Macro Roundup

granted this is FIG bankers literally talking their book but it's an interesting unintended consequences (though I'm sure the FDIC/Fed would prefer more consolidation in retail banking)

"...JPMorgan argues that some midsize U.S. banks -- those with $50 billion in assets or less -- could face a funding problem in coming years as the Fed goes about shrinking its massive balance sheet, according to the 19-page report the New York-based bank has begun sharing with clients....A "deposit is destroyed" if the "Fed does not reinvest," the presentation states....It may also set off a dash for retail deposits, a classification that includes bread-and-butter checking accounts, which banks love because they are especially cheap and stable. Midsize banks will have an especially hard time growing retail deposits by ramping up advertising and investing in branches, according to JPMorgan’s presentation. That’s because they lack the marketing muscle of mega banks such as JPMorgan itself, as well as Wells Fargo & Co., Citigroup Inc., and Bank of America Corp. JPMorgan, like some other banks, offers depositors cash incentives for opening new checking and savings accounts with five-figure balances. About42 percent, or $1.6 trillion, of the new deposits that U.S. banks have amassed since late 2009 have gone to lenders with at least $1 trillion in assets, according to data JPMorgan compiled from regulatory filings and SNL Financial...."

Proxy firm Institutional Shareholders Services Inc. has advised PrivateBancorp stockholders to reject the deal because it undervalues the Chicago-based lender. A shareholder vote is schedule for Friday.

“We have long felt the company needed to improve their funding base to support loan growth,” McEvoy said in the note. “To do so on a standalone basis would be expensive and difficult.”

Selling to CIBC will help PrivateBancorp when interest rates rise, Terry McEvoy, a Stephens Inc. bank analyst, said Monday in a research note to clients.

PrivateBancorp urged investors to vote in favor of its deal with CIBC in a shareholder presentation last month to help “address standalone funding constraints” by giving it access to a large retail deposit base.

Selling to Pinnacle is “an excellent opportunity to really drive some really, serious, dynamic deposit growth to fund this machine over the next several years,” BNC Bancorp Chief Executive Officer Richard Callicutt said in a conference call with analysts in January.

Deposit needs factored into both banks decision’ to seek a partner.

BNC Bancorp

The median for deposits in the form of brokered and listing-service accounts for U.S. banks with at lease $1 billion in assets was 2.5 percent at the end of 2016, according to data from SNL Financial. Those types of funds accounted for more than 20 percent of deposits at BNC Bancorp and PrivateBancorp, according to regulatory filings.

The examples include BNC Bancorp’s $2 billion sale to Pinnacle Financial Partners Inc. and PrivateBancorp Inc.’s roughly $5 billion agreement to sell to Canadian Imperial Bank of Commerce.

A looming push for retail customers may already be spurring dealmaking, JPMorgan says, noting that a handful of bank mergers have involved targets with heavy concentrations of deposits purchased from brokers or acquired through listing services such as QwickRate, both of which are more expensive funding sources than retail accounts.

“The need for retail deposits to fund loan growth, the challenge of organically originating new relationships and the scale required to support technology and brand investments will drive consolidation,” the report states.

Consolidation Driver

Since big banks have the wherewithal to hold onto those gains, smaller ones may have to consider selling or buying rivals to bulk up on retail deposits, JPMorgan argues.

“Large banks are making sizable investments in brand, customer acquisition and technology leading to market share gains,” according to the report.

About 42 percent, or $1.6 trillion, of the new deposits that U.S. banks have amassed since late 2009 have gone to lenders with at least $1 trillion in assets, according to data JPMorgan compiled from regulatory filings and SNL Financial.

Midsize banks will have an especially hard time growing retail deposits by ramping up advertising and investing in branches, according to JPMorgan’s presentation. That’s because they lack the marketing muscle of mega banks such as JPMorgan itself, as well as Wells Fargo & Co., Citigroup Inc., and Bank of America Corp. JPMorgan, like some other banks, offers depositors cash incentives for opening new checking and savings accounts with five-figure balances.

It may also set off a dash for retail deposits, a classification that includes bread-and-butter checking accounts, which banks love because they are especially cheap and stable.

Retail Dash

That could be particularly problematic for banks that rely on deposit products that tend to roll over swiftly, such as brokered accounts bought from third parties, large commercial banking accounts and high-interest savings accounts for wealthy customers.

JPMorgan estimates that a quantitative easing-related deposit-drain could result in loan growth lagging deposit growth by $200 billion to $300 billion a year.

A "deposit is destroyed" if the "Fed does not reinvest," the presentation states.

JPMorgan’s presentation, titled "Core Deposits Strike Back" illustrates how this process will sap bank deposits using the example of a couple who pays off a mortgage that was bundled with other mortgages and sold to the Fed. Right now, when that couple takes that money out of their bank account for that payment, the Fed uses that cash to buy another mortgage bond, recycling it back into the banking system.

Deposit ‘Destroyed’

The Fed is currently holding about $4.5 trillion of securities. The way it will get rid of them is by letting them mature and not buying new ones.

