The US is currently grappling with the dual challenges of elevated inflation and regional banking crises, causing concerns among investors. These could potentially trigger a period of consolidation in the banking sector, said Murthy Grandhi, an analyst at GlobalData in a report.
“The US is currently grappling with the dual challenges of elevated inflation and regional banking crises, causing concerns among investors. These could potentially trigger a period of consolidation in the banking sector. In March 2023, Silicon Valley Bank was acquired by First Citizens and Signature Bank by Flagstar Bank. Now, First Republic Bank is acquired by JPMorgan Chase,” the expert said.
On May 1, 2023, First Republic Bank, which had more than $200 billion in total assets, collapsed, following the earlier collapses of Silicon Valley Bank and Signature Bank, which serve as a stark reminder of how quickly the effects of risky decisions taken at one bank may impact the whole financial system.
First Republic Bank’s failure was attributed to its business model, which focused on catering to high-net-worth individuals and corporations and offering large loans, including jumbo mortgages, using the deposits it received. With historically low interest rates, the bank hoped to entice customers to expand into more profitable products like wealth management. As a result of this, many of the bank’s accounts had deposits exceeding the federally insured $250,000 limit, the report said.
As of December 31, 2022, the bank had uninsured deposits of $119.5 billion accounting for 67.7% of its total deposits. As of March 9, 2023, the bank’s total deposits were $173.5 billion. Following the collapse of Silicon Valley Bank on March 10, 2023, the bank experienced unprecedented deposit outflows, reaching $102.7 billion by April 21, 2023, representing a 41% outflow.
“In this scenario, other midsize banks such as Comerica, KeyCorp, PacWest, Western Alliance Bank, and Zions Bank came under pressure with their share prices falling by 26.6%, 21.5%, 67.5%, 30.3%, and 33.5%, respectively, between March 13 and May 4, 2023, and by 53%, 49%, 86%, 68.9%, and 58.9%, respectively, year-to-date. Recently, Moody’s also downgraded ratings for Zions Bank, Western Alliance Bank, and Comerica.
“For the fiscal year ended December 31, 2022, Comerica, KeyCorp, PacWest, Western Alliance Bank, and Zions Bank reported uninsured deposits of $45.5 billion, $67.1 billion, $17.8 billion, $29.5 billion, and $38 billion, respectively, accounting for 63.7%, 47.1%, 52.5%, 55%, and 53%, respectively, of their total deposits”, the text added.
“Other banks with notable high uninsured deposits include East West Bank, Synovus, Bank of Hawaii, and First Horizon Bank, with 66.7%, 51.3%, 51.9%, and 47.7%, respectively, of their total deposits.
“This high percentage of uninsured deposits points to the fragility of these banking companies and may result in a similar situation that was created by Silicon Valley Bank and Signature Bank.”
