Marketwatch | Nov. 30, 2022
The new year is nearly upon us, and one idea for where to invest is the banking sector, whose margins benefit from the high interest rates, at not terribly demanding valuations.
Here to counter that view is Christopher Whalen, the chairman of Whalen Global Advisers, who makes the bold case that banks were short over $1 trillion in capital at the end of the second quarter, and that it’s only going to get worse as the Fed keeps hiking interest rates.
That claim may surprise those who think the U.S. banking industry has some $2.2 trillion in capital. But he whittles that figure in several ways. First, he notes, there’s a difference between book equity and tangible equity, the latter of which is used by banking regulators to evaluate solvency. It’s a narrower definition, excluding items like goodwill and deferred tax assets, that brings the total down to $1.49 trillion from $2.22 trillion.
Then, drawing on Federal Deposit Insurance Corp. data, he subtracts what’s called accumulated other comprehensive income. “Thanks to QE and now QT, all sorts of assets have become negative return propositions for banks and nonbanks alike. If the coupon pays less than the funding costs, you’re losing money,” he says. That takes capital down to $1.23 trillion.