Is the stock market going to tank?

[JimmyCarter]

ALLL recognizes impairment, not market value.

NMDs have clear value, written up or down, in an acquisition though. Why not mark them to market? (I know that’s an absurd argument on its face, but…. I think it’s more a continuum than the black/white you’re arguing)

ALLL and CECL are just attempts at showing the current value of the assets. The sub standards just get an added layer, but you’re still taking changes in expected credit losses into the FV of the regular portfolio.

Value of deposits above actual amount is marked to market as an acquired intangible asset (CDI) at acquisition separate from the liability, it doesn’t change the liability the company faces from the deposits.

[MultiVerse]

if I’m an equity investor I’m pulling my money without even thinking about the prisoners dilemma

MTM isn’t there for the banks or depositors, it’s for the investors.

Yeah this speaks to inherent conflict in the current system: investors prefer more volatile assets and depositors prefer less volatile assets. The interests of investors and depositors are not aligned.

A fractional reserve bank is essentially a pool of depositors. Depositors earn a return on their savings by making loans to borrowers while also being able to withdraw their savings as needed. To make it work there needs to be diversification between both borrowers and depositors. Bank failures are mostly caused by a lack of diversification among borrowers, but we've also seen how it can come about from a lack of diversification among depositors. So a bank needs to have diversified uncorrelated risk across assets, borrowers and depositors.

On the other side with unaligned interests are investors and managers. Implicitly, investors view banks as a call option on its assets. Investors have a no obligation option to buy bank assets at some date in the future. As a banks value goes up, the value of the option goes up at a faster rate making the option more valuable when the bank's portfolio is more volatile. There's a convex payoff for investors.

Bank volatility is good for investors because of limited liability and government bank protection. If investors were liable for depositors losses and the government didn't insure deposits it would be a different story. There would be little conflict between the interests of investors and depositors because there would be no preference for risk taking, for more volatility.

[Mustonen]

ALLL and CECL are just attempts at showing the current value of the assets. The sub standards just get an added layer, but you’re still taking changes in expected credit losses into the FV of the regular portfolio.

Well, no. CECL (which is just the calculation for ALLL adequacy) is narrowly focused on credit losses - or impairment. Nobody is suggesting that impairment not be recognized as an adjustment to capital through the income statement. It’s not meant to be a representation of FV at all.

Value of deposits above actual amount is marked to market as an acquired intangible asset (CDI) at acquisition separate from the liability, it doesn’t change the liability the company faces from the deposits.

CDI is more recognizing the stability or inertia of that base of deposits. There’s a separate FV adjustment for timed deposits. It all runs through the income statement at acquisition and gets amortized off, same as the loan yield and investment yield (for HTM investments) adjustments. You’re arguing to do all of that all the time. Why?

[JimmyCarter]

Well, no. CECL (which is just the calculation for ALLL adequacy) is narrowly focused on credit losses - or impairment. Nobody is suggesting that impairment not be recognized as an adjustment to capital through the income statement. It’s not meant to be a representation of FV at all.

These are slightly separate arguments, but loans and UST on the balance sheet are treated differently because the loans effectively get viewed under the same mindset as held to maturity while
the UST are viewed as needed for liquidity (unless they qualify for HTM). The credit loss is just endgame FV saying assets are expected to be Uncollectible and worth zero, basically saying they’re no longer akin to a HTM asset. Once you lose that view of the assets, they hit the income statement, just like the UST.

CDI is more recognizing the stability or inertia of that base of deposits. There’s a separate FV adjustment for timed deposits. It all runs through the income statement at acquisition and gets amortized off, same as the loan yield and investment yield (for HTM investments) adjustments. You’re arguing to do all of that all the time. Why?

CDI is reflecting the fact that you have a gain (bad word choice, but value above what you paid for deposits) on your acquisition attributable to securing a favorable but attriting source of funding.

Again, these are liabilities so the fair value is nothing other than the max liability a buyer would assume, eg the deposit base. They are “fair valued” it’s just that the fair value doesn’t change.

[JimmyCarter]

Last add: the time deposits don’t really get fair valued at acquisition, you basically value the off-market (favorable or unfavorable rate) portion of the CD contract and amortize that. The liability of the time deposit doesn’t change.

[Mustonen]

These are slightly separate arguments, but loans and UST on the balance sheet are treated differently because the loans effectively get viewed under the same mindset as held to maturity while
the UST are viewed as needed for liquidity (unless they qualify for HTM). The credit loss is just endgame FV saying assets are expected to be Uncollectible and worth zero, basically saying they’re no longer akin to a HTM asset. Once you lose that view of the assets, they hit the income statement, just like the UST.



