WFC - Wells Fargo

[Rasputin]

the Fed increased their balance sheet from $2.4 Trillion in December 2010 to $4.5 T in December 2014. 

 

Bank of America actually asset capped themselves without fed's consent order

 

Year    BAC EOY total assets

2010    $2.26 T

2014    $2.1 T

 

I didn't see any asphyxiation happening to Bank of America nor did they ever become insolvent.

 

Yes, revenue went down from $110 Billion in 2010 to $85 Billion in 2014, but Net income available to common actually went up.   

 

A similar story is playing at WFC and I have seen how well that story ended at BAC. 

[wabuffo]

Bank of America actually asset capped themselves without fed's consent order

Year    BAC EOY total assets

2010    $2.26 T

2014    $2.1 T

 

I'm not seeing that.  If I go by their regulatory filings (Call Reports) - here are their year-end total assets for the National Association Bank (Federally-Chartered Bank opco) FFIEC call reports.

 

YEAR Total Assets  Bank Reserves (12/31)

2010  $1.482 T      $  69B

2014  $1.574 T      $  82B

2020  $2.162 T      $ 158B            (6/30 - not year-end)

 

I haven't studied BAC in detail, but perhaps their 2010 balance sheet included all their run-off assets in the Countrywide and Merrill Lynch acquisitions that were ring-fenced after the Great Financial Crisis?

 

The federally-chartered domestic bank however has been growing nicely.  I think this is a more direct-comparable to WFC (which does not have an investment bank attached to it).

 

But as i said, I have not studied BAC closely.

 

wabuffo

[Guest eatliftinvestgolf]

Banks can draw down their Fed balances to increase loans.  Wabuffalo continues to miss this point or is not articulating it well

 

First of all - its wabuffo, not wabuffalo.

 

But I'd like to understand your point, Junto, because you seem very adamant about it.  How exactly does a bank "draw down a fed balance" to make a loan?  If I'm missing something, I'm always eager to learn more.

 

wabuffo

 

I think we are confusing a general monetary policy argument with a single bank's balance sheet composition constraints.  wabuffo's makes the good point that as the Federal Reserve's balance sheet grows, so too does the total amount of bank reserves on deposit at the Federal Reserve across the entire banking system. There are a few papers published by various federal reserve board constituents on this topic.

 

Where I'm not following wabuffo's argument is why Wells Fargo specifically *must* have a certain level of reserves on deposit.  I am not a banking expert, but I don't see the full thought process laid out.  I think this is where Junto, who has experience in bank management, is primarily taking issue.  The required reserves is currently zero. The only real constraint that I can see is the requirements for High Quality Liquid Assets and stress test performance, of which reserves on deposit at the Fed are only one category.  Banks have choice with respect to the level of bank reserves at the Fed, and their relative views on liquidity management and balance sheet risk could dictate a different relative composition as a percentage of the total reserves in the banking sector.

 

Now, in a low interest rate environment, it might be that everyone prefers to hold excess reserves at the Fed rather than placing the capital in other categories with balance sheet risks (such as duration).  In addition, if you believe that a high percentage of the recent spike in customer deposits is fleeting, then you would not want to change over your balance sheet mix into other lending categories.  So it might be certainly rational for Wells to continue holding onto the reserves with the expectation of a near-term reduction.

 

Operationally, I'm not really understanding why a bank wouldn't be able to reduce excess reserves at the fed and use the capital to fund other assets, ignoring any other balance sheet constraints. Practically, the reserve would be taken over by another entity in the banking system through a series of transactions between fed, bank, customer, bank, and fed. 

 

I respect both your contributions and would welcome further clarification.  What am I missing here?

 

[Rasputin]

The $2.26 T total assets on dec 31 2010 and $2.1 T total assets dec 31 2014 are from the 10K for Bank of America Corporation (Holding Company) whose shares I have owned since Aug 2011.  Total assets did not eclipse the $2.26 T level until Dec 31 2017.  Average earning assets for Bank of America Corporation (Holding Company) also had similar trend for the same time period.  Revenue never went back to $110 Billion (fy 2010) while net income available to common marches upward. 

 

I understand your point that when the Fed purchases securities from banks, they credited the banks current accounts thus increasing their reserves at the Fed.  So total reserves must go up as the Fed executes its QE program.  But what about individual bank?  Could some bank like WFC sell much less than other banks? say US branches of foreign banks?

 

These numbers are from Wells Fargo & Company and Subsidiaries consolidated balance sheet (not Wells Fargo Bank, NA):

 

Total debt securities March 31 2020 : $501.564 B

Total debt securities June 30 2020 : $472.58 B

A decline of $29 B

 

The fed balance sheet increased from $5.8 T March 30 2020 to $7 T June 29 2020 or an increase of $1.2 T

 

From Q2 call transcript

 

John McDonnell

Yes, hi. Good morning, John could you remind us just where you're on the asset cap flexibility, what needs to be done each quarter now with deposits coming in and some loan demand and what kind of flexibility you have to operate under that and where you are

today on the way it gets measured? Thanks.

