Against our expectations, we have devoted quite a bit of space to banks this spring.

It wasn't just unexpected, it was also very unwelcome. We definitely did not have spiraling bank failures on our bingo card for 2023 and it really brought home how much of our economy and society - to say nothing of regulators - have been lulled dangerously into expecting the low rate era (2008-2022 inclusive) to be permanent.

This has proven to be a major mistake and one that we have likely not heard the end of. Banks are not the only institutions vulnerable to steadily rising rates.

To put a bow on the 2023 banking crisis (March-May), there are two very probable consequences for the sector going forward:

1. More regulation is coming.

2. The current set of conditions make bank stocks, whether in the US and other developed countries, very unattractive.

There is a slight exception for big banks that we have covered but in general, while bank stocks have bounced strongly over the last month as existential risk of total annihilation has receded, it is still a tough sector to really find attractive.

If you are long banks, as a sector or individually, now would be a good time to settle up and find another investment.

The number one reason for this is simply that banks - especially smaller and regional banks - are going to be making lower profits going forward.

And that is pretty interesting! Banks are a pretty critical part of the economy and a well functioning banking sector is helpful for a well functioning America.

Why is this happening? What are these threats?

Well, fundamentally, many of today's US banks have a mismatch between how they want to make money and the realities of actually doing so.

More specifically, there is some tough competition out there. It isn't clear that banks are offering a great deal to their customers compared to what they can get elsewhere from other types of financial institutions.

Consumer choice in banking is great just perhaps not for US banks.

Part of that is due to the incoming regulation which will raise their costs and also force them to hold more capital on the side. At the same time, it is worth repeating, of course, that it wasn't a lack of capital that sank Silicon Valley Bank or First Republic.Rather it was the speed of being able to move money combined with todays depositors having plenty of other (safe) options.

But the bigger issue today might be the new "high interest rates for longer" environment we keep talking about. These higher rates are proving a real - and counterintuitive - challenge to most American bank business models.

The reason is that many banks - even big ones - are going to have to pay their depositors more or risk slowly but steadily losing deposits to other types of financial institutions.

This is a nasty trade off for the banks. If they pay more interest for deposits, they lose profits. If they do not pay more they risk losing deposits which will leave them with less capital and the ability to make loans which will.....cause them to lose profits.

You already likely intuitively know this, of course. No matter its size or degree of sophistication, your bank likely pays you a fraction of what you could be easily getting elsewhere. And slowly but surely American savers are waking up and realizing that they could be getting 4-5%+ with a few clicks.

It isn't happening in a rush like a bank run but over time, these deposit outflows will mean a slow moving crisis for banks and especially banking stocks.

For bank customers, there are numerous other alternatives. For instance, neo-banks and other deposit taking institutions online are happy to pay you huge amounts to transfer over your savings with no minimums or bells and whistles. Or you could buy high yield money market funds or even, as we frequently suggest, your own Treasuries via Treasurydirect.gov.

Find out more on the latter in our piece here.

Additionally, people can move money around easier than ever, of course. You can set up a new account in minutes and have your money deposited in a few days. You can literally go from earning 0.05% to 5% over your coffee break.

Seize the day, today!

Furthermore, as banks have fewer deposits they are also making fewer loans. That fact combined with the mini credit crunch this spring is creating other alternatives for people. You likely have seen the "Ask Now, Pay Later" firms at online checkouts but major private equity firms are also teaming up with companies like PayPal to get into the consumer loans business.

In summary, the threats to traditional banking are growing and will only gain from the recent troubles. The sharks are not just circling, they are taking off big chunks from traditional banking revenues.

But that isn't all. There are also companies that have all the positive attributes of successful and well-run banks and very few of the negatives. Some of these companies are not interested in being banks whatsoever but, especially as stocks, might have some of the same positive attributes like stable balance sheets and easy access to capital.

*******

Have questions? Care to find out more? Feel free to reach out at contact@pebble.finance or join our Slack community to meet more like-minded individuals and see what we are talking about today. All are welcome.