In the current environment, banks will have to do more than rely on profits and capital to prove their value
, a mid-sized lender by U.S. standards, are back above $101, down only 4 per cent from their record high set in late 2021.
Because Americans were flush with cash from trillions of dollars worth of stimulus payments, they dumped the money into chequing and savings accounts that paid almost no interest. It gave banks virtually free money to lend, and for years it made for nice profits. But once central banks started hiking interest rates around the world in early 2022, the cheap funding dried up.
To help banks that are bleeding deposits, the Federal Reserve set up an emergency lending program for lenders, and it’s been wildly popular. Within two weeks of its creation in mid-March, US$110-billion had been borrowed. In late March, Chris McGratty, head of U.S. bank research at Keefe, Bruyette & Woods, summarized the problem in a note to clients: “An upside-down funding base is unsustainable.”
In normal times, an upside-down funding model wouldn’t be the end of the world. Even if banks report some quarterly losses, they all have much more capital – effectively excess cash – to absorb them than they did during 2008.
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