Banks are more than $1 trillion short of capital, analyst says, who fears shortfall will only get worse

This statement may surprise those who think that the US banking industry has about $2.2 trillion in capital. But it reduces that figure in several ways. First, he notes, there is a difference between book equity and tangible equity, the latter being used by banking regulators to assess solvency. It’s a narrower definition, excluding things like goodwill and deferred tax assets, which brings the total down to $1.49 trillion from $2.22 trillion.

Then, using data from the Federal Deposit Insurance Corp., it subtracts what is called accumulated other comprehensive income. “Thanks to QE and now QT, all sorts of assets have become negative return propositions for banks and non-banks. If the coupon pays less than the funding costs, you lose money,” says This brings the capital down to $1.23 trillion.

Now comes the most controversial part. It first notes market losses on loans and securities created in 2020 and 2021, for the impact of this year’s Fed rate hikes. This right is enough to push the banks into insolvency, with some $1.74 trillion in mark-to-market losses.

Additional losses of $794 billion arise if bank holdings of US Treasury securities, mortgage-backed securities, and state and municipal securities are also marked to market. Put it all together, according to Whalen’s calculations, and the banks have a $1.3 trillion shortfall in the second quarter.

Admittedly, and this is very important, banks do not have to value their assets at market price. So what’s the concern? This exception is not infinite – banks are allowed to ignore mark-to-market losses as long as they have the ability and intention to do so. “Even if the bank holds these low-coupon assets created in 2020-2021 in its portfolio until maturity, cash losses and low yields could eventually force a sell,” Whalen said.

He performed a similar analysis on JPMorgan Chase JPM,
which he calls one of the best managed banks. Jamie Dimon’s group has a deficit of $16 billion in the second quarter – and a deficit of $58 billion if the market price adjustment is 17.5% higher – on Whalen’s figures.

The big question is when these asset sales might take place. “Asset sales will happen slowly, but lenders can force the issuance of collateral that is 20 points under water,” he told MarketWatch in an email. And what is unbearable now is bound to get worse. “Higher rates only make the eventual mess worse,” Whalen added.

The market

US Equity Futures ES00

NQ00
were pointing higher in early action. Commodities advanced, with gains for CL oil
and gold GC00.
The DXY Dollar
was weaker.

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The buzz

Fed Chairman Jerome Powell is scheduled to speak at 1:30 p.m. at the Brookings Institution, the current employer of former Fed Chairman Ben Bernanke. There are also two other speakers from the Fed, with Governor Michelle Bowman scheduled to speak on banks, while Governor Lisa Cook speaks at the Detroit Economic Club.

It’s a big day on the economic calendar, even excluding Powell’s speech. The ADP jobs report, second estimate of third-quarter GDP, advanced trade report for October, Chicago PMI, job openings and pending home sales are all due out, along with the beige book of economic anecdotes expected at 2 p.m.

In the Eurozone, year-on-year inflation slowed from 10.6% to 10% in November.

CrowdStrike Holdings CRWD
collapsed after the cybersecurity company guided slowing subscription revenue growth.

NetApp NTAP
also declined after the cloud computing company reported earnings well below analysts’ estimates.

HZNP Therapeutic Horizon
rallied after the Irish drugmaker said it was in talks to be bought, along with heavyweights including Amgen AMGN,
Johnson & Johnson JNJ
and Sanofi FR:SAN
going around the business.

An Alzheimer’s drug from Biogen BIIB
and Eisai JP:4523
moderately reduced cognitive decline, but also comes with side effects.

DIS by Walt Disney
said its returning CEO, Bob Iger, will initiate organizational and operational changes that could result in impairment charges. He flagged the Disney Media and Entertainment division, which includes its streaming services, for changes.

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