Lately, the financial landscape in the United States of America (US) has been beset by looming uncertainty for banks.
Market volatility, a trend that the banking sector has rarely accommodated, has begun to put pressure on regulators, forcing them to take unprecedented decisions.
This has become abundantly clear as the country’s largest bank has been given permission to expand further, a move that may once again prove necessary.
Banks such as JPMorgan Chase & Co., despite their reputations, have been reluctant to bid to take over troubled banks. This is a testament to the severe impact of the ongoing crisis, as major institutions have been wary of venturing into the complex web woven by failing regional banks.
Ripple effect of US bank failures
An important indicator of this dilemma is the recent bankruptcies of Silicon Valley Bank and First Republic Bank. Both banks were seized by the Federal Deposit Insurance Corp (FDIC), a major banking regulator.
The collapse of these institutions was so rapid that some of the largest US banks did not have time to bid, forcing the FDIC to sell First Republic Bank to JPMorgan as the most profitable option.
This raises questions about the efficiency of the banking system in handling the crisis. Notably, the FDIC has refused to exclude global systemically important banks (G-SIBs) from bidding, attributing the lack of bids to a lack of interest in the asset.
FDIC Chairman Martin Gruenberg has declined to comment on the matter.
Serious impact on the economy.
The volatility of regional banks is more than a concern for the banking sector. They have long been the backbone of the US economy, providing loans to large sections.
However, the recent spate of deposit flight has forced them to cut lending, causing ripples in the economy. Since the crisis began in early March, three US banks have collapsed and shares of others have tumbled, sending the KBW regional banking index down 30%.
The future of these banks remains uncertain due to tightening monetary policy, declining commercial real estate values, and the US debt ceiling debate. Continued stress on regional banks could tip the US economy into recession.
Despite the calm after the initial storm, investors remain cautious. A number of solutions are being proposed, including speeding up bank deal approvals, increasing deposit guarantees and screening investors who anticipate a fall in stocks. However, these options are unproductive or have failed in the past.
As regional banks bow to pressure, they are increasingly dependent on regulators for survival. While regulators have provided temporary solutions such as providing a cash lifeline to meet deposit withdrawals, these measures only address the symptoms and do not provide a long-term solution.
This crisis of confidence has resulted in a vicious cycle of bankruptcy after bankruptcy, thus increasing the pressure on regulators to intervene yet again.
Treasury Secretary Janet Yellen said that the future of US regional banks hangs in the balance. She suggested that earnings pressure could lead to some deals with mid-sized banks, a possibility regulators would welcome.