Podcast Summary
In this podcast, banking expert and founder of Whalen Global Advisers, Chris Whalen, discusses the current state of the US banking system. The conversation focuses on the impact of COVID-19 on commercial real estate, the potential risks in the banking sector, and the role of the Federal Reserve in managing liquidity. Whalen also shares his views on the future of banks like Citigroup and the implications of Basel 3 regulations.
Key Takeaways
Commercial Real Estate Challenges
- COVID-19 Impact: The pandemic has led to value declines and changes in use cases for commercial real estate, including office buildings, warehouses, and malls. Legacy cities are particularly affected, with buildings worth half of what they were before 2019.
- Banking Sector Risks: Banks are slow walking commercial problems, using their liquidity to manage credit. This could eventually lead to losses flowing through their income statements. The analyst community needs to start asking questions about these potential losses.
Consumer Credit Situation
- Credit Card Defaults: The podcast discusses the situation of credit card defaults and the utilization of credit cards. Banks have a dollar and a half of unused credit for every dollar of currently drawn credit cards.
- Low-Income Households: Concerns are raised about low-income households facing credit market difficulties and potential increases in consumer defaults.
Role of the Federal Reserve
- Liquidity Management: The Federal Reserve aims to maintain a reserve number on their balance sheet to avoid liquidity issues. The Fed needs to consider the ins and outs of the treasury general account, as tax payments can cause a sudden disappearance of liquidity.
- Interest Rate Shocks: The potential impact of interest rate shocks on bank balance sheets is discussed, with considerations of deposit costs, yields, and the possibility of financial repression.
Implications of Basel 3 Regulations
- Capital Requirements: Basel 3 requires banks to raise capital for various aspects, including increasing the risk weight on mortgages and mortgage servicing assets. Smaller banks, which are Main Street lenders, may face challenges due to these regulations.
- Regulatory Changes: There may be changes to the Basel 3 proposals, as Chairman Powell and other governors may not support the current version.
Future of Banks
- Citigroup’s Future: Whalen expresses concerns about Citigroup’s future, suggesting that they should either merge with another institution or sell their assets and liquidate the bank.
- Banking Sector Outlook: Whalen is not bearish on banks but does not expect a positive outlook for net income at banks due to rate cuts and slow funding costs.
Sentiment Analysis
- Bearish: Whalen expresses a bearish sentiment towards the commercial real estate market, expecting it to take most of this decade to work out. He also shows concerns about the future of Citigroup and the potential risks in the banking sector due to the impact of COVID-19 and Basel 3 regulations.
- Neutral: While Whalen is not bearish on banks overall, he does not expect a positive outlook for net income at banks due to rate cuts and slow funding costs. He suggests waiting for the next down move before considering buying financials.
