Charting Banking III: funding

by PlanMaestro

A bank’s liabilities are its assets, and its assets are its liabilities – David Merkel’s clever old boss

I am a sucker for paradoxes because they stretch our linear thinking. Before any accountant starts complaining that I should get back to school, let’s give David Merkel the opportunity to explain what that means

Banks that focus on their deposit franchises have something of real value — that is hard to replicate. But any bank can invest their funds aggressively, which will lead to defaults with higher frequency. It is true of insurers as well, most financials die from bad investing policies, and short-term liabilities that require complacent funding markets – David Merkel

Deposits are a sticky funding source and is critical for banks; institutions that for the most part are lending long term with short term borrowings. Deposits in a sense have become long term borrowing and in time of crisis they can make a difference. That was not always the case but FDIC insurance, consequence of the Great Depression, changed the rules of the game. So most modern run on the banks are consequence of the drying up of wholesale funding sources like the Northern Rock case.

So here is a chart from a Citizens Republic Bancorp presentation, a bank that I do own, that tackles this risk of funding sources. Some would argue that instead of equity you should use tangible equity and that instead of total assets you should use tangible assets; you might want to do those adjustments.