CDI is reflecting the fact that you have a gain on your acquisition attributable to securing a favorable but attriting source of funding.

Again, these are liabilities so the fair value is nothing other than the max liability a buyer would assume, eg the deposit base. They are “fair valued” it’s just that the fair value doesn’t change.

But UST are classified as HTM. Even if they’re typically a bit more liquid than a muni or whatever, they’re still classified HTM and they’re meant to be HTM.

Many institutions, after years of being trained to expect low interest rates, have been over reliant on their investment portfolio as a ready source of emergency liquidity, but few in my experience actually relied upon them in lieu of other sources of emergency liquidity and they certainly didn’t use them to calculate liquidity ratios. ETA: None of that means that the optionality isn’t something readily considered ongoing, whether liquidity is at issue or earnings or diversification or anything else.

And I’m only saying CDI and FV adjustments to termed deposits are different sides of the same coin. As an investor, don’t you want to know whether an FI is overpaying for their deposits, particularly vis a vis liquidity concerns, with a potentially abnormal decay rate? Should probably reflect that in capital (/tongue in cheek).

[Mustonen]

Last add: the time deposits don’t really get fair valued at acquisition, you basically value the off-market (favorable or unfavorable rate) portion of the CD contract and amortize that. The liability of the time deposit doesn’t change.

Sorry to disagree, but they really do. A fair value adjustment is made and generally it’s amortized off according to the WAL of the portfolio(s). I’d say it’s a distinction without a difference, though. They do the same thing and live in the same place. The adjustment offsets the liability on the balance sheet.

[JimmyCarter]

But UST are classified as HTM. Even if they’re typically a bit more liquid than a muni or whatever, they’re still classified HTM and they’re meant to be HTM.

Many institutions, after years of being trained to expect low interest rates, have been over reliant on their investment portfolio as a ready source of emergency liquidity, but few in my experience actually relied upon them in lieu of other sources of emergency liquidity and they certainly didn’t use them to calculate liquidity ratios.

And I’m only saying CDI and FV adjustments to termed deposits are different sides of the same coin. As an investor, don’t you want to know whether an FI is overpaying for their deposits, particularly vis a vis liquidity concerns, with a potentially abnormal decay rate? Should probably reflect that in capital (/tongue in cheek).

No, because they don’t impact the value of the liability. I don’t care if they paid a premium for cheaper funding, I just know that when the bill comes due I owe the current value of the account.

As opposed to assets, where if I claim I need them for liquidity purposes, I need the marketable value, not the unconstrained value. I can’t control demand timing of the deposits so I always have to be ready to pay max liability.

I can sell assets at any time, but liquidity can force my hand so if I need to be able to sell now, I will get current market value for them.

[Mustonen]

No, because they don’t impact the value of the liability. I don’t care if they paid a premium for cheaper funding, I just know that when the bill comes due I owe the current value of the account.

As opposed to assets, where if I claim I need them for liquidity purposes, I need the marketable value, not the unconstrained value. I can’t control demand timing of the deposits so I always have to be ready to pay max liability.

I can sell assets at any time, but liquidity can force my hand so if I need to be able to sell now, I will get current market value for them.

We’re in danger of talking this around in another couple circles… but the same analysis can be applied to the loan portfolio. If I’m in a real pickle I can sell some car loans, but I don’t MTM because I don’t intend to ever do that. Same as I don’t intend to ever sell my UST. Unless I do and I include that in my liquidity plan, in which case we completely agree, I should be marking those to market.

And go ahead and tell a former SVB executive (or an SVB investor) that the stability and cheapness of a few billion in deposits doesn’t have value above and beyond what they show on the balance sheet, the value of which would be captured in M&A accounting but not usually otherwise.

[JimmyCarter]

We’re in danger of talking this around in another couple circles… but the same analysis can be applied to the loan portfolio. If I’m in a real pickle I can sell some car loans, but I don’t MTM because I don’t intend to ever do that. Same as I don’t intend to ever sell my UST. Unless I do and I include that in my liquidity plan, in which case we completely agree, I should be marking those to market.

And go ahead and tell a former SVB executive (or an SVB investor) that the stability and cheapness of a few billion in deposits doesn’t have value above and beyond what they show on the balance sheet, the value of which would be captured in M&A accounting but not usually otherwise.

Agreed, I’ll walk away after this because I think we’ve beat it to death.

Last notes: your auto loans are already on the BS at fair value, they just don’t hit the P&L (other than as reflected in NII) until the credit impairment like you mentioned. A hypothetical market participant buyer will price the loan based on expected economics they would achieve given current market terms.