 

John Shrewsberry

Sure, sure. So we were in compliance with it at the end of the second quarter. And the items that we did during the late first and early second quarter to maintain compliance, we're really focused on our wholesale funding footprint by shrinking the amount of external repo and other financing that we do and taking trading assets down and we had a focus on certain categories of non-operational deposits, the ones that have very low liquidity value. And it's really this is from this point forward. It's more of our liability management exercise to make sure that that we don't retain too much in the way of low liquidity value deposits that we're thoughtful about other liabilities. On the asset side, there's so much cash on the balance sheet right now that it gets plenty

of flexibility having to do what we need to do with loans. You saw that our LCR is 129% for the quarter and deposits have grown nicely. So we're very thoughtful and cautious about how we price deposits, it's about those that have low liquidity value. We're thoughtful about maturities as they come up in non-deposit funding because with the inflow of deposits, we can rely more on that and less on notes and institutional CDs and other things. That's the work that we've been doing and that's the path that we have for the next quarter or two.

 

Outlook for H2 NII

 

Ken Usdin

Hi, good morning. Good afternoon now at East Coast. Just a follow-up question on the NII outlook, it seems like in the second half, some pluses or minuses to get to the mid-zone of your 41, 42. But just can you help us understand just how much more roll through there needs to be from here on both asset yields and securities yields to your earlier points of how you're reinvesting and then what from here can also happen on the deposit cost side as a partial offset?

 

Charlie Scharf

Yes, so I think on the deposit cost side, our anticipation is that between the reduction in pricing for interest bearing deposits and the growth or continuity of non-interest bearing deposits that our average deposit cost is back in the single digit basis points by the third or fourth quarter, that's the trajectory that we're on. That's where we were in 2015, 2016. On the asset side, depending on what happens to the LIBOR probably in particular there spreads are holding firm where we're lending hence there will be some, there could be some lower spread loan product that that is replaced with higher, you've heard about that in autos, it's true in some categories of C&I, but that's a piece of it.

On the security front, we've been trying to stay invested but the level of prepayments that Betsy just referred to, I think at our securities portfolio down by almost $30 billion in the quarter and so how much more duration we want to add at these low yields is a separate issue, we haven't been adding much in credit related securities product. But as I mentioned, I think to John the outlook for NIM is relatively range bound through the rest of the year, we're sort of bumping along what we think the bottom could be.

I mean, obviously things could change. But zero in the front end and 60, 70 basis points in the long end, this feels about like where we're likely to be with the things that I mentioned.

 

 

 

 

 

 

 

[wabuffo]

Where I'm not following wabuffo's argument is why Wells Fargo specifically *must* have a certain level of reserves on deposit.

 

I agree about small individual federally-chartered banks.  But the big banks (JPM, BAC, WFC, etc) have a tidal wave of bank reserves being shovelled at them.  One source is the Fed as it grows its balance sheet.  But another, which I made a passing reference to, is the US Treasury. 

 

The US Treasury also has a reserve account at the Fed.  In this environment, the US Treasury has been massively deficit spending.  Each dollar it spends creates a new deposit in the banking system, but also moves a reserve balance from the US Treasury's general account to the reserve account of the bank receiving the spending.  The big banks are the primary receivers of this spending and their reserves (and deposits) are growing because of it. 

 

In WFC's case, it creates a new liability (new bank deposit), but it also creates a new asset (a reserve balance at the Fed - which is denoted as "cash" on the bank's balance sheet).  The rate at which these assets are growing is faster than the rate at which all banks are growing their balance sheets. 

 

They are like Lucille Ball trying to package the chocolates coming at her on the conveyor belt but they are coming in too fast.

 

In WFC's case, they can't (or are not allowed to) grow their balance sheet - so they get squeezed.  (Although, I believe they got a little relief so that they could push out PPP loans).

 

See also the example (which is a special case), that I posted here (Meta Financial):

https://www.cornerofberkshireandfairfax.ca/forum/general-discussion/how-can-the-fed-unlimited-qe-be-deflationary/msg425263/#msg425263

 

wabuffo

[Mephistopheles]

Why cant WFC take the amount that is excess from this and lend

WFC lending doesn't affect their reserve account (at first) and simultaneously creates both a new asset and a new deposit for WFC.  This would push them over their hard asset cap - no can do without affecting its total reserve balance.  The fact is that banks don't need reserves in theory to lend.  They lend first, which creates a deposit.  If the deposit moves, then they use reserves to clear it with the receiving bank.

 

 

If they use a billion dollars of reserves to make a billion dollar commercial loan to an entity that deposits it right back at WFC - Would the reserve account, which is an asset, not decrease by 1 billion? And simultaneously the size of the loan book increases by 1 billion? The deposit liability stays the same.

 

I don't see how this pushes them over the asset cap?

 

I guess what a lot of us are confused about is, once you account for the required reserves including the amount necessary to settle payments and maintain liquidity, why are they required to have excess reserves? If it's a requirement, then it wouldn't be excess.

 

 

Edit: wait I think I get it. The deposits would then double by a billion because the entity would deposit a new billion, not the old billion. Thus assets would go up as well. So its fractional reserve banking in action whereas just leaving it at the Fed prevents this from happening. Right?

[CorpRaider]

A similar story is playing at WFC and I have seen how well that story ended at BAC.

