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US banks face more pain and big changes

A dizzying weekend in late April when the country’s biggest banks visited Acquisition The most troubled regional financiers signaled the end of one wave of problems and the beginning of the next.

After appearing in successful bid For First Republic, a coastal wealth financier with $229 billion in assets, JP Morgan Chase After weeks of stomach-churning volatility, CEO Jamie Dimon offered some much needed comforting words for investors: crisis finished. “

But even if it’s covered in dust from a series of events, seizure by the government Many of the failed mid-sized banks are still active by the forces that triggered the regional bank crisis in March.

growing interest price Losses on securities held by banks will grow even further, motivating savers to withdraw cash from their accounts, putting pressure on the main source of income for these companies.commercial loss real estate Such loans are just beginning to register with banks, and their earnings are shrinking further. Regulators will now turn their attention to mid-sized financial institutions. collapse Silicon Valley Bank’s mismanagement has been exposed.

What lies ahead is perhaps the most significant change in the US banking industry since the 2008 financial crisis.many in this country 4,672 More than a dozen executives, advisers and investment bankers interviewed by CNBC said market forces and regulators will push lenders under the umbrella of stronger banks over the next few years.

“There will be a big wave of mergers and acquisitions among smaller banks because they need to scale,” said co-presidents of the top six U.S. banks, who declined to be named, speaking candidly about industry consolidation. “We are the only country in the world with so many banks.”

how did you get here

To understand the roots of the local banking crisis, it may be helpful to examine the following. return The 2008 turmoil was caused by irresponsible lending fueling a housing bubble whose collapse nearly collapsed the global economy.

In the aftermath of previous crises, the world’s largest banks came under intense scrutiny and needed bailouts to avert a crisis. As a result, ultimately $250 billion In assets with the most changes, including year-to-year, stress test And there were stricter rules governing how much loss-absorbing capital must be kept on the balance sheet.

Non-mega banks, on the other hand, were seen as safer and circumvented loosely from federal oversight. In the years since 2008, regional and smaller banks have traded at a premium to their larger peers and those that have shown steady growth by catering to wealthy homeowners and emerging investors. It happened often. First Republic and SVB were rewarded with higher stock prices. But while it wasn’t as complicated as the big banks, it wasn’t necessarily less risky.

SVB’s sudden collapse in March showed how quickly banks can fail and dispel one of the industry’s core assumptions, the so-called “stickiness” of deposits. The low interest rates and bond-buying programs that have characterized post-2008 have flooded banks with cheap sources of funds, coaxing depositors into keeping cash in accounts that pay pittances.

“For at least 15 years, banks have been flooded with deposits and interest rates are low, so it didn’t cost them anything,” he said. Brian Grahama banking industry veteran and co-founder of an advisory firm Claros Group. “Obviously you’ve changed.”

“under stress”

After 10 consecutive rate hikes, banks turned a profit headline The news is similar this year, but depositors are moving their money in search of higher yields and greater security. Today, too-big-to-fail banks with tacit government backing are seen as the safest places to deposit money. Big bank stocks are outperforming local stocks. JPMorgan shares are up 7.6% year-to-date, while the KBW Regional Bank Index is down more than 20%.

This points to one of the lessons of March’s turmoil. Online tools have made it easier to move money, and social media platforms have created a coordinated fear of lenders. Deposits that were in the past considered “sticky” or unlikely to move suddenly became Slippery. As a result, industry funding is more expensive, especially for smaller banks with a high proportion of uninsured deposits.But megabanks are also forced to pay higher fee to hold deposits;

Some of these pressures will become apparent when regional banks report second-quarter results this month.including banks zions and key corp Said Investors noted last month that interest income has fallen short of expectations, prompting Deutsche Bank analyst Matt O’Connor to warn that regional banks could start cutting dividend payments.

JP Morgan will release bank results on Friday.

“The fundamental problem with the regional banking system is that the underlying business model is under stress,” Lazard said. Peter Orzag. “Some of these banks will survive by being buyers rather than targets.

walk injured

Compounding the industry’s dilemma are the expectations of regulators that: increase surveillance It specifically targets banks in the $100 billion to $250 billion range of assets funded by First Republic and SVB.

“There will be more costs going forward that will drive down revenues and squeeze revenues,” he said. Chris Wolfa bank analyst at Fitch who previously worked at the Federal Reserve Bank of New York.

“Whether it’s steel manufacturing or banking, if you have high fixed costs, you need to scale up,” he said. “The incentives for banks to scale up have increased significantly.”

Wolff said competitors will likely overwhelm half of the country’s banks in the next decade.

SVB and the First Republic gave the best results, exodus Deposits fell in March, but other banks were hurt during the turmoil, according to a top investment banker who advises financial institutions. Deposits fell by less than about 10% in the first quarter at most banks, but banks that fell more than that could be in trouble, the bankers said.

“If you’re one of the banks that lost 10% to 20% of your deposits, you’re in trouble,” said the banker, who asked potential customers to remain anonymous. To relieve the pressure, “either you have to raise capital and bleed your balance sheet or sell yourself.”

