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

Drew Angerer | Getty Images

A stormy weekend in late April, which saw the country’s largest bank take over its most troubled regional lender, marked the end of one bout of trouble – and the beginning of another.

After appearing with try to win For First Republic, the $229 billion lender to wealthy coastal families, c. B. Morgan Chase Chief Executive Jamie Dimon delivered the soothing words investors crave after weeks of turbulent volatility: “This part of the crisis is over.”

But even when the dust settles from a string Government seizures From failing mid-sized banks, the forces that sparked the regional banking crisis in March are still at play.

Rising interest rates will deepen losses on securities held by banks and spur savers to withdraw money from accounts, squeezing the main way these companies make money. Losses on commercial real estate and other loans began to be recorded for banks, further shrinking their bottom line. Regulators will set their sights on mid-sized institutions after the collapse of the Silicon Valley bank exposed supervisory loopholes.

What’s ahead is likely to be the most significant shift in the US banking landscape since the 2008 financial crisis. Many of the country 4,672 Lenders will be forced into the arms of stronger banks over the next few years, either by market forces or regulators, according to dozens of executives, advisors and investment bankers who spoke to CNBC.

“You’re going to have a huge wave of M&A among the smaller banks because they need to get bigger,” said the co-chairman of one of the six big US banks who asked not to be identified speaking candidly about industrial consolidation. “We are the only country in the world that has so many banks.”

How did we get here?

To understand the roots of the regional banking crisis, it is helpful to look Back to the turmoil of 2008, triggered by the irresponsible lending that fueled a housing bubble whose collapse nearly toppled the global economy.

The fallout from that earlier crisis brought the world’s largest banks into scrutiny, which needed bailouts to avert disaster. As a result, he was eventually with the institutions $250 billion or more in assets that have seen the most changes, including annual stress tests and stricter rules governing how much loss-absorbing capital they have to keep on their balance sheets.

Meanwhile, non-giant banks were seen as safer and avoided with less federal oversight. In the years after 2008, regional and smaller banks often traded at a premium over their larger peers, and banks that have shown steady growth by catering to wealthy homeowners or entry-level investors, such as The first republic and SVB, were rewarded by higher stock prices. But while they were less complex than the giant banks, they weren’t necessarily any less dangerous.

The sudden collapse of the SVB in March showed just how quickly a bank could go bust, dispelling one of the industry’s core assumptions: the so-called “persistence” of deposits. The low interest rates and bond-buying programs that defined the post-2008 years flooded banks with a cheap source of financing and prompted depositors to leave cash parked in accounts that paid meager rates.

“For at least 15 years, banks have been overwhelmed with deposits and low interest rates that cost them nothing,” he said. Brian GrahamHe is a banking expert and co-founder of a consulting firm Clarus Group. “Obviously, that has changed.”

‘under pressure’

After 10 consecutive price increases and with banks doing work the address Again this year, depositors moved money in search of higher returns or greater security. Now it is the too-big-to-fail banks, with their tacit government support, that are seen as the safest place for money to stop. Large bank stocks have outperformed Regionals. JPMorgan shares are up 7.6% this year, while the KBW regional index of banks is down more than 20%.

This illustrates one of the lessons of the March turmoil. Online tools have made moving money easier, and social media platforms have led to coordinated concerns about lenders. Deposits that were once considered “sticky,” or unlikely to move, are suddenly slippery. As a result, industry financing has become more expensive, especially for smaller banks that have a higher proportion of uninsured deposits. But even the big banks were forced to pay up higher rates to hold deposits.

Some of that pressure will be felt as regional banks report second-quarter results this month. Including banks Zion And KeyCorp Tell Last month, investors said interest yields were lower than expected, and Deutsche Bank analyst Matt O’Connor warned that regional banks may start cutting dividends.

JPMorgan begins earnings for the bank on Friday.

“The fundamental problem with the regional banking system is that the core business model is under pressure,” said Peter Orsaj, Lazard’s incoming CEO. “Some of these banks will survive by being the buyer rather than the target. We could see over time fewer, larger regionals.”

walking wounded

Adding to the dilemma for the industry is the expectation that regulators will tighten control of banks, particularly those in the $100 billion to $250 billion asset range, which is where First Republic and SVB have identified.

He said, “There will be a lot of costs due to lower pipelines, which will reduce returns and put pressure on profits.” Chris Wolfa Fitch Banking Analyst who previously worked at the Federal Reserve Bank of New York.

“Higher fixed costs require greater scale, whether you’re in the steel industry or banking,” he said. “The incentives for banks to expand have risen materially.”

Half of the country’s banks are likely to be swallowed up by competitors, Wolf said, in the next decade.

While SVB and First Republic saw the largest exodus of deposits in March, other banks were hit in that chaotic period, according to a senior investment banker who advises financial institutions. Most banks saw deposits drop in the first quarter below about 10%, the banker said, but those that lost more than that could be troubled.

“If you are a bank that has lost 10% to 20% of deposits, you have problems,” said the banker, who asked not to be identified as he spoke of potential clients. “You either have to raise capital and destroy your balance sheet or you have to sell yourself” to relieve pressure.

A third option is simply to wait for underwater bonds to eventually mature and pull down banks’ balance sheets — or until lower interest rates mitigate losses.

But that could take years to finish, and puts banks at risk of something else going wrong, like rising defaults on office loans. This may put some banks in the critical position of not having enough capital.

False calm

Orszag has referred to the past few weeks as a “false calm” that could be shattered when banks report second-quarter results. He said the industry still faced the risk of a negative feedback loop recurring due to falling stock prices and an influx of deposits.

“All you need is one or two banks to say deposits are down another 20% and all of a sudden you’re back to similar scenarios,” Orszaj said. “The pound on stock prices, which then feeds into the flight of deposits, which then feeds into stock prices.”

Deals on the horizon

Several bankers said it would take perhaps a year or more to ramp up mergers. This is because acquirers will absorb the blows of their capital when taking over competitors with underwater links. Executives are also looking for a “crystal clear” signal from regulators about consolidation after several deals fall In the last years.

While Treasury Secretary Janet Yellen indicated that openness For bank mergers, recent notes from the Justice Department point to an even bigger deal audit On antitrust concerns, influential lawmakers including Senator Elizabeth Warren disagree more banking consolidation.

When the deadlock breaks, deals are likely to stack in several arcs as banks seek to improve their size in the new system.

Banks that benefited from assets of less than $250 billion may find those benefits forfeited, leading to more deals between medium-sized lenders. Other deals will create combined entities of less than $100 billion and $10 billion in asset levels, which are likely regulatory thresholds, according to Klaros co-founder Graham.

Larger banks have more resources to comply with upcoming regulations and consumer technology demands, advantages that have helped financial giants including JPMorgan steadily increase profits despite higher capital requirements. However, the process is unlikely to be comfortable for sellers.

But distress for one bank means opportunity for the other. merged banka New York-based corporation with $7.8 billion in assets that caters to unions and nonprofits, will consider acquisitions after its share price recovers, according to the chief financial officer. Jason Darby.

“Once our currency is back to a place where we feel it is more appropriate, we will take a look at our tolerance,” Darby said. “I think you will see more and more banks raise their hands and say, ‘We are looking for strategic partners as the future develops.'”

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