Whereas with something like UST you wouldn’t actually look at the income over the life of the note (outside of HTM) if the hypothetical “market participant” could buy an identical asset on the open market for less.

Deposit premiums only exist in an acquisition because someone has paid a set amount for the total equity and the purchase price needs to be allocated to the underlying assets . That asset doesn’t have attribution in the course of business because the unit of account on the liability is the deposit itself whereas the value of the premium is attributable to the going concern value of the entity. It would be reflected in the equity value, but it’s not part of the deposits.

[Mustonen]

Agreed, I’ll walk away after this because I think we’ve beat it to death.

Last notes: your auto loans are already on the BS at fair value, they just don’t hit the P&L (other than as reflected in NII) until the credit impairment like you mentioned. A hypothetical market participant buyer will price the loan based on expected economics they would achieve given current market terms.

Whereas with something like UST you wouldn’t actually look at the income over the life of the note (outside of HTM) if the hypothetical “market participant” could buy an identical asset on the open market for less.

Deposit premiums only exist in an acquisition because someone has paid a set amount for the total equity and the purchase price needs to be allocated to the underlying assets . That asset doesn’t have attribution in the course of business because the unit of account on the liability is the deposit itself whereas the value of the premium is attributable to the going concern value of the entity. It would be reflected in the equity value, but it’s not part of the deposits.

Last note to your last notes (but not to get the last word): The UST we are talking about are all classified as HTM, so I don’t think we’re actually arguing about anything at all at this point, unless it’s whether they CAN be HTM. Also, there’s a ready market for auto loans, and an individual loan level analysis wouldn’t be necessary for pricing. You can trade ‘em like baseball cards if you want (not literally, due diligence efforts would be a good bit more than baseball cards or UST).

Deposit premiums and discounts are reflected in the equity value through the income statement, and the other side of the entry adjusts deposits. At least, that’s where I’ve always had the entry recorded. Nobody ever complained. And agreed that it’s not quite apples to apples, but I bring it up because it’s the extreme conclusion to the idea that the balance sheet should be more thoroughly marked to market. I just don’t think that provides investors clarity in this particular industry.

[JimmyCarter]

Last note to your last notes (but not to get the last word): The UST we are talking about are all classified as HTM, so I don’t think we’re actually arguing about anything at all at this point, unless it’s whether they CAN be HTM. Also, there’s a ready market for auto loans, and an individual loan level analysis wouldn’t be necessary for pricing. You can trade ‘em like baseball cards if you want (not literally, due diligence efforts would be a good bit more than baseball cards or UST).

Deposit premiums and discounts are reflected in the equity value through the income statement, and the other side of the entry is part of the deposits. At least, that’s where I’ve always had the entry recorded. Nobody ever complained. And agreed that it’s not quite apples to apples, but I bring it up because it’s the extreme conclusion to the idea that the balance sheet should be more thoroughly marked to market. I just don’t think that provides investors clarity in this particular industry.

In a past life I did a bunch of fair value-adjacent work for banks and others, but am light on the operational/ALCO/etc side so I do appreciate the dialogue.
In the spirit of the internet though, I steadfastly refuse to admit whether I’ve learned anything.

[Mustonen]

Likewise, though I’m a poor accountant and an even worse trader.

This has been instructive and some of the workiest TGR dialog I’ve engaged in. I barely feel like I wasted any time, and that’s a shit feeling.

[mcphee]

so…..is it going to tank?

[JimmyCarter]

so…..is it going to tank?

It definitely could possibly do that or not

[LeeLau]

It definitely could possibly do that or not

There will be price movements!!

[Mustonen]

Some people will lose money. Also, some people will make money.

[mcphee]

Perfect! Thanks!

[Cono Este]

DB had a massive prop desk!

[LeeLau]

DB had a massive prop desk!

And were prime for many funds

[summit]

Man there were some opportunities this morning. The only one I jumped on was PHG at 15.67. I really think they are unfairly beat up.

[Cono Este]

[gravitylover]

Pretty much

[LeeLau]

Sold some INTC calls to get more return. Nicely above bag holding price now.

Sold some SNAP puts on the rinse and repeat following CEO testimony pump.

WAL gains now offsetting FRC losses. Gonna keep holding both. Sold some FRC puts to add a bit more hopefully

[Cono Este]

Selling premium in these cases is usually the right play. It’s a little different than a single company shitting the bed, and the stock staying down for yrs. A few more factors going on. Back in the day they’d jam us with premium and we’d scalp 1/16ths just to fucking stay alive and pay our theta. Fuck you Bank of Mitshubishi Tokyo!