 

It seems so similar to me that I wonder if I'm like deluding myself.  On the BAC timeline we are back around the time when Mike Mayo was hammering BAC on the conference calls about their efficiency ratios and returns on assets and equity and they were writing settlement checks and paying bills to Skadden one after another and I was complaining about how illiterate Moynihan comes across while holding BAC-WTA up to my eyeballs.  Well before BRK conversion to common but after they made the (brutal) investment.  Though I think BAC dived to like 40% of TBV at one point later in the timeline.

[wabuffo]

https://www.bnnbloomberg.ca/exploding-fed-balance-sheet-risks-unintended-brake-on-bank-loans-1.1416538

 

“When the Fed creates reserves, it’s seizing space on the asset side of bank balance sheets by eminent domain,” Wrightson ICAP chief economist Lou Crandall said."

 

When the Fed buys a bond from an investor, it credits what it owes the investor to a bank as a reserve balance. There’s no crowding out as long as the investor leaves that money on deposit with the bank.

 

But if the investor wants to take the money out, the bank must find a way to provide it. It can reduce its reserve balance at the Fed. The trouble is it can only do that through a transaction with another bank because banks are the only institutions allowed to hold those balances at the Fed.

 

From the perspective of the banking system as a whole, the reserve balance remains on the asset side of the balance sheet, taking up space that could otherwise be devoted to loans to businesses and consumers.

 

Ok - here's a former NY Fed President, Bill Dudley:

https://www.bloomberg.com/opinion/articles/2020-01-29/fed-s-repo-response-isn-t-fueling-the-stock-market

 

“…when the Fed buys T-bills and increases the amount of reserves in the banking system, that liquidity can’t go elsewhere.  It can move from bank to bank as households and businesses shift where they hold their bank balances."

 

Sometimes I think the Fed is like George Costanza in that Seinfeld episode where George realizes that when every instinct he has is wrong, the opposite would have to be right.  The Fed thinks that 1) lowering rates and 2) buying more Treasuries will cause 1) more consumption and 2) more bank lending. 

 

But in reality, lowering rates punishes savers more than it helps borrowers - thus causing savers to save even more to have the same income.  So the Fed lowering rates hurts consumption.  And then, by buying more Treasuries, the Fed pushes more of commercial banks asset mix into cash balances held at the Fed.  This actually hurts bank lending. 

 

The Fed must be like George Costanza and do the opposite of what its instincts are making it do.  Maybe, in order to stimulate the economy, the Fed must 1) raise rates, and 2) shrink its balance sheet.

 

wabuffo

[LearningMachine]

But the big banks (JPM, BAC, WFC, etc) have a tidal wave of bank reserves being shovelled at them. 

 

Each bank gets to decide how much of the deposits they want to keep as cash earning 10 basis points with the Fed, or put in treasuries (which albeit are yielding less and less  because Fed and other banks are buying them, but yielding more than 10 basis points), or put in Mortgage Backed securities (which albeit are also yielding less and less as other banks want to buy them, but yielding more than treasuries).  At the end of the day though, it is up to the bank to choose and not a strict requirement to keep it in reserves at the Fed.

 

For example, BAC does not have the asset cap, but is voluntarily choosing to keep the incoming deposits in cash earning 10 basis points at the Fed, and will roll them over to other higher yielding assets based on factors like how sticky the deposits are, whether they can get higher yielding assets later, etc.

 

Here are the excerpts from the BAC 2020 Q2 call:

Paul Donofrio -- Chief Financial Officer

 

Yeah. So just to be clear, we're talking about a couple of hundred million off of, you know, from Q2 to Q3. I won't repeat all the kind of drivers of that. You know, beyond Q3, NII is really kind of -- the growth of NII is going to be dependent upon sort of asset growth and redeployment of deposits into higher-yielding acuities.

 

We've added $284 billion in deposits since year-end. All of that had gone into cash, earning 10 basis points. So, you know, as we assess the future of this pandemic, as we kind of assess how much of that is going to stick around and we get a little bit more confident on the -- on those two elements, that can be deployed into securities or a portion of it, let's say, can be deployed into securities. And, you know, that's -- there's a big difference even in these rates between what you can earn on a mortgage-backed security or a treasury bond and 10 basis points.

 

[Mephistopheles]

or buy treasuries?

If WFC spent its entire $217 billion to buy Treasuries, then during payment clearing, some other bank would receive $217 billion in WFC's reserves.  The other big banks also don't want any additional reserve balances.  For example, JPMorgan holds $306 billion of reserves - do you think they want another $200 billion when JPM's total assets are a bit over $2T?  Reserves are also the preferred asset by bank regulators when it comes to the big banks meeting their "living will" regulations - even over super-safe Treasuries.

 

But by buying $217 bn in treasuries, or $150 or 100bn, that means there is a seller or sellers in the market willing to make that trade. If JPM sells WFC $10 bn in Treasuries, then they'd in effect be agreeing to accept that money in the form of reserves for the transaction.

So the banks do have control over their individual reserve levels, even though the reserves of the entire system is controlled by the Fed. Banks can lend it out, though a bank like WFC has to be careful to not let that lending swell up its customer deposits. But there is no stopping a bank like BAC or JPM from lending out those cash reserves (thus creating new assets and deposits) and allowing the reserves to move around in the system as they may.

