On Monday evening, Bloomberg News ran with a story explaining that US officials were working on finding ways that they might be able to temporarily expand FDIC (Federal Deposit Insurance Corp) coverage to all deposits at savings institutions. Treasury Department staff, the article explains, are making an attempt to figure out if regulators have enough authority under emergency conditions to insure deposits greater than $250K, which is the current limit, without legislative consent.
To be sure, these authorities do not yet think such action necessary, but the runs at several regional banks this March has gotten the wheels turning. According to Bloomberg, there is one legal framework currently under discussion for expanding FDIC coverage that makes use of the Exchange Stabilization Fund.
This fund was created back in the Great Depression era, and has been used in the past to buy and sell currencies and to provide financing when necessary to foreign governments. This is the only pool of money under the full authority of the Secretary of the Treasury, which is a way to get around the Legislative branch of government.
Speaking of the Secretary...
Treasury Secretary Janet Yellen is expected to give the keynote address today (Tuesday) at the American Bankers Association Summit in Washington, DC. Earlier, copies of her address were distributed to the media. Yellen is expected to say, "The steps we took were not focused on aiding specific banks or classes of banks. Our intervention was necessary to protect the broader US banking system. And similar actions could be warranted if smaller institutions suffer deposit runs that pose the risk of contagion."
Madam Secretary will attempt to soothe... "The situation is stabilizing. And the US banking system remains sound. The Fed facility and discount window lending are working as intended to provide liquidity to the banking system. Aggregate deposit outflows from regional banks have stabilized."
Lastly, the Secretary will try to cement a place for regional banks... "Large banks play an important role in our economy, but so do small and mid-sized banks. These banks are heavily engaged in traditional banking services that provide vital credit and financial support to families and small businesses. They also increase competition in the banking sector, and often have specialized knowledge and expertise in the communities they invest in."
Now...
Look at the last part of the first segment above. This (Exchange Stabilization Fund) is the only pool of money under the full authority of the Secretary of the Treasury. Now look at the back half of the first paragraph in my second segment... "Our intervention was necessary to protect the broader US banking system. And similar actions could be warranted if smaller institutions suffer deposit runs that pose the risk of contagion."
Is This Tradeable?
I think so. I entered into long positions in both KeyCorp (KEY) largely because I have traded this name well in my past, and First Republic Bank (FRC) largely because this stock is currently the epicenter of both Janet Yellen's and JPMorgan Chase (JPM) CEO Jamie Dimon's attempts to stabilize the regional US banking sector in aggregate.
My play is that with the support that we know the 11 banks that deposited $30B at First Republic are working on, and with the suggestive words that will be spoken by Secretary Yellen this morning, that the algorithms that control price discovery in 2023 will take over and drive some regional banks in a northerly direction, at least in the short-term.
I have no intention whatsoever to carry these long positions into Wednesday's FOMC policy decision. I am already up small on both of these positions. My goal is to either make 20% (FRC) or 10% (KEY). My panic point is a loss of 8% for both. Whichever comes first.... I am out of here.
These positions are rather smallish (about 1/8) of what I would consider a core investment stake, and are strictly trades. I am not getting married to either one of these, and I don't care if I make my 10% or 20% quickly and the stocks run much further. I just know that I will not tolerate any loss greater than 8%. Ever.