A third option is to simply wait until the underlying bonds eventually mature and are off bank balance sheets, or until lower interest rates mitigate losses.

But that could take years, exposing banks to the risk of something going wrong, such as an increase in defaults on office loans. This could put some banks in a precarious position without sufficient capital.

“False Calm”

Meanwhile, another veteran financial banker and former banker said banks were already looking to divest assets and businesses to boost capital. goldman sachs Partner. The banker said they are looking to sell their payments, wealth management and fintech businesses.

“A significant number of companies are looking at their balance sheets and trying to think, ‘What do I have that I can sell and get at an attractive price?’” Banks said the house.

But banks are in trouble because the market doesn’t have room to sell more of the lender’s shares, despite declining valuations, he said. Lazard’s Orzag. He said further rate hikes would shy away from institutional investors as they could cause further weakness in the sector.

Orzag called the past few weeks a “false calm” and said it could be crushed if banks report second-quarter results. The industry still faces negative risks. feedback loop Falling stock prices and deposit runs could return, he said.

“All it takes is one or two banks to say, ‘Deposits are down another 20%,’ and suddenly we’re back in a similar scenario,” Orzag said. “Prices skyrocket, which leads to deposit flight, and then bounces back to the stock price.”

near future deals

It will likely take a year or more for the merger to take off in earnest, according to bankers. It absorbs the blow to capital when an acquirer buys a competitor with a hidden bond. Management is also seeking “absolutely clear” signals from regulators regarding the merger after several transactions are completed. scuttled in recent years.

Secretary of Finance era Janet Yellen gave a signal openness On bank mergers, recent Justice Department remarks suggest bigger deal scrutiny Antitrust concerns and influential lawmakers, including senators Elizabeth Warren be against more Bank consolidation.

Once the impasse is lifted, deals are likely to be concentrated in a few groups as banks try to optimize size under the new regime.

Banks that once benefited from having less than $250 billion in assets may lose that advantage and trade more among mid-sized firms. Claros co-founder Graham said other deals would likely create large companies below the regulatory threshold of $100 billion or $10 billion.

Large banks have more resources to meet upcoming regulatory and consumer technology demands, benefiting financial giants such as JPMorgan as they steadily grow earnings despite rising capital requirements is useful for Still, the process doesn’t seem comfortable for sellers.

But a hardship for one bank is an opportunity for another. merged bankis a New York-based institution with assets of $7.8 billion that serves labor unions and nonprofits, and plans to consider buying it once its stock recovers, according to its CFO. Jason Darby.

“Once the currency returns to what we think is a more appropriate level, we will look at the ability to roll up,” Darby said. “As the future unfolds, I think more and more banks will raise their hands and say, ‘We are looking for a strategic partner.’”