This created some $2.5 trillion in excess bank deposits, according to JPMorgan. It estimates that 60 percent, or $1.5 trillion, of that money will trickle out of banks in the next four to five years if the Fed follows through with recent guidance and begins reversing quantitative easing in December.

The Fed’s bond-buying spree from 2009 to 2014, dubbed quantitative easing, inadvertently left the industry flush with deposits. Investors took money they got selling mortgage-backed bonds and Treasury securities to the Fed and parked it in U.S. retail and commercial bank accounts.

JPMorgan argues that some midsize U.S. banks -- those with $50 billion in assets or less -- could face a funding problem in coming years as the Fed goes about shrinking its massive balance sheet, according to the 19-page report the New York-based bank has begun sharing with clients.

The company’s investment bankers are warning depository clients that they may begin feeling the crunch in December, thanks to a byproduct of how the U.S. Federal Reserve propped up the economy after the financial crisis, according to a copy of a confidential presentation obtained by Bloomberg News and confirmed by a JPMorgan spokesman.

JPMorgan Chase & Co. has some advice for regional banks: A deposit drain is coming, so merge while you can.

JPMorgan Tells Banks to Partner Up as U.S. Deposit Drain Looms

Matthew Monks, "JPMorgan Tells Banks to Partner Up as U.S. Deposit Drain Looms,"Bloomberg, May 8, 2017, https://www.bloomberg.com/news/articles/2017-05-08/jpmorgan-tells-banks-to-partner-up-as-u-s-deposit-drain-looms

Leslie Hook and Tim Bradshaw, "Driverless cars inspire a new gold rush in California," Financial Times, May 24, 2017, https://urldefense.proofpoint.com/v2/url

Driverless cars inspire a new gold rush in California

It is a breezy spring day in Willows, California, and a motley collection of cars is preparing to take on the winding course at the Thunderhill Raceway. But unlike most auto races, this isn’t a test of the skill of the person sitting behind the wheel. These cars are driving themselves. The entrants in the Self Racing Cars challenge range from navigation technology start-ups and component suppliers to budding software companies and students. In a narrow sense, the race is a failure: after two days of practice, most teams never manage to make it around the course fully autonomously. Still, there is electricity in the air. Programmers buzzing from energy drinks make tweaks to their codes while investors stroll in the parking lot to check on their companies. Self-driving cars are the hottest thing in Silicon Valley, and this race is a way for the smallest, boldest start-ups to show their stuff. “You are seeing a Cambrian explosion of different possibilities, as each different start-up explores a slightly different space or path through the problem,” says organiser and investor Joshua Schachter, boldly comparing the proliferation of driverless car start-ups with the appearance of complex animals on earth. Last year there were just three entrants in the race. This year, there are 10 — just one indicator of the youth and the rapid growth of the driverless sector. Entrepreneurs and investors are rushing to cash in on a trend that has already made several fortunes, and autonomous vehicle start-ups seem to pop up almost every day. Investment in the sector reached an all-time high of $750m in the first quarter of this year, according to CB Insights.

But even enthusiasts are beginning to worry that the sector might be overhyped. Carl Bass, one of the competitors in last month’s race and a Silicon Valley veteran, is among them.“There is such a crazy thing going on in the market right now around autonomous vehicles,” he says as he hops into his self-driving go-kart. “It is kind of like if you can spell ‘self-driving’ you can sell it for a billion dollars.”Yet it is not just Silicon Valley money pouring in. The world’s top automakers such as Ford and General Motors have joined Google’s parent Alphabet, Uber and other tech companies in funding research for self-driving technology. For the automakers, autonomous vehicles pose an existential threat. Instead of owning cars, consumers in the driverless age will simply summon a robotic transportation service to their door. One venture capitalist says auto executives have come to him saying they know they are “screwed”, but just want to know when it will happen. This desperation has prompted a string of big acquisitions, which in turn has fuelled the hopes of the fortune-seekers in Silicon Valley. Last year GM paid $1bn for Cruise, a self-driving car start-up, while Uber paid $680m for Otto, an autonomous trucking company that was less than a year old. In March Intel spent $15bn to buy Israel’s Mobileye, which makes self-driving sensors and software.

As in past tech hype cycles, the business model for driverless cars is not clear, nor is the timeline for how long it could take the market to develop. At the moment, driverless cars have nearly mastered highway driving but still struggle in complex urban environments, and there are huge legal and regulatory questions to be worked out. But such details do little to diminish the promise of the technology, say entrepreneurs and investors in the sector. “This is going to be earth-shattering for the industry,” says Sebastian Thrun, one of the pioneers of self-driving cars at Google. “Transportation is a multitrillion dollar industry. I would argue that, given the potential of this technology, we are under-hyping it.”Other driverless tech evangelists echo this view. “This is almost like something that should be a mission of the human species, instead of a company,” says James Wu, chief executive of mapping start-up DeepMap. “It can benefit everybody and save lives.”In the near term, one of the biggest challenges for the sector is a severe talent shortage. People with expertise are in high demand, giving them extraordinary leverage. Instead of taking a job with a salary, they launch start-ups, then sell out to a company that wants to hire them. This lucrative route has come to be known as the “acqui-hire”.

