After the failures of Silicon Valley Bank in March, behemoths such as JPMorgan Chase attracted deposits despite paying minimal interest. Many small and medium-sized banks did not fare so well
More banks were due to report earnings after we published this leader. But the market has already made a judgment: America’s banks are worth only about their combined book value, having traded at nearly a 40% premium at the start of the year. The likely result of their low valuations, combined with a landscape in which size matters, is a tried-and-tested response to banking crises over the past four decades: consolidation.
America has 4,700 banks and savings institutions, or one for every 71,000 residents. To observers in the, which has only one bank for every 85,000 people, that seems excessive. Yet it is a historical low: in 1984, when comparable data begin and the population was much smaller, there were nearly four times as many institutions. Since then the industry has seen almost continuous consolidation.
At the same time, smaller banks are at risk of losing the regulatory advantages they now enjoy. When calculating their regulatory capital, banks with less than $700bn in assets typically do not have to mark to market even the securities that they class as “available for sale” and which are meant to be a source of quick cash in an emergency. Those smaller than $250bn are exempted from the strictest liquidity rules, stress tests and failure planning.
The most important changes to the market’s structure are likely to be among banks which are close to significant regulatory thresholds. There are 20 banks which are between $100bn and $250bn in size. If the penalty for crossing the $250bn threshold is reduced, many may find it advantageous to merge. Doing so would allow them to spread the growing costs of complying with regulation over a bigger business, while making it even more likely that their depositors would be bailed out in a crisis.
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