Fostering relationships with local banks has been vital to the lower and middle-income communities in our country. But as necessary bank consolidation has taken shape in the past several years, these long-standing connections have been lost to larger banks taking more share of the market.
Before NYCB acquired Signature Bank’s 40 branches and $38 billion in assets in March 2023 as well as another acquisition in late 2022, it was a small lender that could adhere to a different set of regulatory rules and restrictions. After any bank crosses a certain threshold of assets, however, those operations change.
As of late, its credit rating was downgraded to “junk” and at least 13 brokerages have lowered their price targets for the bank’s stock since the release of the earnings reports, according to Reuters. This has brought attention to the bank as it grapples with the transition and has others worrying about potential problems resurfacing in the coming future.
Other recent quarter losses have followed other premier regional banks such as KeyBank and Citizens Financial Group, who reported profit drops of 90 percent and 70 percent respectively compared to the previous year.
Different can be said about larger, commercial banks like JPMorgan, Citi, Wells Fargo or Bank of America, who collectively earned 11 percent more than the previous year, according to the Wall Street Journal. What hedges the larger institutions against major drops in overall revenue are alternate means of income through other services that they offer such as trading, investment banking and wealth-management businesses.
After being in a high-inflationary environment, regional banks are looking to recover from higher interest rate payments on retained deposits, significant customer withdrawal and exposure to losses in their commercial real estate portfolios.
Although inflation is moving closer to the Fed’s goal of 2 percent, there still lies uncertainty on when the Federal Reserve will begin cutting rates, according to their recent press release.
Dr. Gerald Daniels, associate professor of economics at Howard University, believes that there currently is not as much risk in the banking sector relative to what we have seen before whether or not the value of assets will continue to be affected by the high interest rate environment “depends.”
“It would seem that many banks have adjusted to the high-interest rate environment,” he said. “The Fed has signaled that they’re planning to potentially cut rates or keep them the same at least through 2024, so we don’t see the same level of risk that we did see in the periods where they had these really high-rate hikes.”
Geopolitical tensions are factors that deter our fight against inflation. With major conflicts occurring in Ukraine and the Middle East, and the increasing tensions in Asia, this could be a problem for the Fed moving forward.
The Office of Financial Research published a report in December warning that continued geopolitical conflict has “increased economic uncertainty for advanced foreign economies and exposed U.S financial institutions to greater risk.”
As the new year unfolds and more conflict arises, inflation could persist once again, impacting smaller players. Regional and community banks will feel the effects of lost interest income from decreased lending activity.
Madison Brooks, a junior honors finance major from Dallas, Texas spoke on the effects of consolidation within the banking industry.
“If bigger banks are going to start buying smaller banks it could mean that the policies that customers are used to are going to change,” she said.
When a customer or small business seeks to take out a loan, smaller banks tend to offer more favorable interest rates and may charge smaller fees compared to the bigger banks. It may be harder for middle-income or low-income individuals to borrow from the bigger banks as well.
In many communities, the role of a credit union or regional bank is crucial to families that have built beneficial relationships with the institutions through several generations. Credit unions, however, are unique in that they are much safer for people to put their money into because they are less vulnerable to bank runs or liquidity issues, the same factors that caused the Silicon Valley Bank collapse in March 2023, along with the fall of several other banks.
Data shows that even the largest credit unions with more than $1 billion in assets only have 9 percent of their deposits uninsured, compared to the largest 800 banks in the U.S., who have an average of about 36 percent of their deposits uninsured, according to Fox Business.
Zoë Shelton, a junior finance major from Chevy Chase, Maryland affirms the personal purpose that credit unions serve.
“I personally use a credit union because that’s what my grandma uses, and my mother uses and so that’s what I grew up seeing,” she said. “Those same things that would hurt you in a larger commercial bank may help in a smaller regional bank where relationships matter.”
Copy edited by Alana Matthew