Correspondent Blog

We are staunch advocates that banks should avoid risks that they do not get compensated for.  One such risk that banks take without compensation (or revenue) is on-balance sheet, fixed-rate loans.  With the current flat or slightly inverted yield curve, plus the current volatility of the market, borrowers have a pricing advantage to lock in…

Most bankers would refuse to accept risk without reward (or revenue).  It would make no sense to risk the bank’s capital without adequate compensation. However, some banks are inadvertently taking risk without any additional revenue. The yield curve is currently flat, and the average community bank’s cost of funding is highly correlated to Fed Funds…

Banks often lose 5% of a loan’s value before a loan is even booked due to interest rate risk in loan pricing. Persistently high inflation and the unknowns in the new administration’s implementation of stated policies have translated to rapid increases in long-term interest rates.  In a period of rapid change (or high volatility), we…

Deposit costs and liquidity remain a challenge for some community banks as competition for core funding remains intense.  The graph below compares the liquidity ratio for community banks (under $10B in assets) and banks over $100B in assets.  The average difference in liquidity is stark, but for many community banks the issue is translating to…

Bankers have been taught to diversify their loan portfolio to reduce idiosyncratic (individual borrower) risk and to stabilize earnings. The thinking is that diversification-induced lending leads to banking resiliency. We believe that while lending diversification leads banks to lend more in normal times (especially for banks over $50B in assets) and does benefit the general…

The abrupt collapse of Silicon Valley Bank (SVB) is a stunning example of bank leadership not understanding interest rate risk, running into trouble with an inverted yield curve, and ignoring the impact of a severe monetary correction on long-duration assets. There will be much more discussion and information written on this bank’s collapse, as well…