[wabuffo]

So the banks do have control over their individual reserve levels, even though the reserves of the entire system is controlled by the Fed. Banks can lend it out, though a bank like WFC has to be careful to not let that lending swell up its customer deposits. But there is no stopping a bank like BAC or JPM from lending out those cash reserves (thus creating new assets and deposits) and allowing the reserves to move around in the system as they may.

 

This is true if the only clearing transactions were between banks.  Then the reserves would shift between banks but never grow (or contract).

 

But you have the Fed and the US Treasury pursuing policy objectives that are also adding new reserves to the banking system.  So WFC shifting $10 billion in clearing transactions to JPM is dwarfed by the flows coming from the Federal government creating new reserves for both WFC and JPM (and small banks too).

 

To put some numbers on it - we can look at the flows since March 11th Fed b/s when the Federal response to the current pandemic crisis began (til Sep 2nd Fed b/s):

 

1) The Fed bought $1.7t in Treasury debt and $0.5t in MBS  = swapped for $2.2t in new bank reserves.

2) The US Treasury deficit spent $2.0t = creates $2.0t in new bank reserves.

3) The US Treasury issued $3.3t in new debt = that removes $3.3t in bank reserves in exchange for new interest-earning assets (ie, Treasuries held by the public).

 

So total it up = +2.2+2.0-3.3 = $0.9t increase in bank reserves.

 

During this same period, total bank reserves held at the Fed went from $1.95t on March 11th to $2.85t on Sep 2nd - that's an increase of $0.9t.  The numbers foot and cross-check.

 

Another MMT point - 1) and 3) above are asset swaps with the private sector so these transactions don't create new bank deposits.  But 2) creates new bank deposits - so deficit spending by the US Treasury should add $2t in new bank deposits.  Let's cross-check that as well.  Total US commercial bank deposits (based on Fed H.8 report) went from $13.5t on March 11 to $15.5t - an increase of $2t in new banking sector deposits.  Another foot and cross-check!

 

wabuffo

[Ice77]

..

 

[Mephistopheles]

Does nobody want to touch it? Ameritrade said WFC was one of the most popular stocks in June. I don't know what that means exactly, but it was one of the ten stocks mentioned by Ameritrade. Robinhood owners of WFC have risen from 20,000 to near 100,000 in the last few months. COBF board members are clearly buying it. WFC appears to be very popular! And yet the stock can't stop going down. What is going on?

 

You make good points about historical ratios to book value but that is backward looking. Stock investors are forward looking. Right now the stock is saying that there is bad news out there that hasn't been released yet.

 

Maybe a large holder is selling off their entire position

 

:D

 

;D

 

Very underappreciated comment.  :P

 

Haha ;D

[Mephistopheles]

So the banks do have control over their individual reserve levels, even though the reserves of the entire system is controlled by the Fed. Banks can lend it out, though a bank like WFC has to be careful to not let that lending swell up its customer deposits. But there is no stopping a bank like BAC or JPM from lending out those cash reserves (thus creating new assets and deposits) and allowing the reserves to move around in the system as they may.

 

This is true if the only clearing transactions were between banks.  Then the reserves would shift between banks but never grow (or contract).

 

But you have the Fed and the US Treasury pursuing policy objectives that are also adding new reserves to the banking system.  So WFC shifting $10 billion in clearing transactions to JPM is dwarfed by the flows coming from the Federal government creating new reserves for both WFC and JPM (and small banks too).

 

To put some numbers on it - we can look at the flows since March 11th Fed b/s when the Federal response to the current pandemic crisis began (til Sep 2nd Fed b/s):

 

1) The Fed bought $1.7t in Treasury debt and $0.5t in MBS  = swapped for $2.2t in new bank reserves.

2) The US Treasury deficit spent $2.0t = creates $2.0t in new bank reserves.

3) The US Treasury issued $3.3t in new debt = that removes $3.3t in bank reserves in exchange for new interest-earning assets (ie, Treasuries held by the public).

 

So total it up = +2.2+2.0-3.3 = $0.9t increase in bank reserves.

 

During this same period, total bank reserves held at the Fed went from $1.95t on March 11th to $2.85t on Sep 2nd - that's an increase of $0.9t.  The numbers foot and cross-check.

 

Another MMT point - 1) and 3) above are asset swaps with the private sector so these transactions don't create new bank deposits.  But 2) creates new bank deposits - so deficit spending by the US Treasury should add $2t in new bank deposits.  Let's cross-check that as well.  Total US commercial bank deposits (based on Fed H.8 report) went from $13.5t on March 11 to $15.5t - an increase of $2t in new banking sector deposits.  Another foot and cross-check!

 

wabuffo

 

Thanks, this clears it up for me.

[LearningMachine]

So the banks do have control over their individual reserve levels, even though the reserves of the entire system is controlled by the Fed. Banks can lend it out, though a bank like WFC has to be careful to not let that lending swell up its customer deposits. But there is no stopping a bank like BAC or JPM from lending out those cash reserves (thus creating new assets and deposits) and allowing the reserves to move around in the system as they may.

 

This is true if the only clearing transactions were between banks.  Then the reserves would shift between banks but never grow (or contract).

