Billionaire-backed firm raked in profits prior to regional banking crisis
Las Vegas-based Beal Bank USA, part of billionaire Andy Beal’s financial empire, achieved a record year in 2022 just before the regional banking crisis took hold.
According to a Bloomberg report, new data from the Federal Reserve reveals that Beal Bank USA borrowed as much as $4.7 billion from the Fed’s emergency lending facility in the latter half of 2022, with the latest available figures showing the loans were still outstanding as of December 7, 2022. The Fed usually releases the names of borrowers with a two-year delay, providing new insight into the events leading up to the 2023 banking crisis.
While other institutions struggled during the banking turmoil, Beal Bank USA’s fortunes took a different turn. The bank’s net income more than doubled in 2022, reaching $1.2 billion, and it recorded a return on equity above 40%. This performance outstripped that of the top 10 largest US banks, such as JPMorgan Chase, whose returns were considerably lower.
Strategic bet on Treasury securities?
While the exact use of the Fed’s borrowed funds remains unclear, analysts speculate that Beal Bank USA may have borrowed from the discount window at a rate between 2.5% and 3.25%, which was lower than the rising yields on Treasury securities at the time. Beal’s large investment in Treasuries, amounting to $18 billion, could have been funded by the borrowed funds, Bloomberg noted.
In addition to the Fed loans, Beal Bank USA also tapped the Federal Home Loan Banks (FHLBs) for a combined $4.4 billion in 2022. The FHLB program, designed primarily to support mortgage lending, was also used by Beal Bank for investment activities. The use of emergency lending programs like these has sparked discussion over their role in maintaining financial stability, particularly among smaller banks.
Is regulatory oversight needed?
The timing of Beal Bank’s borrowing has raised questions about the condition of the banking sector. Despite high liquidity levels in the system, smaller banks found the Fed’s discount window more attractive in late 2022, as the spread between the benchmark borrowing rates and the discount window rates narrowed. Bill Nelson, chief economist at the Bank Policy Institute, noted that the facility was an option for smaller banks.
“When you look at the gamut of smaller institutions, there’s a lot of them where that’s not such an unattractive rate,” he said in an interview with the Odd Lots in 2023. “Maybe they lost a municipal deposit and need funding for a little while.”
Beal, known for his bold investment strategies, has long been a supporter of president Donald Trump. His investments included high-stakes bets during the California energy crisis and post-9/11 bond purchases.
The surge in borrowing from the Fed’s discount window in late 2022 has raised concerns over the financial health of smaller institutions and contributed to the wave of deposit runs seen in 2023. In response, some experts have called for banks to regularly engage with the discount window to reduce its stigma and ensure liquidity during times of crisis.
“The discount window keeps the banks alive,” said Anat Admati, a finance and economics professor at the Stanford Graduate School of Business, in an interview with Bloomberg. “It is not meant to be where they fund everything.”
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