Today, Jack speaks with two veteran bankers about bank lending, a key engine of the real economy, and where it is headed. John Toohig, Head of Whole Loan Trading at Raymond James, and Randy Woodward, managing director at Raymond James, join Forward Guidance to share how the rapid surge in interest rates has drastically changed the math for community and regional banks. Now that deposits are no longer free, banks must charge far higher rates on their loans (auto, mortgage, commercial, commercial real estate, etc.) in order to earn a commensurate return. 

Toohig notes that some that banks have NOT yet sufficiently raised their loan yields, to account for this surge in cost of funds. There are two potential reasons for this: first, loan officers are making loans that may not make economic sense because they are incentivized to do so and/or it is to a key client relationship; and second, because many in the banking industry expect that the Federal Reserve will lower interest rates which will put a ceiling on funding costs. However, bank regulators (such as the FDIC) may be in the process of forcing some banks to realized losses. Filmed on June 8, 2023.

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Follow John Toohig on Twitter https://twitter.com/RJWholeLoans

Toohig’s latest edition of “Let’s Talk Loans” on LinkedIn: https://www.linkedin.com/pulse/lets-talk-loans-vol-54-john-toohig/?trackingId=aQYzOQTGTamI1nI%2FRdRp4A%3D%3D

Follow Randy Woodward on Twitter https://twitter.com/TheBondFreak

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Timestamps:

(00:00) Intro

(13:45) Liquidity In Seconday Loan Market

(27:25) Permissionless

(28:03) Commercial Real Estate

(35:22) There's Something Far Scarier Than Higher Borrowing Costs

(41:41) The Giant Flaw In The "Banks Don't Need Deposits Because They Create Deposits" Argument
44:38 Money Is Being Destroyed Right Now, That Means Less Lending"

(51:49) Blockworks Research

(52:49) Bankers Are Paying WAY More Attention To The Fed And Rates (And Nick Timiraos) Than They Were Pre-2020

(57:29) Bank Regulators Are Encouraging Some Banks To Realize Losses

(01:01:15) "Social Media Risk" For Banks

(01:07:13) Why Don't The Banks Just Make Loans At Higher Rates?

(01:10:34 Cracks Are Already Starting To Appear In Subprime Credit

(01:14:37) Why Hasn't Credit Contraction Been Faster, Given These Headwinds?

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Disclaimer: Nothing discussed on Forward Guidance should be considered as investment advice. Please always do your own research & speak to a financial advisor before thinking about, thinking about putting your money into these crazy markets.