 

But you have the Fed and the US Treasury pursuing policy objectives that are also adding new reserves to the banking system.  So WFC shifting $10 billion in clearing transactions to JPM is dwarfed by the flows coming from the Federal government creating new reserves for both WFC and JPM (and small banks too).

 

To put some numbers on it - we can look at the flows since March 11th Fed b/s when the Federal response to the current pandemic crisis began (til Sep 2nd Fed b/s):

 

1) The Fed bought $1.7t in Treasury debt and $0.5t in MBS  = swapped for $2.2t in new bank reserves.

2) The US Treasury deficit spent $2.0t = creates $2.0t in new bank reserves.

3) The US Treasury issued $3.3t in new debt = that removes $3.3t in bank reserves in exchange for new interest-earning assets (ie, Treasuries held by the public).

 

So total it up = +2.2+2.0-3.3 = $0.9t increase in bank reserves.

 

During this same period, total bank reserves held at the Fed went from $1.95t on March 11th to $2.85t on Sep 2nd - that's an increase of $0.9t.  The numbers foot and cross-check.

 

Another MMT point - 1) and 3) above are asset swaps with the private sector so these transactions don't create new bank deposits.  But 2) creates new bank deposits - so deficit spending by the US Treasury should add $2t in new bank deposits.  Let's cross-check that as well.  Total US commercial bank deposits (based on Fed H.8 report) went from $13.5t on March 11 to $15.5t - an increase of $2t in new banking sector deposits.  Another foot and cross-check!

 

wabuffo

 

Wouldn't this increased money supply eventually create inflation?

Wouldn't interest rates follow inflation rate?

Wouldn't that be a better time for banks to buy higher yielding assets?

Even with limited asset cap, Wells Fargo should still be able to earn a higher interest rate on capped assets it is allowed to hold?

With today's market cap, we are getting to buy the right to returns from those capped assets for a fraction of those assets.

[wabuffo]

Thanks, this clears it up for me.

 

Mephistopheles - I'm glad the penny dropped for you!  In looking up the Fed/US Treasury numbers since the pandemic started, it also triggered an insight for me as well.

 

I've been slightly perplexed as to why the US Treasury ramped up its account balance in its reserve account at the Fed.  It used to carry a balance of between $100B-$400B for years since the GFC, but lately has ramped it up to over $1.6t!  Here's a chart to show visually what I am talking about.

 

 

Sorry for getting into the weeds here, but this will come back to the discussion on bank reserves.  The US Treasury has to adhere to a hard cap on total debt outstanding that is mandated by Congress (the infamous "debt ceiling" which causes the many "budget showdowns").  This debt ceiling was temporarily repealed in July 2019 until July 2021.  So the US Treasury has been issuing a lot of debt during this crisis.  As we've seen upthread it issued $3.3t of debt vs $2.0t of deficit spending.  This has caused its General Account balance to climb to $1.6t.  I always wondered why it was doing that. 

 

I now have a working theory - to keep bank reserves from climbing even higher while the Fed was expanding its balance sheet!

 

One of the central points of MMT is that US Treasury debt issuance isn't really a financing operation for the US government.  US Treasury debt issuance is a reserve maintenance function in that it soaks up the excess reserves that would pile up in the banking sector from all of that deficit spending.  Let's go back to our upthread calculations.  What if the US Treasury does what it usually does, issues new, net debt equal to its deficit spending for a given period?  Let's re-run the calculations.

 

1) The Fed bought $1.7t in Treasury debt and $0.5t in MBS  = swapped for $2.2t in new bank reserves.

2) The US Treasury deficit spent $2.0t = creates $2.0t in new bank reserves.

3) The US Treasury issued $2.0t in new debt (instead of $3.3t which it actually issued) = that removes $2.0t in bank reserves in exchange for new interest-earning assets (ie, Treasuries held by the public).

 

Total it up = +2.2+2.0-2.0 = $2.2t increase in bank reserves.  In this hypothetical case, bank reserves would have gone from $1.95t on March 11th to $4.15t on Sep 2nd (instead of $2.85t).  Per the Fed's H.8 report - total US commercial bank assets = $20t.  Thus, without the US Treasury supporting the Fed's balance sheet expansion by removing excess reserves via greater US Treasury lending (which transactionally moves a reserve from the banks to the US Treasury's general account), total US banking reserves would've taken up 21% of assets - crowding out bank lending during the pandemic.

 

That makes sense to me and helps demonstrate that the Fed and the US Treasury are co-ordinating their actions to limit the impact to the banking sector.  Its also clear that the Fed's actions are squeezing bank balance sheets in a way that Fed and US Treasury officials are worried about.  And if its an issue worth worrying about for all banks - it must be a huge issue right now for WFC because of its total asset cap.  The Bloomberg article linked upthread even quoted a former Fed official discussing this exact strategy as a potential response to a scenario of the Fed massively expanding its balance sheet.

 

"Another way to do it would be to persuade the Treasury to increase its deposits at the Fed,” said [former Fed official Roberto] Perli, who is now a partner at Cornerstone Macro LLC.

