What do investors think
Every banking crisis has its own narrative, Nicholas Mangee argues in this commentary. Interestingly, the 2023 banking crisis was not the outcome of systemic risk nor indicated a serious chance of contagion. As a matter of fact, while three regional banks have collapsed this year, other banks have reported strong earnings. Instead, the following narratives are prevalent among investors currently:
- Lax oversight of regional banks and low rates encouraged rapid growth and overleveraging to fund mortgage origination and Treasury acquisition.
- Policymakers and the nation’s largest banks are exacerbating the too-big-too-fail problem. Although regulations prohibit any bank from holding more than ten percent of total deposit liabilities outstanding system-wide, JP Morgan, as a private-sector buyer of last resort, was allowed to eclipse that ceiling by holding over three trillion dollars in assets.
How This Regional Bank Mortgage Lender Crisis is Different
By: Nicholas Mangee – Georgia Southern University
What is next for the banking sector in the U.S
In this commentary, Aswath Damodaran expects the following changes in the banking sector going forward:
- Consolidation: US banking business has consolidated, with the number of banks operating dropping from 14,496 in 1984 to 4,844 in 2022. The 2023 bank failures will accelerate this consolidation, especially as small regional banks, with concentrated deposit bases and loan portfolios, are assimilated into larger banks, with more diverse structure.
- Profitability: as banks consolidate, they will struggle to maintain profitability, and perhaps even see profits drop, as disruptors from fintech and elsewhere eat away at their most profitable segments.
- New accounting rules: the rules on when securities get marked to market might be tightened even though a rule change requiring every investment security to be marked to market will not materialize as such change will create its own dangers.
- Regulatory changes: the 2023 banking crisis highlighted two issues: duration mismatches at banks and deposit stickiness (the speed at which depositors can withdraw their money). Aswath Damodaran expects that forthcoming regulatory changes will try to incorporate both of these issues.
Breach of Trust: Decoding the Banking Crisis
By: Aswath Damodaran – New York University
