JP Morgan Chase CEO Jamie Dimon testifies during a Senate Banking, Housing and Urban Affairs Committee hearing on Capitol Hill in Washington, DC, September 22, 2022.

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The whirlwind weekend in late April, when the country’s largest lender took over struggling regional lenders, marked the end of one wave of problems and the beginning of another.

after appearing with win the bid For First Republic, an institution that provides $229 billion in loans to wealthy families along the coast, JPMorgan After weeks of stomach-churning volatility, Chief Executive Jamie Dimon delivered the reassuring words investors crave: “This part of the crisis is over.”

But even when the dust settles, a string of government seizure The factors that sparked the regional banking crisis in March are still in play despite the collapse of mid-sized banks.

Rising rates would exacerbate losses on securities held by banks and prompt savers to withdraw cash from their accounts, squeezing the main way these companies make money. Banks are just starting to suffer losses on commercial real estate and other loans, further squeezing bank profits. Regulators will turn their attention to mid-sized institutions after the failure of a Silicon Valley bank exposed regulatory lapses.

What’s about to happen could be the most significant shift in the US banking landscape since the 2008 financial crisis.many countries 4,672 Over the next few years, whether by market forces or regulators, lenders will be forced into the arms of stronger banks, according to a dozen executives, consultants and investment bankers interviewed by CNBC.

“There will be a massive wave of mergers and acquisitions among the smaller banks because they need to get bigger,” said a co-president of the Big Six U.S. banks, who asked not to be named, referring to industry consolidation. The only country with so many banks.”

How did we get here?

To understand the roots of the regional banking crisis, it is necessary to look at Back in the turmoil of 2008, irresponsible lending fueled a housing bubble whose collapse nearly destroyed the global economy.

The aftermath of the earlier crisis has drawn scrutiny of the world’s largest banks, which need bailouts to avert disaster.As a result, the institution is ultimately $250 billion or more of the most variable assets, including annual stress tests and stricter rules dictating how much loss-absorbing capital must be kept on balance sheets.

Meanwhile, non-big banks are considered safer and subject to less federal oversight. In the years following 2008, regional banks and smaller banks often traded at higher prices than larger banks, while banks that saw steady growth by catering to wealthy homeowners or start-up investors, such as first republic and SVB, both reaping the rewards of rising share prices. But while they are less sophisticated than the big banks, they are not necessarily less risky.

Silicon Valley Bank’s sudden collapse in March showed how quickly banks can collapse, upending one of the industry’s central assumptions: the so-called “stickiness” of deposits. Low interest rates and bond-buying programs after 2008 provided banks with a cheap source of funding and enticed savers to park their cash in accounts paying paltry interest rates.

“For at least 15 years, banks have been well-stocked and interest rates are low, and they haven’t paid anything,” he said. brian grahama banking veteran and co-founder of consulting firm Claros Group. “That has clearly changed.”

‘under pressure’

After 10 consecutive interest rate hikes and the bank’s title Again this year, news emerged that savers had shifted funds in search of higher yields or a greater sense of security. Now, the too-big-to-fail banks, with implicit government backing, are seen as the safest places to park your money. Big banks outperformed regional banks. JPMorgan shares have risen 7.6 percent this year, while the KBW Regional Bank Index has fallen more than 20 percent.

This illustrates one of the lessons of the March riots. Online tools have made it easier to move money, and social media platforms have raised coordination concerns for lenders.Deposits that used to be considered “sticky” or less likely to move suddenly became slip. As a result, funding costs for the industry are higher, especially for smaller banks with a high proportion of uninsured deposits.But even big banks are forced to pay higher interest rate to keep deposits.

Some of that pressure will be apparent as regional banks report their second-quarter results this month.bank includes Zion’s and key company Tell Investors last month signaled lower-than-expected interest income, and Deutsche Bank analyst Matt O’Connor warned that regional banks could start cutting dividend payouts.

JPMorgan releases bank earnings on Friday.

“The fundamental problem with the regional banking system is that its fundamental business model is under pressure,” said Peter Orszag, Lazard’s incoming chief executive. “Some of these banks will survive by being buyers rather than targets. We may see fewer, larger regional banks over time.”

walking injury

Regulators’ expectations complicate the industry’s woes. Strengthen supervision Banks, particularly those with assets between $100 billion and $250 billion, that’s where First Republic and SVB are positioned.

“There’s going to be more costs and that’s going to drive down returns and put pressure on earnings,” he said. Chris WolfeAnalyst at Fitch Bank, formerly at the Federal Reserve Bank of New York.

“Whether it’s steel manufacturing or banking, higher fixed costs require greater scale,” he said. “The incentive for banks to expand has increased significantly.”

Half the country’s banks could be swallowed by rivals in the next decade, Wolf said.

A top investment banker advising financial institutions said that while deposit outflows from SVB and First Republic were worst in March, other banks were hurt during that chaotic period. Deposits at most banks fell by about 10% or less in the first quarter, but those that lost more than that could be in trouble, the banker said.

“If you happen to be one of the banks that is losing 10% to 20% of deposits, then you have a problem,” the banker, speaking on condition of anonymity, said of potential clients. “You’re either going to raise money and let the balance sheet bleed, or you have to sell yourself” to ease the pressure.

A third option is to wait for underwater bonds to eventually mature and be rolled off bank balance sheets, or to wait until interest rates fall to cushion losses.

But that could take years to manifest and puts banks at risk of other problems, such as rising defaults on office loans. This could leave some banks dangerously undercapitalized.

“False Calm”

Orsag called the past few weeks a “false calm” that could be shattered when the bank reports its second-quarter results. He said the industry remained at risk that the negative feedback loop of falling share prices and deposit runs could return.

“You just need one or two banks to say, ‘Deposits are down another 20 percent,’ and all of a sudden, you’re back to something like that,” Orszag said. “There’s a shock to stock prices, which then leads to an outflow of deposits, which then feeds back into stock prices.”

upcoming deals

Multiple bankers said the merger could take a year or more to accelerate. This is because the acquirer absorbs the loss of its own capital when buying a competitor with underwater bonds. Executives are also seeking “complete clarity” from regulators on the integration after several deals closed. Scuttled Last few years.

Although Treasury Secretary Janet Yellen has hinted openness For bank mergers, recent DOJ comments point to bigger deal review Influential lawmakers, including Sen. Elizabeth Warren, push back against antitrust issues more Banking Consolidation.

When the impasse does break, deals are likely to focus on several fronts as banks seek to optimize their size under the new regime.

Banks that once benefited from assets below $250 billion may find those advantages disappear, leading to more deals among mid-sized banks. Klaros co-founder Graham said other deals would create large entities below the $100 billion and $10 billion asset levels, which could be a regulatory threshold.

Larger banks have more resources to comply with upcoming regulations and consumers’ technological demands, advantages that have helped financial giants such as JPMorgan Chase & Co deliver steady earnings growth despite higher capital requirements. Still, the process can be uncomfortable for sellers.

But one bank’s woes mean another’s opportunity. union bankThe New York-based agency, with $7.8 billion in assets serving unions and nonprofits, will consider a buyout after its share price recovers, its chief financial officer said. Jason Darby.

“Once our currency gets back to where we think it’s more appropriate, we’ll look at our ability to pick it up,” Darby said. “I do think that as you go forward, you’ll see more and more banks Raise your hand and say, ‘We’re looking for a strategic partner’.”

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