The purchase prices of recent acquisitions work out to “roughly a $10m price tag per person,” says Mr Thrun, who is often referred to as the godfather of self-driving cars. “It is a lot of money.” He hopes the price tag will fall as more engineers gain the necessary skills, noting that the self-driving car seminar he co teaches at Udacity has had more than 25,000 applicants. The most controversial acqui-hire was when Uber snatched up a small trucking start-up, Otto, founded by Anthony Levandowski, a former Google engineer. Mr Levandowski was an early member of Google’s self-driving team, now known as Waymo, earning more than $120m in bonuses for his work.But outside Waymo he was worth even more. Mr Levandowski started discussions with Uber before leaving Waymo; when he founded Otto, it was purchased by Uber for $680m in equity in just six months. (The events that surround Mr Levandowski’s departure are the subject of a lawsuit, which alleges that Uber infringed on Waymo patents and stole trade secrets. Uber has denied wrongdoing).With headline deals like these, investors such as Amy Gu, a partner at venture capital firm Hemi Ventures, fear that the sector may be attracting the wrong type of entrepreneur. “I think a lot of people are attracted to the industry purely by the capital that is flowing in, instead of by their desire to figure out this problem,” she says. While she is still investing in autonomous start-ups, she says she seeks companies that have a revenue model rather than just an exit strategy. Self-driving engineers say the frenzy has complicated life for them too — and poses risks in terms of safety and reputation. US regulators have so far been fairly permissive about testing autonomous vehicles, but many worry that one terrible accident by an overambitious start-up would quickly change the environment. Testing of autonomous vehicles is already legal in more than a dozen states, and federal guidelines were issued last year.

Some of these start-ups operate in a kind of paranoid secrecy, so that their competitors do not know what they are doing, or even who works for them.Zoox, based in Menlo Park in the San Francisco Bay area, has raised hundreds of millions of dollars in venture funding without ever showing its technology or its “robo taxi” design in public. David Liu, founder of self-driving start-up PlusAI, says he has seen rivals try to draw new employees with the promise of a quick acquisition. “You have a couple of guys who worked in Tesla or Apple or Google before, they start a company and expect to be sold in six months,” he explains.This mindset is often accompanied by unfounded marketing claims that, he worries, could damage the credibility of the entire industry.***Automobiles are a heavily regulated industry, and carmakers in Detroit often speak a different language to entrepreneurs in Silicon Valley. Established carmakers are terrified of missing out, but also afraid of damaging their brands by moving too quickly. Start-ups, in turn, can be overly dismissive of the carmakers’ expertise.

A widespread assumption is that as autonomous vehicles become accepted, people will stop buying cars altogether and instead use autonomous transportation fleets that they can summon by smartphone. In the tech world, there are three main contenders working on services like these: Waymo, Uber and Tesla. Tesla has already been pushing the boundaries with intelligent driving assistance in its cars. Waymo and Uber are testing robo-taxis, albeit with a human still sitting in the driver’s seat.It is unclear where the clutch of new autonomous vehicle start-ups will fit in. With no path to the consumer, most are not able to generate revenue, and some are struggling. Several engineers specialising in artificial intelligence, an area that is core to autonomous driving, told the Financial Times they had recently left the sector because of doubts about its viability. “In the actual gold rush, you knew there was gold out there somewhere, and people were able to mine it,” says Josh Hartung, chief executive of Poly-Sync, which makes software for autonomous vehicles.

In the autonomous gold rush, it’s less obvious whether there is any gold there, he says. “There is effectively zero revenue that is being produced by this industry,” he points out. “You’ve got this massive, multi-billion-dollar science project, that’s basically on VC life support, until such a time as somebody ships and makes money.”Even when self-driving technology becomes ready, regulation, public acceptance and developing a viable business model will form barriers to widespread implementation. “I think people have underestimated some of the forces that will resist driverless vehicles,” says Mr Bass. At a time when many politicians are obsessed with saving jobs from robots, a technology that is poised to put millions of drivers out of work has plenty of natural enemies. “Silicon Valley may have underestimated the Teamsters,” he says, referring to the powerful labour union.

Such worries seem almost beside the point at the Self Racing Cars competition. Several attendees compare the race with the Homebrew Computer Club, the hobbyist group where Steve Jobs and Steve Wozniak first came up with their version of the personal computer. Like the advent of the PC, the prize here is potentially vast, promising to revolutionise the way people and goods are transported. “Everybody’s big dream is, I want to be the next million-dollar or billion-dollar, start-up,” says Anthony Navarro, head of the student self-driving car team from Udacity, which had just six weeks to develop the software for itsautonomous car. “There’s opportunities to be your own CEO.”As the sun starts to hang low in the sky at the racetrack, Mr Navarro and other students gather for a pep talk from George Hotz, 27, the founder ofself-driving software start-up Comma.ai. Although they are bleary-eyed from all-night coding sessions, they listen intently. As he addresses the group, it is the words on Mr Hotz’s T-shirt that seem to say it all: “We are gonna be so rich,” reads the slogan on the back, alongside his company logo.