 

The issue will be what happens when the debt limit is restored next summer?  That could move the US Treasury to the sidelines as it pertains to excessive debt issuance. How will that affect the Federal Reserve's response to a slow economy and its responses to that economic outlook vis-a-vis bank balance sheets?

 

It also demonstrates how kinda nonsensical much of what the Fed does really is.  In this crisis, the Fed hatches a plan to lower long-term rates by purchasing vast amounts of Treasuries thus making Treasury debt “scarcer”.  But an outcome of this strategy is excessive bank reserve accumulation which could hurt lending.  So to solve that problem, the Fed gets the US Treasury to....issue a lot more...uhh...Treasury debt?  The Fed is George Costanza! 

 

Or perhaps the Fed is Principal Skinner from the Simpsons....

 

Interesting stuff to be sure.

 

wabuffo

[Rasputin]

To me the asphyxiation and choking is too fear mongering. 

 

1.  The asset cap is on Wells Fargo and Co (holding company) not on WF NA, and as wabuffo pointed out, BANA was still growing somewhat between 2010 and 2014 even as Bank of America and Co (holding company) total assets were down from $2.26 T to $2.1 T.  And yes, there is more room for BANA to grow within BAC compared to WF NA within WFC.  As of June 30 2020, WF NA had total assets $1.8 T compared to $1.97 T for consolidated WFC holding company.

 

2.  The cash account at the fed is not the total cash of the holding company.  So there is a lot flexibility within the holding company to adjust.  The only liquidity requirements are RLAP and LCR.  Once they meet these plus some for buffer during pandemic, they are free to do whatever else they want.  The idea that WFC holding company has to sell all of their securities during a FED QE program and thus their cash balance will take over the $500 B securities portfolio, I think is too far fetched. 

 

Talking about aggregate excess reserve is fun, but to me, it doesn't tell me whether or not WFC is an investment that will produce 10% annualized return going forward

 

3.  BAC holding company was asset capped from 2010 to 2016, their total assets at year end, declined during the Fed's QE operation back then.  No asphyxiation, no choking, I saw flourishing.  I don't see why WFC can't do the same, this is not the first QE program. 

 

 

 

 

[wabuffo]

BAC holding company was asset capped from 2010 to 2016

 

Show me where BAC was under a regulatory order to cap assets.  It’s one thing to voluntarily put bad assets into run-off after a mortgage market debacle at Countrywide and Merrill Lynch. That makes economic sense.  It’s smart management of the business.

 

But it’s quite another to be forced to shed profitable assets by regulatory fiat (and WFC was/is a healthy bank with great assets). Especially when those self-same regulators are pushing more deposits (and bank reserves) at you.  Look, the cap at Wells could be lifted soon - in which case WFC could be a great stock investment.  Those here investing in WFC could hit a home run.  But I can’t predict that and the regulator hate for Wells is high after all the years of Wells arrogance and defiance for the establishment in NY and DC.

 

wabuffo

[Rasputin]

A similar story is playing at WFC and I have seen how well that story ended at BAC.

 

It seems so similar to me that I wonder if I'm like deluding myself.  On the BAC timeline we are back around the time when Mike Mayo was hammering BAC on the conference calls about their efficiency ratios and returns on assets and equity and they were writing settlement checks and paying bills to Skadden one after another and I was complaining about how illiterate Moynihan comes across while holding BAC-WTA up to my eyeballs.  Well before BRK conversion to common but after they made the (brutal) investment.  Though I think BAC dived to like 40% of TBV at one point later in the timeline.

 

Walking down memory lane

 

News cycle for BAC in 2011

 

http://blogs.reuters.com/christopher-whalen/2011/10/19/is-bank-of-america-preparing-for-a-chapter-11/

https://www.nasdaq.com/articles/fed-rejects-bank-americas-plans-dividend-increase-bac-2011-03-23

https://www.euromoney.com/article/b12kjbzm46xb4p/downgraded-banks-face-hits-from-additional-collateral-payments

 

my lowest cost lost was $4.94 Dec 19 2011, TBV on 9/30/2011 was $13.22 or about 0.37 TBV.  Net Charge-offs in 2011 was $20.4 B, non interest expense in 2011 was $80.3 B (non efficiency ratio was???).

Barclay presentation, page 9 showed what they have settled, how much rep and warranties reserves, etc...all gone now. 

Brian's presentation at GS showed how far they have come between 2010 to 2014.  and yes this is during Fed asphyxiation and choking program. 

BAC_BRT_Presentation_at_Barclays_Final.pdf

Bank_of_Americas_BAC_CEO_Brian_Moynihan_Presents_at_Goldman_Sachs_US_Financial_Services_Conference_Transcript___Seeking_Alpha.pdf

[Rasputin]

BAC holding company was asset capped from 2010 to 2016

 

Show me where BAC was under a regulatory order to cap assets.  It’s one thing to voluntarily put bad assets into run-off after a mortgage market debacle at Countrywide and Merrill Lynch. That makes economic sense.

 

But it’s quite another to be forced to shed profitable assets by regulatory fiat. Especially when those self-same regulators are pushing more deposits (and bank reserves) at you.  Look, the cap at Wells could be lifted soon - in which case WFC could be a great stock investment.  Those here investing in WFC could hit a home run.  But I can’t predict that and the regulator hate for Wells is high after all the years of Wells arrogance and defiance for the establishment at NY and Washington.

