, the following gives an interesting perspective:
https://fred.stlouisfed.org/series/DDOI02USA156NWDB
The positive slope followed by a flat line is called a success by central bankers but I have doubts.

For question #2, if you are agnostic about exactly timing the cycles and/or if you can opportunistically build-up your position as a privileged insider and deep pocketed investor when the sun don't shine, you can still consider the option of focusing on the US "market leaders" and the "resilients". From a globalist and marketing-oriented report recently released and relayed by Bloomberg with sensationalist titles.
https://www.mckinsey.com/industries/financial-services/our-insights/global-banking-annual-review-2019-the-last-pit-stop-time-for-bold-late-cycle-moves




Title: Re: Are big banks value traps ?
Post by: CorpRaider on October 22, 2019, 07:31:20 AM
Didn't WFC just post like a +2% growth in deposits?  With no CEO and being a supposed national pariah? 
Title: Re: Are big banks value traps ?
Post by: JEast on October 22, 2019, 07:33:12 AM
Another challenger bank bites the dust, but the multitudes still keep trying.  Maybe a few will eventually take hold in 10years time as the big FAANG types seem more focused with making 'content' for streaming these days.

https://www.fintechfutures.com/2019/10/us-challenger-bank-denizen-shuts-down/
Title: Re: Are big banks value traps ?
Post by: John Hjorth on October 22, 2019, 10:05:52 AM
Didn't WFC just post like a +2% growth in deposits?  With no CEO and being a supposed national pariah?

CorpRaider,

Please read here (https://newsroom.wf.com/press-release/corporate-and-financial/wells-fargo-names-charles-w-scharf-chief-executive-officer).
Title: Re: Are big banks value traps ?
Post by: RuleNumberOne on November 04, 2019, 09:07:24 AM
All the Dems have said they want to restore the corporate tax rate to 35%. Bank EPS takes a big hit right there.
Title: Re: Are big banks value traps
Post by: elliott on November 12, 2019, 10:45:30 AM
I'm playing devils advocate here but I think you guys underestimate the banking business, particularly in today's world.

Calling the banks stodgy or tech-averse is superficial IMHO. Banks are not tech averse, they are incredibly financially disciplined (it's their raison d'etre!). These are not VC shops looking to cash in by inventing the next best tech.

Additionally you are ignoring the regulatory component. The FRB will be so far up a new bank's colon that it's too painful to think of. The large banks took 10 years to comply with FRB/OCC matters. And they are still not done.

Citi, Wells, JPM all have over 200,000 employees, each. Google and apple have half that. Simply to bring on the kind of manpower needed will be a billion dollar endeavor.

It is not just 'lets build some credit models and start slingin' cards". On the models side, these banks have 2, 3, 4 thousand models each. Who is going to build these? Who is going to validate them? How long is that going to take? It is not feasible. And the people building these models - they are not cheap. We billed out at 600, 700 an hour for regulatory models, not even valuation models which are much more important. And then you need a validation group which again, is incredibly not cheap.

Then you need to integrate into the markets. On the consumer side, now you need instantaneous scoring services at a massive scale and you need retail partners to integrate it. Retail partners who are already being serviced by these large banks and at a lower cost than you can provide. And these banks and policy teams who know these business better than you (and they) do. This is not just incredibly expensive but a hell of an endeavor to start from scratch. Systems migrations take two years - and that's a migration.

On the institutional side, it's even more opaque. First you have no idea what these product which are being traded. Show me anyone at Apple or Google who can explain why Kirk's spread option model is conceptually unsound but under what circumstances it is still acceptable to use. Nobody. Now tell me who is going to figure that out and then design a systems application to price certain products with certain models under specific circumstances. Of course you can use vendors to tap into the market in this way but the regulators will destroy you. And they're expensive as hell and there's a reason all the banks have migrated to in-house solutions. So unless you want to lose money on every trade for 4-5 years until you can build your own system to migrate over from a vendor platform, you're out of luck.

This article: https://seekingalpha.com/article/2561895-apple-pay-has-long-term-implications-for-visa-mastercard-and-retail-banks
postulates that Apple is entering the retail payments sphere as a means to enter the financial industry at a whole.
Well look at the payments - has Apple or Stripe built their own systems? No, they are playing on top of the established rails. Maybe this will change but it is difficult to see why. To build out such a system is incredibly expensive and the payoff is very uncertain. Expected ROI today is almost certainly very negative. And V/MC and the banks are expected to sit tight while this happens? I think not. Even if Apple or Google does go down this road they are opening themselves up to so many costs it will be absolutely brutal and the banks will slaughter them on the institutional side.

Anyways take it with a grain of salt because predicting the future is a foggy endeavor but if I had to wager I would say the odds are with the status quo.

I agree with you 100% that many forecasting the end of banks are not factoring in appropiately the complexity of regulations and the lending business.
But, will disruptors have to bear such complexities? Some say the real disruption is coming from the non banks.

In any case, I can imagine google, facebook, or amazon offering checking accounts to make money not from lending but simply from the users data. Actually, I thought that was precisely the reason behind their interest in banking. Granted, if they dont lend the money, how will they pay interest? Maybe they wont. There is a lot of money out there sitting in bank accounts earning 0% pa thanks to central banks. Alternatively, they could also assume the UI/client facing side of the deposit business by aggregating deposits from several banks. Banks would still exist in this scenario, but in this area at least they would have been commoditized.
How would that impact their profitability? I have no clue.

Title: Re: Are big banks value traps ?
Post by: elliott on November 13, 2019, 03:23:07 PM
Google made a move.

https://www.cbsnews.com/news/google-checking-accounts-will-come-with-citibank-fees/
Title: Re: Are big banks value traps ?
Post by: Spekulatius on November 13, 2019, 07:05:59 PM
Google made a move.

https://www.cbsnews.com/news/google-checking-accounts-will-come-with-citibank-fees/

More clarity from one of the horses mouth:
 https://www.sfcu.org/stanford-federal-credit-union-announces-partnership-google/ (https://www.sfcu.org/stanford-federal-credit-union-announces-partnership-google/)

It looks like a standard CU account with a GUI/ mobile wrapper from Google. It is interesting they they chose to partner with a CU. I wonder how they deal with the affiliation restriction for a CU. You have to be local or work for one of the many Company’s on that affiliate list or use a “backdoor” in order to join a CU.
Title: Re: Are big banks value traps ?
Post by: RuleNumberOne on January 15, 2020, 09:39:52 AM
I think the regulators won't allow "fintechs" to enter banking. Probably Buffett talks to bank CEOs and regulators about this all the time.

Given enough time, the banks will update their tech infrastructure and catch up. I think this is what is happening.

My fear with banks is what happens in the next recession. Are insolvent European banks their counterparties? Can Europe prevent deleveraging or the failure of the Euro?
Title: Re: Are big banks value traps ?
Post by: wabuffo on January 15, 2020, 10:12:00 AM
I think the regulators won't allow "fintechs" to enter banking

Wal-Mart tried to enter banking and was rejected by the Chair Bair.  Remember when everyone feared the growth of Wal-Mart and its ambitions?

https://www.nytimes.com/2007/03/17/business/17bank.html (https://www.nytimes.com/2007/03/17/business/17bank.html)

Today - just substitute Amazon (or Facebook, Google, etc) for Wal-Mart.

wabuffo