The year 2023 has indeed been tumultuous for the U.S. banking industry, marked by the collapse of three major banks and the ongoing ‘great consolidation’ narrative. A closer examination of the reasons and consequences of these developments is crucial for understanding the future of the sector.
Historical data portrays a continuously dropping number of banks since 1920, from around 31,000 banks in 1920 to less than 26,000 banks in 1929. Nowadays, fewer than 4,160 banks remain operational, with the top ten holding more than 54% of FDIC-insured deposits. The four largest banks alone report $211.5 billion in unrealized losses, further stressing the bleak outlook for the industry.
Bank failures such as those of First Republic Bank, Silicon Valley Bank, and Signature Bank have led to massive costs for the Federal Deposit Insurance Corporation (FDIC). With the combined assets of these banks surpassing the top 25 banks that crumbled in 2008, the sector grapples with severe consequences beyond the institutions themselves. Other banks, like Pacwest Bancorp and Western Alliance Bancorp, face tremendous losses in market capitalization value and share price drops, indicating that the problem is not confined to a few large players.
One potential explanation for these difficulties is the U.S. banks’ decreasing profitability, especially those providing mortgages. These institutions reportedly lost an average of $301 for every loan originated in 2022, down 87% from the $2,339 profit per loan in 2021. Another contributing factor is the consequence of the Federal Reserve’s actions. The consecutive rate hikes have resulted in an inverted yield curve, where 10-year and 2-year treasury bonds in the U.S. have switched places, ultimately hurting banks with substantial reliance on long-term bonds.
Amidst growing challenges, uncertainties, and financial losses, the U.S. banking industry struggles to find a stable footing. On one hand, the consolidation of banks and their growing size might signal resilience and the ability to weather economic storms. On the other hand, the sector’s struggles pose questions about its long-term sustainability and capacity to support the broader economy. Observers might wonder whether this consolidation is truly the industry’s salvation, or rather a sign of deeper systemic issues that must be addressed.
As the debate unfolds, it is vital for stakeholders to consider the various factors at play, from the impact of central bank decisions to the consequences of market dynamics and bank-specific policies. Only with a comprehensive understanding can the industry and regulators navigate the challenges and uncertainties that lie ahead.
Source: news.bitcoin.com
