Breach of Trust: Decoding the 2023 Banking Crisis
It has been an eventful year for banking, with large banks (SVB, Signature and First Republic) all falling like dominos, leaving investors unsettled and regulators off balance. That said, markets have been remarkably resilient through this crisis, suggesting that markets are either in denial or that they have concluded that this is a crisis with relatively small systemic risks. I am a dabbler in banking, and as a novice, I start with basics by looking at the structure of the banking business, with the intent of not only finding the value drivers but also the risk exposure. I use that structure to evaluate how the unprecedented rise in rates in 2022 affected banks, both in good ways (by making their low or no interest deposit base more valuable) and bad ways (by reducing the values of their loans and investment securities). I also look across the bank failures of the year, looking for patterns, and conclude that it is deposit stickiness that seems to be the prime factor. I close by looking at some of the determinants of this stickiness and why bank regulators will have to incorporate these measures into future regulations.
Slides: https://pages.stern.nyu.edu/~adamodar...
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