Yellen Agrees With Celente: More Banks Will Merge
More banks will merge and the pace of consolidation will rise as the office building bust rolls out.
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More banks will merge this year as their costs rise, operating margins shrink, and other institutions offer higher interest rates to depositors, U.S. treasury secretary Janet Yellen said at last week’s conference in Paris on global debt and climate issues.
We have been predicting a rising number of bank mergers since the mid-March collapse of Signature and Silicon Valley banks.
After the banks imploded, depositors began shifting their money to larger banks they believe are “too big to fail” or to money market funds and other venues that pay as much as 4 percent or more on deposits.
The average interest rate conventional banks pay on savings accounts was 0.25 percent last week, according to Bankrate.com.
Conventional banks are having to raise interest rates they pay on deposits to hang onto their customers, but those higher interest payments are whacking banks’ profitability, Yellen noted.
OPERATION WARP SPEED: OBESITY ADDITION
“Her comments are the clearest sign yet that regulators are bracing for the tumult the industry weathered earlier this year to flare up,” The Wall Street Journal said.
After the banks’ collapse this spring, the treasury department guaranteed all deposits in the failed institutions, not just those that fell within the Federal Deposit Insurance Corp.’s $250,000 limit.
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U.S. small and regional banks still collectively hold more than $500 billion in low-yield treasury securities they bought during the COVID War and have been unable to sell because newer bonds pay better returns.
Now weak second-quarter earnings could drive down banks’ share prices and force more to put themselves up for sale.
“I don’t think it’s a huge threat to the sector, but there probably will be banks that end up wanting to merge,” Yellen told a press briefing.
While mergers could shore up the banking industry’s stability, there remains a danger of the biggest banks becoming even bigger, she noted.
“We certainly don’t want overconcentration,” she added.
Small and mid-size banks hold more than 60 percent of loans against U.S. office real estate, a sector now undergoing a sharp devaluation, as we have reported in “Market Value Plunges for San Francisco Office Buildings” (2 May 2023) and many other articles.
Remote work has forced landlords to slash rents to keep tenants and attract new ones to fill their empty spaces. At the same time, operating costs and interest rates have risen.
As a result, office building owners have begun to give their buildings to their lenders or simply default on their loans.
About $270 billion in commercial real estate loans are coming due this year at a time when a growing number of already-strapped borrowers will need to refinance.
The office property crisis will not create chaos in the U.S. banking industry, although the additional pressure could cause some banks to fail, Yellen said.
TREND FORECAST: Given the pressures on banks described above, the industry is already in a slow-rolling crisis.