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Bank Runs, Bank Failures, Bailouts and More from ELFA’s National Funding Conference

Date: Mar 16, 2023 @ 03:00 PM
Filed Under: Industry Insights

I attended the Equipment Leasing & Finance Association’s 34th Annual National Funding Conference in Chicago, March 14 – 16. It was one of the more interesting industry conferences with multiple surprise announcements of several bank balance sheet liquidity and postponed securitization events taking place the weekend preceding the event and carrying through during the conference. 

Everyone in attendance was highly focused on the bank runs, bank failures and the potential impact on the securitization market, as well as a credit freeze on lessor warehouse line availability. Within just days, the consensus quickly changed from an isolated Silicon Valley Bank (SVB) run to a serious bank asset/liability management systemic issue. Despite prior planned conference topics, the bank failures were the most discussed issue during the convention from my observation.

First came the SVB run on the preceding Friday, followed by the government’s charge to cover a staggering bailout of full deposit coverage exposing the lack of insurance coverage on bank deposits – which only validated the fragile systemic issue in our banking system. 

The conditions also exposed the Saudi lack of ongoing support for Credit Suisse, which tumbled in value exposing further capitalization weakness of the institution. 

While it was too last-minute to revise prior conference topics to fully cover the impact on our industry and markets, after the Tuesday luncheon economist Robert Westcott provided an excellent industry analysis and the opportunity to ask questions about the bank failures. I asked the following four questions:

  • What is the estimated date of when you believe consumers and small businesses will burn through the $700 billion of remaining federal and state COVID-19 2020 subsidies (which could provide a timeline of when the Fed could be incented to start reducing rates to avoid a hard landing)?
  • Is it common monetary policy for the Fed to control and manipulate structural labor and wage growth?
  • What do you believe is the probability of a systemic crisis in the bank asset/liability management failures of SVB and potentially many more?
  • Since we as taxpayers must pay for it with higher taxes, is it appropriate for the government to bailout SVB (or any bank) in light of the moral hazards we experienced during the Great Recession?

Side conversations during breaks stimulated creative ideas of how we can learn and benefit from our industry’s highly and well capitalized finance companies’ abilities to replicate a Great Recession Warren Buffet bailout fund for other susceptible finance companies that are negatively impacted by the capital markets overreaction to the bank runs through no fault of our own, despite our otherwise strong industry private company financial positions. 

The general consensus was that, once again, history is repeating itself, but from a new form of failed asset/liability management despite high quality assets standing behind the risk. As was mentioned in the Independent’s round table discussion, another toxic issue is declining bank core deposits from clients’ either overreaction to these bank risks or simply those seeking higher yields outside of the banking system. 

Last November, I wrote an article about my “Triple Threat” thesis and the potential damage to banks which was rejected by one of Crains Chicago Business writers as witnessed by Michael Toglia, publisher of Equipment Finance Advisor, in our written joint correspondence. Until SVB’s failure this past week, Crains doubled back on my thesis and is considering partially endorsing it. 

I believe that nearly all community banks across the country have similar negative spreads and material Hold to Maturity (HTM) unrealized fixed income securities losses on their balance sheets. Positions that could render many banks insolvent if liquidation of these HTM securities need to be sold to satisfy Tier One regulatory capital requirements. The core negative deposit migration only exacerbates the risk of a potential bank run. Complicating these two risks is the higher chances of a credit freeze on small business, comprising 60 percent of the GDP jobs machine. 

Whatever we learned as an industry in the last Great Recession should be heeded despite any government-backed bank moral hazard bailouts. Reducing debt, fortifying our balance sheets and creating as much dry powder will help during this potential replicated bank liquidity crisis. An industry sponsored Buffet type bailout fund could also be an option considering the current strength of our industry entrepreneurs who, unlike the banks and its asleep at the switch regulators, have learned our lesson once again: creative and intelligent independents always trump bureaucratic banks and the failed regulatory system. Skin in the game always prevails in our business and those that have the gold still rule. 

Dale R. Kluga
Equipment Finance Founder & CPA
Dale Kluga is a Commercial Banking and Leasing Executive with over 40 years of consistent advancement in business development, credit, collections and operations. Demonstrated accomplishments include: founding and managing the commercial leasing business for LaSalle National Bank of Chicago; founding partner of Great American Leasing Company, LLC, a small ticket leasing operation; founding partner of Cobra Capital LLC (NKA Providence Equipment Finance) a SME funding, portfolio servicing and bank leasing back office company; management of a portfolio servicing business for LINC Scientific Leasing; and co-founding a suburban banking facility at the age of 29. Recognized as a visionary and persuasive negotiator in successfully conceiving strategic direction and implementation of operations that have contributed substantially to corporate financial growth.
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