 

wabuffo

 

I never said it was regulatory ordered, I said self-imposed, look at their 10Ks, they were selling a lot of businesses.  But focusing only on excess cash reserve balance to me, to try to see the future for WFC, to me misses the whole picture. The asset cap is not a permanent, though I don't know if the fed choking program is permanent. 

[wabuffo]

I never said it was regulatory ordered, I said self-imposed.

 

Then you are comparing apples and rutabagas.  The two situations are not at all the same.  BAC was shrinking because it was ridding itself voluntarily of bad assets.  WFC is healthy and ridding itself of good assets involuntarily.

 

We will just have to agree to disagree.  Despite all of that I am agreeing with you that WFC could be a good stock to own if regulators come to their senses.

 

wabuffo

[Cigarbutt]

^Thanks to wabuffo and Rasputin for this exchange and i'd like to pour some gasoline on the fire.

The above is a schematic representation as to why the argument may not be about the same topic although there is an intersection point.

There is the central bank reserves cycle which has been excessive lately on the left and there's the real life cycle where lending and borrowing decisions are made, on the right side, with commercial banks in the center.

 

Rasputin seems to focus on what is happening on the right side. Banks will survive and who knows what will happen here. Maybe there's more to say about this part.

 

As far as wabuffo's take on the spike in the Treasury account, i have a different perspective. i think the Treasury, like many corporate and individual players, simply drew (conceptually) its almost-always open credit line and increased its "savings" (ie the modern way to say to incur debt) in order to meet unusual demand for cash. Their early august announcement would seem to support this hypothesis as they don't seem to be concerned, at this point, about the potential impact on bank reserves from reducing the cash balance to more 'normal' ::) levels.

https://home.treasury.gov/news/press-releases/sm1077#:~:text=U.S.%20Department%20of%20the%20Treasury,-Search&text=During%20the%20July%20%2D%20September%202020,than%20announced%20in%20May%202020.

 

However, even if i disagree (often at the margin) about the 'meaning' of various central bank strategies, i agree that they have become mostly irrelevant or like a growing obstacle. At the end of the day, what counts is the ability for private participants to lend and borrow using debt productively.

[LearningMachine]

WFC could be a good stock to own if regulators come to their senses.

 

Even if regulators don't come to their senses, and the asset cap limit is not lifted, it is still $1.95 Trillion assets for the price of $0.102 Trillion market cap.

 

To earn 15% annually for shareholders, they need to earn only $15.3 Billion per year from those assets, that is, 0.78%.

 

Are you saying Fed is tying Wells Fargo's hands and not allowing it to invest that in higher yielding Mortgage Backed securities for now, and will not allow it to invest in higher yielding treasuries in the future (when interest rates go up)?

 

[Junto]

Why cant WFC take the amount that is excess from this and lend

WFC lending doesn't affect their reserve account (at first) and simultaneously creates both a new asset and a new deposit for WFC.  This would push them over their hard asset cap - no can do without affecting its total reserve balance.  The fact is that banks don't need reserves in theory to lend.  They lend first, which creates a deposit.  If the deposit moves, then they use reserves to clear it with the receiving bank.

 

 

If they use a billion dollars of reserves to make a billion dollar commercial loan to an entity that deposits it right back at WFC - Would the reserve account, which is an asset, not decrease by 1 billion? And simultaneously the size of the loan book increases by 1 billion? The deposit liability stays the same.

 

I don't see how this pushes them over the asset cap?

 

I guess what a lot of us are confused about is, once you account for the required reserves including the amount necessary to settle payments and maintain liquidity, why are they required to have excess reserves? If it's a requirement, then it wouldn't be excess.

 

 

Edit: wait I think I get it. The deposits would then double by a billion because the entity would deposit a new billion, not the old billion. Thus assets would go up as well. So its fractional reserve banking in action whereas just leaving it at the Fed prevents this from happening. Right?

 

The best real life example to think about industry wide along this lines was the PPP program. Banks used existing liquidity to make PPP loans to borrowers who then deposited the money in the bank giving them the loan. It drove large asset growth across the industry as loans went up, deposits went up but not much money left the bank until the borrower paid it out to the employee. As employees were paid, the deposit volume decreased (unless you also had the deposit account for the employee at which point it is only net of the taxes and insurance costs coming out of the paycheck).

 

The other factor that occurred was that with more or less shut downs across the country, the payables decreased, receivables decreased, and liquidity surged as working capital expanded while sales slowed. Since the orders did not rebound in most industries instantaneously and companies and individuals have delayed capital expenditures and maximized government programs, the cash on deposit at banks has grown. 

 

I think we have to be careful from being macro investors when looking at banks. Wabuffalo is using macroeconomics to review and decide on his investment in WFC. I think that is a poor investment thesis and why I continue to disagree on his FED decides everything synopsis as it relates to individual banks. Perhaps a good portfolio construction strategy if he wants to use it to avoid this sector or limit exposure, but poor investment strategy when looking at an individual company.

