The future of banking stability
Following recent bank failures – including Silicon Valley Bank (SVB) in March, and more recently JPMorgan Chase’s bailout of First Republic Bank – serious questions have been raised about the stability of the global financial system. In many of the cases, rising inflation had put increased pressure on the banks’ balance sheets, and large amounts of customer withdrawals proved to be the final nail in the coffin.
It is a difficult time for businesses – not just for those with deposits or loans under pressure or banks that are struggling. So what does the banking landscape look like in the wake of these failures and what is the outlook for banking M&A activity.
We asked Peter Davis, EY Americas Financial Services Markets & Solutions Leader; John Walsh, EY Americas Banking and Capital Markets Leader; plus Sid Khosla, EY Americas Financial Services Strategy and Transactions Managing Partner for their perspective.
Where it has gone wrong, regulators and other banks have stepped in fairly quickly to protect customers. Is everything back to normal now or are you still seeing ongoing issues as a result of recent bank failures?
Peter Davis (PD): We still see increased risk in the market. While the focus has been on deposits and balance sheet management, we are now seeing a shift in focus to potential credit losses.
What are the wider implications of the SVB, Signature and First Republic collapses on the banking market?
PS: The rapid bank failures will redefine crisis management playbooks, with response times reduced from days to hours.
The rapid bank failures are likely to accelerate the trend of bank consolidation, as customers balance personal services with security in times of significant market stress.
For large regional banks, we can expect adoption of the capital, liquidity and robustness requirements that were previously reserved for the largest banks.
Do you think we are over the worst or should we still prepare for more volatility?
PS: We do not yet fully understand the consequences of the rapid rise in interest rates. Significant unrealized collateral losses combined with potentially increasing credit losses and continued deposit outflows could put much greater pressure on local and regional banks.
In an environment rich in real-time information, new stresses can quickly escalate into a market crisis. Companies are alert to potential stress points and changes in market sentiment.
