1/22/26 Commercial Bank Mangagement

Class Schedule: Exam planned for Tuesday.
Exam Structure: First question on each exam is an "Elevator Speech" related to course content.
Bonus Opportunities:
- Watch video resources to gain bonus points (last bonus question can replace a missed question).
- Bonus points applied to self-performance reviews at the semester's end.
Pre-class Preparation:
- Students are encouraged to review materials beforehand, such as PowerPoints for engaging discussions.
- Points given for opening Blackboard content before class; 2 points added for opening Lecture material.

Important to stay informed via university announcements due to potential weather disruptions (historical context of ice storms and COVID implications).

The Great Depression:
- Key entity to understand: FDIC (Federal Deposit Insurance Corporation) created due to widespread bank failures during this period.
Texas Banking Crisis:
- Characterized as a regional crisis concurrent with the savings and loan (S&L) crises.
- Major cause: Overreliance on oil and gas sectors (poor asset management).
Savings and Loan Crisis:
- Caused by mismatches in funding (e.g., issuing 30-year fixed-rate mortgages while attracting deposits with variable rates).
- Major terms include deregulation, fraud, and mismatches in asset and liability management.
- Resulted in significant losses as deposits' rates increased unexpectedly, causing funding issues for S&L banks.
Great Recession (circa 2008):
- Triggered by subprime mortgages bundled into securities, leading to systemic financial instability globally.
- Affected banks' portfolios with good mortgages mixed with bad ones, illustrating poor lending practices.
- TARP (Troubled Asset Relief Program) introduced to stabilize major banks.
Post-2008 Implications:
- Relatively stable environment until the onset of COVID-19, which saved many banks from significant losses.
- Government programs like PPP (Paycheck Protection Program) aimed to retain employment during the pandemic.

Results in decreased credit support for banks, many of which had already faced challenges from prior periods.
Transitioning into COVID-19 heightened the existing weaknesses in the market.

Banks initially struggled with loan losses but were stabilized by government programs.
Discussion on interest rate stability leading into 2022 and significant rises in interest costs through multiple Federal Reserve adjustments.

Interest Rate Adjustments:
- Fed raised rates multiple times (11 times from March 2022 to July 2023).
- Adjustable-rate loans heavily affected as banks responded to cost changes.
- Example: Rate increase from 4% to 9% impacts borrowing costs significantly.

March 2023 saw SVB's rapid decline due to liquidity issues that were exacerbated by a loss of depositor confidence.
Liquidity Crisis Scope:
- A substantial $45 billion in deposits left within a day, leading to closure by FDIC.
- Highlight on the outflow of funds due to lack of deposit insurance for amounts over $250,000, emphasizing the risk of concentrated depositors.
Regulatory Oversight:
- Discussion of SVB's regulatory failures, including excessive concentration in bonds and insufficient risk management protocols.
- Regulatory errors in detecting vulnerabilities before the bank's crash are explored.
**Risk Concentration Issues: **
- Banks typically manage risks across diversified portfolios; SVB heavily concentrated their investments in ten-year bonds without matching deposit durations, risking loss exposure in rising rate environments.

SVB identified as well-capitalized yet faced imminent closure due to asset duration mismatches not recognized through normal accounting.
- Concentration of uninsured deposits highlighted as a significant risk vulnerability.

Current focus on banks' capability to foster customer confidence amidst shifting rates and liquidity concerns.
Predictions on future interest rates and impacts on borrowing costs outlined, including a gradual potential return to lower rates.