 

I am long WFC:

- Catalyst of a new CEO with a new management team that I believe can refocus the organization on prudent growth and profitability, diversity in revenue streams, and materially improve the cost infrastructure of the organization

- Trading at $24.79 compared to tangible book at $31.88 and book at $38.67 and 2022 earnings of $3.52

- The banks I manage ($1 billion in assets so small in comparison) are not seeing widespread defaults and stress in the portfolio to levels where realized losses can be expected at the levels the large banks are reserving. The other community banks I talk to our also not seeing materially increased level of defaults.

- I see some secular growth in housing due to demographic shifts (Millennials are driving new household formation), interest rates, and housing inventory levels being the lowest since 2003 and on the lower bound of history going back to the 1960s (months of housing supply https://fred.stlouisfed.org/series/MSACSR)

- Wells Fargo was #3 in mortgage volume in 2019 and given its relatively low asset needs to originate and sell mortgages, I am sure they are leaning into this market growth. Add to it the forbearance mortgage buyback program that Bloomberg has already mentioned is driving earnings at WFC by the billions (https://ca.finance.yahoo.com/news/banks-uncover-loophole-buy-home-100000066.html

- regulatory catalyst of coming off issues related to prior management that if relaxed under new management will be an immediate pop to the stock price

- COVID vaccine may result in a material jump in job creation across the board but particularly in the hospitality sector (restaurants specifically) that I think is being discounted on its ability to bounce back.

 

I may be wrong on how it plays out but this is a value forum and I think this is straight up a value investment. Strong potential upside with a limited downside and a dividend around 1.63%.  If it is dead money for a little while, I am still earning above savings account rates but if it does move forward the way I anticipate into 2022 earnings, it could be a double in three years. 

 

 

[wabuffo]

Wabuffalo Wabuffo is using macroeconomics

 

If I didn't think you were a nice guy, I'd swear you are doing this on purpose.  >:(

 

The best real life example to think about industry wide along this lines was the PPP program. Banks used existing liquidity to make PPP loans to borrowers who then deposited the money in the bank giving them the loan.

 

No part of this transaction involves the bank's reserves leaving the Fed's settlement account at this stage.  A bank can extend a loan (creating a new bank asset) which then simultaneously creates a new deposit at that bank (liability).  So far this does not change any reserve balance this bank has at the Fed.  As you noted, required reserves have been suspended by the Fed.  So its just regulatory capital requirements and loan pro-forma profitability (included credit risk assessments) that govern bank lending.

 

It drove large asset growth across the industry as loans went up, deposits went up but not much money left the bank until the borrower paid it out to the employee. As employees were paid, the deposit volume decreased (unless you also had the deposit account for the employee at which point it is only net of the taxes and insurance costs coming out of the paycheck).

 

Right. By paying employees and depositing their payroll at other banks, this bank then clears these payments at the Fed with the banks receiving the employee payroll checks and direct deposits. But other banks are also clearing payments to this theoretical bank in a similar manner.  Some days this bank's reserve balance goes up a bit, some days it goes down a bit.  But total reserves in the system don't change, they just move back and forth between this bank and the other banks.  Once again, nothing that banks, in aggregate can do affects reserve balances.  Only the Fed through its balance sheet decisions and regulatory policies (and the US Treasury through its deficit spending) affects total reserves.

 

But here's the thing, in addition to PPP, as part of the CARES Act, the US Treasury also mailed checks or made direct deposits under the EIP program (Economic Impact Payments) around the same time as PPP.  Some of the depositors at this theoretical bank probably received some of these payments as new deposits.  Guess what, these payments (and checks being deposited) were cleared by the Fed from the US Treasury's general account to this bank's reserve account - so this bank's reserves went up (until these also got spent). 

 

The other factor that occurred was that with more or less shut downs across the country, the payables decreased, receivables decreased, and liquidity surged as working capital expanded while sales slowed. Since the orders did not rebound in most industries instantaneously and companies and individuals have delayed capital expenditures and maximized government programs, the cash on deposit at banks has grown. 

 

Sure - one company's receivables going down is another's payables going down - in the end cash and deposits just move around.  If it was just the private sector alone, total aggregate cash and deposits balances wouldn't change.  They can't.  But we also have the US Treasury spending which creates new deposits from thin air.  The main reason deposits are up in Q2 is partly because of new loans being created (including lines being drawn by desperate businesses) but mostly because of US Treasury spending (which creates new deposits). 

 

So far - I'm not seeing your explanation of how banks can withdraw bank reserves - which I think was your central point.  i.e. - banks control the amount of reserves (and not the Fed).  Perhaps I missed it here somewhere in your descriptions of various types of banking activity.

 

I am long WFC:

 

Good for you - I hope it works.  Honestly, I'm not short WFC.  I'm just making a simple point that there were tremendous flows in Q2 involving the Fed and the US Treasury that raised the total amount of bank reserves.  The big banks like WFC were the recipients of these large reserve flows which is out of their direct control.  In WFC's case, it squeezed them harder than their big bank peers because of their total asset cap.  These flows may not continue in Q3 and/or beyond and so WFC will manage through it.  Or the Fed can have a change of heart and remove the cap. I have no idea. I'm not questioning yours or anyone else's investment thesis in WFC or the banks.

 

My main point was about bank reserves and not WFC.  But thanks for the discussion, Jinto  :o .

 

wabuffo