Trade Alert: Even More Regional Bank Bets
Taking advantage of today's rally to place more bearish bets.
Revisiting The Banks Most Likely To Go Bust
In a post last week, looked at the regional banks most likely to go bust.
To recap our approach:
Getting The Data
[We started with] the FFIEC (Federal Financial Institutions Examination Council) Central Data Repository's Public Data Distribution web site. The other piece was figuring out which banks had exhausted the Federal Reserve’s new, post Silicon Valley Bank collapse assistance program, The Bank Term Funding Program (BTFP).
As you might imagine, the Federal Reserve isn’t going to advertise which banks have tapped out their lifelines, but as the banking expert explained, there are a couple of hints to look for in the data:
A big increase in “other borrowed money” in Q1. This will likely include loans from the BTFP, or,
An increase in pledged loans or pledged securities in Q1. This will likely be assets that were pledged to the BTFP as collateral for the bank’s loans from the BTFP.
Putting It Together
To build the list, I had my analyst start with all the regional banks in America that are publicly traded and also have options traded on them (since we’re going to bet against them using options). Then I had him indicate which ones had likely exhausted their BTFP resources based on the two hints above. Next, I had him total each bank’s AFS and HTM securities, and determine how much of each was under water, and divide those amounts by each bank’s tier one capital. I’ve embedded the spreadsheet below, so you can see all the data yourself, and following that, I’ve posted a few trades I just opened based on the data. Before we get to that, a few cautions.
After posting that list, I posted put spread trades on three banks from the list. I also mentioned I’d probably buy OTM puts on them in the future. Today, I took advantage of the rally to place orders to buy long puts on the same three banks (as we did with the other three regional banks yesterday).
Details below, but first a note about our thesis that deposit flight to money market funds would continue to put stress on banks’ bottom lines, forcing them to raise deposit rates if they want to stem the “bank walk” (slow motion bank run). So far, that thesis remains intact:
Keep reading with a 7-day free trial
Subscribe to The Portfolio Armor Substack to keep reading this post and get 7 days of free access to the full post archives.