John Maxfield, banking specialist and author of the Maxfield on Banks Substack, joins Jack to discuss the history and future of the U.S. banking system. Drawing on his wide-ranging historical knowledge, Maxfield notes that when it comes to banks, failure is the norm, not the exception. Maxfield argues that the acute phase of the banking panic in the U.S. is likely over, as loan yields will rise and deposit flight will slow down.

Maxfield makes the case that, paradoxically, a serious cause of bank failure is not just not enough liquidity: often banks fail because there was too much liquidity. Maxfield and Farley take an in-depth look at Silicon Valley Bank’s enormous influx in deposits, which more than tripled since the first quarter of 2020, which they used to buy an enormous amount of securities that lost value as the Fed raised rates.

Filmed on April 3, 2023.

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Timestamps:

(00:00 ) Intro

(03:14 ) "Failure Is The Rule, Not The Exception" When It Comes To Banking

(06:51 ) Diagnosing Silicon Valley Bank's (SVB) Collapse

(16:45 ) Excess Liquidity Is The Problem, Not The Solution

(22:58 ) "Interest Rate Risk Can Be As Deadly As Credit Risk"

(27:04 ) Permissionless

(28:08 ) Some Banks' Unrealized Losses Exceed Book Value

(36:22 ) Is The Bank Panic Over? (John Says Yes)

(39:51 ) "Banks Will Always Make Money"

(44:33 ) Will Banks Decrease Their Lending?

(52:17 ) Blockworks Research

(53:15 ) How Did Banks' Manage Their Interest Rate Risk?

(58:02 ) Assumptions About Deposit Duration Play A Key Role In Asset Liability (Mis)Matching

(01:05:03 ) About The Maxfield On Banks Substack

(01:07:40 ) Parallel To The Savings & Loan Crisis

(01:10:55 ) Big Banks Get Bailed Out, Small Banks Don't (Unfair?)

(01:11:47 ) Executive Compensation And Bank Performance (An Inverse Relationship)

(01:13:27 ) Bank Insolvency Is Not Necessarily A Death Sentence

(01:21:01 ) What Banks Need To Learn From SVB's Collapse

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Disclaimer: Nothing discussed on Forward Guidance should be considered as investment advice. Please always do your own research & speak to a financial advisor before thinking about, thinking about putting your money into these crazy markets.