Summarize this content to 100 words A dizzying weekend in late April when the country’s biggest banks visited Acquisition The most troubled regional financiers signaled the end of one wave of problems and the beginning of the next.After appearing in successful bid For First Republic, a coastal wealth financier with $229 billion in assets, JP Morgan Chase After weeks of stomach-churning volatility, CEO Jamie Dimon offered some much needed comforting words for investors: crisis finished. “But even if it’s covered in dust from a series of events, seizure by the government Many of the failed mid-sized banks are still active by the forces that triggered the regional bank crisis in March.growing interest price Losses on securities held by banks will grow even further, motivating savers to withdraw cash from their accounts, putting pressure on the main source of income for these companies.commercial loss real estate Such loans are just beginning to register with banks, and their earnings are shrinking further. Regulators will now turn their attention to mid-sized financial institutions. collapse Silicon Valley Bank’s mismanagement has been exposed. What lies ahead is perhaps the most significant change in the US banking industry since the 2008 financial crisis.many in this country 4,672 More than a dozen executives, advisers and investment bankers interviewed by CNBC said market forces and regulators will push lenders under the umbrella of stronger banks over the next few years.“There will be a big wave of mergers and acquisitions among smaller banks because they need to scale,” said co-presidents of the top six U.S. banks, who declined to be named, speaking candidly about industry consolidation. “We are the only country in the world with so many banks.”how did you get hereTo understand the roots of the local banking crisis, it may be helpful to examine the following. return The 2008 turmoil was caused by irresponsible lending fueling a housing bubble whose collapse nearly collapsed the global economy.In the aftermath of previous crises, the world’s largest banks came under intense scrutiny and needed bailouts to avert a crisis. As a result, ultimately $250 billion In assets with the most changes, including year-to-year, stress test And there were stricter rules governing how much loss-absorbing capital must be kept on the balance sheet.Non-mega banks, on the other hand, were seen as safer and circumvented loosely from federal oversight. In the years since 2008, regional and smaller banks have traded at a premium to their larger peers and those that have shown steady growth by catering to wealthy homeowners and emerging investors. It happened often. First Republic and SVB were rewarded with higher stock prices. But while it wasn’t as complicated as the big banks, it wasn’t necessarily less risky.SVB’s sudden collapse in March showed how quickly banks can fail and dispel one of the industry’s core assumptions, the so-called “stickiness” of deposits. The low interest rates and bond-buying programs that have characterized post-2008 have flooded banks with cheap sources of funds, coaxing depositors into keeping cash in accounts that pay pittances.”For at least 15 years, banks have been flooded with deposits and interest rates are low, so it didn’t cost them anything,” he said. Brian Grahama banking industry veteran and co-founder of an advisory firm Claros Group. “Obviously you’ve changed.””under stress”After 10 consecutive rate hikes, banks turned a profit headline The news is similar this year, but depositors are moving their money in search of higher yields and greater security. Today, too-big-to-fail banks with tacit government backing are seen as the safest places to deposit money. Big bank stocks are outperforming local stocks. JPMorgan shares are up 7.6% year-to-date, while the KBW Regional Bank Index is down more than 20%.This points to one of the lessons of March’s turmoil. Online tools have made it easier to move money, and social media platforms have created a coordinated fear of lenders. Deposits that were in the past considered “sticky” or unlikely to move suddenly became Slippery. As a result, industry funding is more expensive, especially for smaller banks with a high proportion of uninsured deposits.But megabanks are also forced to pay higher fee to hold deposits;Some of these pressures will become apparent when regional banks report second-quarter results this month.including banks zions and key corp Said Investors noted last month that interest income has fallen short of expectations, prompting Deutsche Bank analyst Matt O’Connor to warn that regional banks could start cutting dividend payments.JP Morgan will release bank results on Friday.“The fundamental problem with the regional banking system is that the underlying business model is under stress,” Lazard said. Peter Orzag. “Some of these banks will survive by being buyers rather than targets.walk injuredCompounding the industry’s dilemma are the expectations of regulators that: increase surveillance It specifically targets banks in the $100 billion to $250 billion range of assets funded by First Republic and SVB.“There will be more costs going forward that will drive down revenues and squeeze revenues,” he said. Chris Wolfa bank analyst at Fitch who previously worked at the Federal Reserve Bank of New York.”Whether it’s steel manufacturing or banking, if you have high fixed costs, you need to scale up,” he said. “The incentives for banks to scale up have increased significantly.”Wolff said competitors will likely overwhelm half of the country’s banks in the next decade.SVB and the First Republic gave the best results, exodus Deposits fell in March, but other banks were hurt during the turmoil, according to a top investment banker who advises financial institutions. Deposits fell by less than about 10% in the first quarter at most banks, but banks that fell more than that could be in trouble, the bankers said.”If you’re one of the banks that lost 10% to 20% of your deposits, you’re in trouble,” said the banker, who asked potential customers to remain anonymous. To relieve the pressure, “either you have to raise capital and bleed your balance sheet or sell yourself.”A third option is to simply wait until the underlying bonds eventually mature and are off bank balance sheets, or until lower interest rates mitigate losses.But that could take years, exposing banks to the risk of something going wrong, such as an increase in defaults on office loans. This could put some banks in a precarious position without sufficient capital.”False Calm”Meanwhile, another veteran financial banker and former banker said banks were already looking to divest assets and businesses to boost capital. goldman sachs Partner. The banker said they are looking to sell their payments, wealth management and fintech businesses.“A significant number of companies are looking at their balance sheets and trying to think, ‘What do I have that I can sell and get at an attractive price?’” Banks said the house.But banks are in trouble because the market doesn’t have room to sell more of the lender’s shares, despite declining valuations, he said. Lazard’s Orzag. He said further rate hikes would shy away from institutional investors as they could cause further weakness in the sector.Orzag called the past few weeks a “false calm” and said it could be crushed if banks report second-quarter results. The industry still faces negative risks. feedback loop Falling stock prices and deposit runs could return, he said.”All it takes is one or two banks to say, ‘Deposits are down another 20%,’ and suddenly we’re back in a similar scenario,” Orzag said. “Prices skyrocket, which leads to deposit flight, and then bounces back to the stock price.”near future dealsIt will likely take a year or more for the merger to take off in earnest, according to bankers. It absorbs the blow to capital when an acquirer buys a competitor with a hidden bond. Management is also seeking “absolutely clear” signals from regulators regarding the merger after several transactions are completed. scuttled in recent years.Secretary of Finance era Janet Yellen gave a signal openness On bank mergers, recent Justice Department remarks suggest bigger deal scrutiny Antitrust concerns and influential lawmakers, including senators Elizabeth Warren be against more Bank consolidation.Once the impasse is lifted, deals are likely to be concentrated in a few groups as banks try to optimize size under the new regime.Banks that once benefited from having less than $250 billion in assets may lose that advantage and trade more among mid-sized firms. Claros co-founder Graham said other deals would likely create large companies below the regulatory threshold of $100 billion or $10 billion.Large banks have more resources to meet upcoming regulatory and consumer technology demands, benefiting…
https://www.cnbc.com/2023/07/10/american-banks-face-more-pain-huge-shift.html US banks face more pain and big changes

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