Are Banks Safe?
Money For the Rest of Us
J. David Stein
4.5 • 1.4K Ratings
🗓️ 15 July 2020
⏱️ 28 minutes
🧾️ Download transcript
Summary
Is a bank collapse coming due to bank exposure to collateralized loan obligations as defaults increase?
Topics covered include:
- What are collateralized loan obligations (CLOs), how are they structured, and what has been their historical default rates.
- How much exposure do banks have to CLOs and will it impact your bank savings and investments.
- What are bank capital ratios and how are they calculated.
- How banks are more conservatively run due to the adoption of the Basel III regulatory framework.
- What are bank stress tests and how have they performed.
- Why the Federal Reserve just capped dividends for the largest U.S. banks.
- How many U.S. banks have failed during the pandemic crisis compared to the Great Financial Crisis.
Thanks to Simplifi and Policygenius for sponsoring the episode.
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Transcript
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| 0:00.0 | Welcome to Money for the rest of us. This is a personal finance show on money, how it works, how to invest it and how to live without worrying about it. |
| 0:09.0 | I'm your host David Stein today's episode 305. It's titled, How Safe Are Banks? |
| 0:17.0 | Last month I had several plus members share an article with me that was published in The Atlantic |
| 0:21.7 | titled The Coming Bank Collapse. |
| 0:24.6 | The subtitle was the U.S. banking system could be on the cusp of calamity. |
| 0:29.6 | This time we might not be able to save it. |
| 0:33.0 | The article was written by Frank Partnoy, he's a law professor at UC Berkeley. |
| 0:38.0 | That's a pretty ominous title. |
| 0:41.0 | We want to look at the article as well as the state of US banks and banks around the world, |
| 0:48.0 | should we be worried? Given the pandemic, is the banking system poised to collapse? |
| 0:55.0 | I was especially interested in the article because it came out right after I had increased |
| 1:01.0 | my allocation to preferred Stocks and added a Preferred Stock |
| 1:05.8 | E.F. to the money for the rest of us plus model portfolios. The particular |
| 1:10.4 | Preferred Stock E. T. F. that we use by I shares has about 26% allocated to banks. |
| 1:18.0 | And if banks are on the cusp of this calamity, that does not bode well for preferred stocks. In the article |
| 1:26.4 | Partnoy is particularly worried about bank's exposures to an esoteric security |
| 1:32.3 | called a collateralized loan obligation or |
| 1:36.1 | CLO. We discussed CLOs back in episode 2006 in May 2018. |
| 1:46.3 | Collateralized loan obligations are asset-backed securities |
| 1:50.6 | issued by special purpose vehicles or SPVs. The SPV purchases leverage loans, which are |
| 1:58.6 | non-investment grade bank loans that have been syndicated. A bank will make a loan to a non-investment |
| 2:06.5 | grade company, a higher risk company, and then sell that loan into the |
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