The Bank Panic’s Winners and Losers Are Becoming Clear

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About the author: Brian Graham is a co-founder and partner at Klaros Group, an advisory and investment firm focused on the future of financial services. 

A tsunami of bank information has hit over the last few days and weeks: first quarter earnings, inflows into government money market funds and Treasury bonds, regulatory reports on recent bank failures, enforcement actions, and, of course, the failures and resolutions of Silicon Valley Bank, Signature, and most recently First Republic.  

The cause of this banking crisis could not be simpler. Many banks forgot that interest rates can go up as well as down. When the Federal Reserve increased rates to fight inflation, those banks incurred losses. For most, the losses are a problem, but not existential. But for a handful, such as SVB and First Republic, the losses resulting from poor risk management were large enough to drive them into economic insolvency. Going forward, many banks will need to raise capital to fill the holes in their balance sheets, which could well be painful for existing shareholders. And, while more bank failures can never be ruled out, there probably aren’t a lot more SVBs or First Republics waiting in the wings.

Out of this cacophony, a clear picture is emerging of both the longer-term winners (punch line: the largest banks, in particular

JPMorgan

) and losers (principally regional banks with between $75 billion and $250 billion in assets). 

The biggest and most direct winners are the three banks that put themselves in position to pick up the pieces. First Citizens bought what was left of SVB; its stock nearly doubled. New York Community Bank acquired the remains of Signature; its stock jumped 50%. Over this past weekend, JPMorgan acquired First Republic; despite its mammoth size (First Republic is only about 5% of the combined company assets), JPMorgan’s stock jumped in the wake of its acquisition. It turns out being one of the few banks able to bid in a forced sale under intense time pressure is a recipe for getting a good deal.

Bank failures are simultaneously reshaping the market for deposits. Rising rates had already created incentives for depositors to shift funds out of low yielding checking accounts. The shock of the SVB failure drove companies, foundations, and others with large balances above of the $250,000 FDIC insurance cap to re-examine where they keep their money. Funds are moving both for higher yields and greater safety (to “too big to fail” banks, to fully insured accounts made possible by deposit networks, and to direct investment in Treasuries and government money market mutual funds). Since the SVB failure, industry-wide deposits are down more than $130 billion (even as bank assets are up almost $200 billion in that period), while more than $400 billion of new money has poured into government money market mutual funds.  

Once again, JPMorgan comes out a clear winner. In the first quarter, only JPMorgan and U.S. Bancorp, among the top 35 publicly traded banks, saw an increase in non-interest bearing deposits (such as checking accounts) as large commercial depositors sought safety. The losers from this rapid shift in depositor behavior are the regional banks that have been heavily reliant on such deposits and yet, in the wake of SVB, are not perceived as being “too big to fail.” Every large and regional bank other than JPMorgan and U.S. Bancorp saw significant outflows of non-interest bearing deposits, totalling more than $150 billion. All of them have to replace lost “free money” with higher-cost funding. To be clear, this is a profitability, not solvency, issue. These banks are likely to see a permanent increase in their cost of funds, especially relative to the largest banks.

In addition to deposit shifts, this latest bank crisis—like past crises—will result in political and regulatory fallout. Recall that Congress increased the threshold for stricter regulation in 2018 from $50 billion in assets (as defined in the Dodd-Frank Act in the wake of the global financial crisis) to $250 billion. The biggest banks have been subject to this more intense supervision all along. But each of the three recent bank failures involved banks with assets between $100 and $250 billion. The Federal Reserve report on the SVB failure explicitly recommends lowering the cut-off for closer scrutiny to $100 billion. Regardless of where the new threshold ultimately lands, a much tougher regulatory environment is ahead for some banks.

There really aren’t any winners when regulation increases, though both community banks and the “too big to fail” banks will likely see little change in their respective regulatory burdens. The losers from looming tougher regulation, though, are clear. Regional banks with assets of $75 billion to $250 billion face a very different and more challenging regulatory environment, much more consistent with what the largest banks have faced for years. And the existing disincentive to exceed $250 billion in size will evaporate.

Across the board, JPMorgan is a big winner, while the big losers are those regional banks facing increased funding costs and a much tougher regulatory environment. 

At the end of 2022, there were 29 U.S. banks with assets between $75 billion and $250 billion, with a combined $4.6 trillion in assets. They made up a little more than one-fifth of the entire U.S. banking sector. That number will collapse within about 18 months, resulting in a significant restructuring of the banking industry. Some of these banks will combine to join the ranks of the largest banks, given the disappearance of any disincentive to stay below $250 billion in assets. Some will shrink through the sale of assets and business lines to stay well away from the threshold for stricter regulation. And smaller banks will likely rush to consolidate to offset the high costs of regulation while staying well away from the new regulatory threshold, resulting in a big increase in banks with around $50 billion in assets. 

The millions of consumers and businesses that rely on these banks need to be prepared for significant disruption and change.  

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