Taps Coogan – October 28th, 2022

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Chris Whalen, Whalen Global Advisors Chairman, bank analyst, and author of The Institutional Risk Analyst recently spoke with Blockworks Macro about the outlook for banks amid rising funding costs and falling financial markets.

In a somewhat technical discussion, Mr. Whalen notes that banks sitting on large inventories of mortgages written at the very low rates of past years are watching as their funding costs rise higher. With the Fed Funds rates expected to end up between 4-5% (and presumably deposit rates at some point too), mortgages written at low rates of yesteryear may end up as perpetual loss-makers for banks, threatening solvencies issues like those see during the Savings & Loans crisis of the 1980s. And because people who took out loans and mortgages at super low rates are strongly incentivized not to pre-pay, banks are staring at rapidly increasing duration risk on those loss-making loans.

He further notes that with the Fed itself being the largest holder of such mortgages and low yielding treasuries, and now obliging itself to pay the Fed Funds rate on trillions of dollars of bank reserves, they will not be able to remit income to the federal government for years.

The silver lining, according to Mr. Whalen, is that banks are finally looking to make loans more aggressively at today’s higher rates which may mean more efficient use of their balance sheets.