Heartland Tri-State, Counting Uninsured Deposits, and Downgrades: This Week's Top Stories

Our thoughts are with those affected by the devastating wildfires in Maui, even Zoom wants its workers back in the office, and President Biden imposed a fresh ban on investments in China's high-tech sector. Here's what else you might want to read this week.

"Don't Worry It Was Just a Scam"

The failure of Heartland Tri-State Bank in Kansas remains curious, but it's now clear that fraud was involved. The Financial Times ticks through possible causes, including high levels of uninsured deposits or unrealized securities losses as well as depositor runs, and concludes nothing of the sort occurred. Kansas Banking Commissioner David Herndon told the paper: "We declared the bank insolvent because of a scam they fell victim to." Herndon described the fraud to American Banker as "very sudden" and unrelated to the factors that brought down SVB, Signature, and First Republic. The FDIC said it is investigating, and estimates Tri-State's failure will cost the agency $54.2 million, or 39% of Tri-State's $139 million in assets. Tri-State's CEO, Shan Hanes, had been the chairman of the Kansas Bankers Association but left that post in recent months. The FT reported that a KBA spokeswoman declined to say when Hanes left or why. It's all rather curious, and I'm sure we'll hear more soon.

"Some Banks Struggle to Report Uninsured Deposits Correctly"

One institution has revised its total number of uninsured deposits several times since February, from as low as $3.1 billion in June to high as $5.3 billion in July. It has also restated its Q1 uninsured deposits twice. And it's not alone. Since SVB's collapse, 47 banks have restated their year-end 2022 uninsured-deposits downward. Flawed information systems and reporting methodologies could be to blame, the article suggests, but so could incentives and optics.

"Why Wealth Deposits Remain a Sore Spot for Banks"

While commercial deposits have stabilized since the events of March, wealth deposits continue to decline as the yields offered by money market funds and Treasury bills are proving too enticing for many customers to pass up. 

"Moody's Downgrades 10 Regional Banks as Crisis Pressures Persist"

The ratings agency cited strains on deposit balances, interest rate risk, and a deteriorating commercial real estate market as reasons for the downgrades. It also said several larger banks were under review, indicating that they could be downgraded soon, and it gave 11 more banks a negative outlook, suggesting that they could be downgraded in the medium to long term.

While regionals demonstrated resilience during the second quarter, with many adding deposits, that liquidity came at a cost. Several charts in this article highlight the extent to which margins have shrunk as deposit costs outpace loan yields, and another article from S&P discusses how banks are managing the situation by trimming securities portfolios and prioritizing their most profitable customers.

"Treasury Management Steps into the Spotlight"

With pressures on margins increasing, banks are increasingly focusing on cross-selling to make customer relationships stickier and earn additional fees. New research on commercial banking from one consulting firm found that banks that provide customers with treasury management services earn a substantially higher ROE than those that only offer credit and deposit services. You can access that report here.

"PayPal Launches Digital Token in Push to Capture Crypto Payments"

There was a fair amount of news on stablecoins this week, beginning with this announcement from PayPal on Monday. It's the first major U.S. fintech to launch a stablecoin, called PayPal USD, which is backed by the U.S. dollar and short-term Treasuries. Given its compliance with multiple regulatory regimes, risk management capabilities, and massive user base, the company believes it is well-positioned to succeed in a market currently dominated by USD Coin and tether.

On Tuesday, the Fed issued new guidance on the issuance of stablecoins, fintech partnerships, and distributed ledger technology that many analysts believe will curb banks' interest in crypto-related activities. A day later, former acting Comptroller of the Currency Brian Brooks penned an op-ed on how stablecoins can help the U.S. dollar maintain its status as the world's reserve currency.

"Judge's CFPB Data Rule Pause Could Open a Lane for Late Fee Rule Opponents"

A federal judge's decision to prevent the CFPB from enforcing a data-collection rule for small businesses until the Supreme Court decides whether the bureau's funding structure is constitutional could create an opportunity for banks to block another rule that would cap late fees at $8. The bureau is "under pressure from the White House" to finalize the late-fee rule, according to Ballard Spahr Senior Counsel Alan Kaplinsky.

"'This Is the Sleeping Giant': Banks Zero In on Fourth-Party Risk"

Increased reliance on vendors, rapidly emerging technologies, and greater regulatory scrutiny on fintech partnerships are waking community banks up to fourth-party risks, or threats posed by a vendor's vendors. 

"Banks' Appetites for Funding Through Fed's Emergency Facility Moderates in Q2'23"

The Fed stood up the Bank Term Funding Program after SVB and Signature collapsed in March, and over the subsequent 12 weeks, banks borrowed heavily from the program. BTFP balances have stabilized since, though they remain elevated at a number of institutions.   

"Property Loans Are So Unappealing That Banks Want to Dump Them"

Banks seeking to sell their commercial-property loans aren't finding much of a market for them, which is raising questions about what the loans are actually worth. It's a conundrum: Many banks are willing to sell at a discount to shore up liquidity and avoid getting stuck with a bunch of foreclosed properties, but taking too large a haircut could spook investors and lead to insolvency.

"July Inflation Data Shows 'Convincing' Signs Price Pressures Easing, Taking Heat off Fed"

U.S. inflation ticked up ever so slightly last month. The soft print has many speculating whether the Fed is done hiking rates, or at the very least, will keep rates at current levels come September. Meanwhile, on the other side of the world, China slid into deflation. Falling consumer and producer prices in the world's second-largest economy could provide a boost to the Fed and other central banks in their battles against inflation, but they pose an ominous headwind to global growth.