BTN with Ethan Heisler The Bank Treasury Newsletter

Wonders never cease in the bank treasury world, what with earthquakes in the metro NYC area to eclipses of the sun, but surely the sudden flattening of the yield curve this month, which is now half as inverted as it was last month, must stir the imagination of even the most experienced bank treasurer. This month’s newsletter pulls back the curtain on key talking points in the bank treasury world, explaining why a neutral balance sheet is not risk-free, why neutral, risk-free interest rates may not exist, why bank treasurers should never count on liquidity to be there when they need it, and why regulators trying to prevent liquidity problems in the banking system with pre-positioned collateral at the discount window may make bank treasury even more complicated than it already is.

On the first anniversary of the crisis last March, this month’s newsletter looks at the unique circumstances and mistakes that ultimately led to the failure of SVB and lessons learned. One of those lessons is to beware of lessons learned, especially when they are based on “flawed, post-mortem reviews,” as Fed Governor Bowman argued this month. Even if the Basel 3 Endgame proposal looks like it is headed for a delay, our bank treasury contacts tell the newsletter that bank supervisors are already tightening guidance. A particular NYC regional bank was likely a victim of their new hardball approach. On a positive note, banks see stabilizing trends in their deposit balances and pricing and uninsured depositors are not in crisis mode anymore. However, most also believe that unless rates go back to 0%, depositors are not going to shift back to checking levels held as recently as two years ago, when noninterest-bearing deposits in the system equaled 30% of total deposits, compared to 23% last quarter.

This month’s newsletter discusses how bank treasurers restructured their underwater bond portfolios last quarter when the 10-year rallied in November and December. It also explains why bank treasurers, most of whom believe they have more to fear from the Fed cutting rates by 300 basis points than raising them, are more hedged for higher rates going into 2024 than they were going into 2023.

Ethan talks to privacy experts about the value of personal information and what banks need to do to protect their employee and customer data given escalating risks in the cyber-security space. Leading 25-year expert in cybersecurity, Jonathan Nguyen, and Tom Daly, founder and chief of MePrism explain why companies need to think beyond just preventing data breaches and make a real plan for what happens after they’ve already occurred.

There are a lot of strange things going on in the bank treasury world, and as always, bank treasurers know to prepare for anything. You have a yield curve that is inverted for the longest time in decades, and where the marginal cost to fund a loan makes it difficult to lend profitably. You have high interest rate volatility as reflected in the MOVE index that, like the inverted yield curve, has persisted for a very long time. None of these things are good for the bank treasury business. But, on the bright side, if you have cash to invest, an overnight risk- free rate from the Fed still cannot be beat, and if you are paid to do nothing, do nothing.

As far as bank treasurers are concerned, a couple of rate cuts at the end of the year would be ideal for trends in their NIMs and NIIs this year. It could certainly help with AOCI recapture. Profits have been under pressure from rising deposit repricing expenses that bank treasurers see as just starting to crest. This month’s newsletter covers these issues and goes through some of the other key topics on the bank treasury agenda, from the Basel 3 Endgame to the fallout from the FHFA’s FHLB100.

Sam Theodore, a veteran European bank analyst, reflects on what to expect from the unexpected both in the US and in the Eurozone. Has digitalization changed the nature of deposit funding? What new metrics do analysts need to consider, and how do artificial intelligence and machine learning fit into credit analysis? How should analysts incorporate exogenous risk into their thinking about credit safety?