On May 1, 2023, the U.S. experienced the second largest bank failure in its history. First Republic was officially closed with the FDIC appointed as Receiver and JPMorgan Chase Bank acquired approximately $229.1B in assets. JPMorgan Chase remains the largest national bank in the US. First Republic Bank is not the first bank to fail this year. In fact, in March 2023 two other large regional banks, Signature Bank and Silicon Valley Bank, also failed. Similar to First Republic, these institutions were acquired by other banks and depositors were able to keep all their deposits. However, citizens should be uneasy about what is happening in the banking industry right now. Today, I want to share my thoughts on the real consequences of bank failures.
What Are Regional Banks?
According to the Federal Reserve, regional banks are financial institutions with total assets between $10B to $100B. These banks, along with community banks ($10B or less in assets) make up the largest number of banks in the U.S. Regional banks play an important role in the banking industry by catering to customers that are usually ignored or not the target of larger banks.
The Real Consequences of the 2023 Bank Failures
Less local banking options to cater to local citizens needs
One of the primary benefits of regional banks is they hold specialized knowledge regarding their regions with the objective of providing services their communities really need. A good example is Silicon Valley Bank. This was the preferred bank for many tech start-ups. Not only was it conveniently located but had services that specifically catered to tech entrepreneurs’ banking needs. Small businesses and start-ups particularly rely on regional banks for banking products that can be tailored to their particular business. With the loss of regional banks, these kinds of services may no longer be available to those that need them most.
Another real consequence of bank failures is citizens lose access to essential banking services. Regional banks usually have many branches throughout the community whereas larger banks have less branches. Citizens rely on having easy access to banks to carry out their personal banking activities.
Consolidation of banking risk
Consolidation of banking risk is another one of the real consequences of bank failures. In 2012, there was a total of 6,089 FDIC insured commercial banks in the US with a total of 85,196 branches. As of 2022 that number dropped by 32% and 16% respectively (FDIC). Another even more startling statistic is that the top 5 banks in the US hold over 50% of the market share by total assets (WalletHub). Right now, you may be asking why is this a bad thing? Well, this concentration of banking power also results in the risk that if these institutions experience significant challenges, then the whole market can be negatively affected. Another consequence of this concentration is that now these five banks have the power to collude to force smaller competitors out of business. They could also just acquire smaller banks thus reducing competition.
Banks become too big to fail
According to the Federal Reserve Bank of Atlanta, the term “too big to fail” is not about a bank’s size. Instead, it is about the impact that a bank’s collapse can have on the country’s financial industry and economy. Having this coveted status means there is an incentive for bank managers to make riskier decisions than they would otherwise make. Additionally, it creates a competitive disparity between banks with this status versus those (usually smaller banks) that do not. For example, depositors are more likely to deposit with larger banks because they are viewed as safe.
Finally, too big to fail banks are more likely to receive capital from investors because they are seen as a safe investment. In these situations, the bank is not seen as safe because of management capabilities but instead because they are protected from collapse. Smaller banks will have to compete harder for whatever resources are left.
I really enjoyed writing this blog about the real consequences of bank failures! Let me know if you’d like to see more of my views on current financial/accounting events. Want to know what would happen if your bank fails? Click [HERE].
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