Correspondent Blog

Lending is getting riskier. Due to higher rates, inflation, and a slowing economy, the three essential credit metrics – probabilities of default (POD), POD rate of change, and POD volatility- have all materially increased from 2022. In this article, we look at what is happening at the state level, look at 30 common industries where…

We have used the term “second-order thinking” in our writings, and some bankers were curious about what exactly we mean. The term came to popularity in banking after Howard Marks wrote his seminal work on investments – The Most Important Thing. The “most important thing,” as described in the book, is the ability to drill…

This month, we rolled out “Tate,” our generative AI chatbot driven by ChatGPT that was designed to increase the productivity of our employees and allow us to become familiar with large language models. It’s been two weeks since its introduction, and we have already learned more than we bargained for. As one of the first…

Last week we spoke to a $1.2B community bank management team. The CLO was lamenting how he was losing quality loans and deposits to three aggressive national banks in the territory. An example was a $1.95mm owner-occupied CRE loan, where the borrower had multiple operating accounts totaling almost $500k. While this community bank is not…

Last week (HERE), we looked at how deposit account tiering is used, some of the objectives that banks might employ, and the effectiveness of tiering in total. As discussed last week, many banks tier without objective, without data, and without supportive marketing, thus rendering the methodology worthless and possibly hurtful. We challenged several commonly held…

In the wake of regional bank failures, one potential answer to equity shorting and bank runs is having the FDIC increase deposit insurance.  The regulators are considering three options: raising the limit above $250k, raising the cap for only certain accounts (such as banks’ business accounts), or eliminating the cap entirely.  Increasing insurance coverage on…

Adjusting pricing for deposit tiering according to account size is essentially a tradition in banking. A typical bank’s money market accounts often have six tiers ranging from $2,000 to $100,000. The question that always comes up is whether you have suitable tiers and the correct number of tiers. Are you using your tiers to drive…

Last week, we published an article [here] discussing how fair value accounting for assets and liabilities may have prevented the failure of Silicon Valley Bank, even if sound risk mitigation practices were not resolutely embraced by management.  We argued that valuing assets at historical value or measuring net interest margin (NIM) is not only a…

Just when you were getting your bank’s head around how you will operationalize ChatGPT (our breakdown HERE), AutoGPT, an application built on top of ChatGPT, gets released and takes the technology to a new level. We have played with this “AI agent” for the past two weeks and can report that it will be a…

Analysts, regulators, legislators, and bankers have been attributing the root cause of SVB’s failure in the past month.  Some blame the dilution of the Dodd-Frank provisions, others the lack of oversight by regulators, and others still blame social media for exacerbating the deposit run.  The root cause of Silicon Valley Bank’s (SVB) failure is poor…

Focusing on uninsured deposit performance is a hot topic among investors, analysts, and regulators. The concern is grounded in data as higher balance accounts are more interest rate and risk-sensitive than lower balance accounts. While every bank is now tracking the general metric, only a few banks monitor deposit performance in the category. That is…

In recent articles (here and here and here), we discussed why banks that take risks to earn higher revenue demonstrate lower performance as measured by return on assets (ROA). Empirical evidence, historical bank failures, and common sense teach us that many risks do not translate to higher yields. We analyzed why pay-for-risk does not lead…