The Never-Ending Crisis of U.S. Regional Banks

The banking crisis of spring 2023 was marked, first and foremost, by the failure of three US regional banks. These types of banks, which are all the more vulnerable to market conditions and are not systemic, are still experiencing financial difficulties that could lead to further bankruptcies. The gigantic and singular power given by the American public authorities to the largest banking and financial establishments can only exacerbate this situation.

The times ahead are likely to be turbulent for US regional banks. After a series of bankruptcies at the start of 2023, and the downgrading of several banks by various rating agencies, their profits have continued to deteriorate. Their results for the last quarter of 2023 bear witness to this. These include KeyBank, down 90% year-on-year, Citizens Financial Group, down 70%, and PNC Financial Services, down over 40%. Many of them are falling on the stock market. For example, the US regional bank New York Community Bank, which had bought Signature Bank when it went bankrupt last spring, saw its share price fall by 40% after the publication of its results. These banks, described as "regional" in terms of their financial weight, with assets worth between $10 and $100 billion, are particularly dependent on the economic climate.

The fall in their profits is primarily the result of interest rate hikes by the US Federal Reserve. For the past two years, these increases have led to a depreciation in the value of the bonds they hold on their balance sheets (particularly government bonds, which remain highly liquid), and heavy losses that have resulted in a flight of deposits to the largest banks. These capital outflows are exacerbated by the absence of deposit guarantees at these regional banks, and also by the yields offered, which remain lower overall than at other establishments. What's more, the digitization of payment methods and the emergence of instant payment systems are intensifying this phenomenon, as demonstrated by the case of Silicon Valley Bank. It went bankrupt in just ten hours, after $42 billion in withdrawals by its depositors, leading to a flight of liquidity to banks with a guarantee of support whatever the cost by the US government, such as JP Morgan or Bank of America (whose profits, incidentally, reached record highs in the last quarter of 2023).

To counteract this situation, in a competitive banking environment and increased household demand for high yields in the face of inflation, regional banks are forced to increase the interest they offer. This comes at a very costly price, impacting their profits. This is all the more true given that the composition of their revenues, which are derived more from customer deposits than systemic banks, forces them to continually increase the yields they offer. 

Their high exposure to commercial real estate (around four to five times greater than the largest banks) exacerbates this situation, as the sector is in dire straits. In the U.S., commercial real estate prices have fallen by 11% since March 2022, the largest drop ever seen during a monetary tightening cycle. And there's every reason to believe that this situation will continue as, on the one hand, remote working attracts more and more employees (leaving offices unoccupied), and on the other, as $1.2 trillion of commercial real estate debt matures by 2026 in the US, while interest rates are set to remain high for several years and the default rate continues to rise.

At the same time, the U.S. economic situation, marked by a slowdown in economic growth to 3.3% in the final quarter of 2023, is also having a major impact on the results of regional banks. The more than 30% rise in bankruptcies in the US between 2022 and 2023, and the increasing number of defaults, are prompting them to save more than before. And the emergence of new regulations is exacerbating this phenomenon, as the FDIC (the organization that manages the country's deposit guarantee fund) requires banks to increase their reserves in order to pay fees to compensate uninsured depositors. These new regulations, linked to the modification of the credit loss model, now take into account the disruptive context of high interest rates and future uncertainties based on forecasts. To avoid the same scenario as in March 2023, judged with hindsight as one of the worst banking crises in modern American history, with, in terms of assets, three bankruptcies larger than the twenty-five that took place in 2007-2008, American supervisory bodies are seeking to take the necessary precautions. But these measures ignore the long-term trends that have made these banks, now as then, more vulnerable than ever.

The devitalization of regional banks is above all linked to the monetary policies that have succeeded one another over the last few decades, always favoring the richest (whatever their activity and usefulness), both from the point of view of households and companies, banks in the first instance. Successive cuts in interest rates and abundant liquidity have accentuated the main consequence of the debt-system: the concentration of wealth. By extension, power has been concentrated in the hands of a minority of players, enabling them to take ever greater risks to the detriment of others. This structural inequality has constantly enabled the biggest banks to buy up smaller, very fragile banks for token amounts, as demonstrated by JP Morgan's takeover of First Republic Bank and First Citizens Bank's takeover of Silicon Valley Bank. Since 2008, the number of banks in the United States has fallen by around 40%, and by over 80% since 1980.

Since money is nothing other than trust, which is concentrated and exchanged, it moves to the largest banks (which will be the first to use the central bank's digital dollar when it is introduced in the coming years).

Against this backdrop, the risk of bankruptcy is growing for many regional banks. The fall in their profits in the final quarter of 2023 raises the prospect of a similar or even more tragic episode than that of last March. All the more so, if loan demand falls further as a result of rising interest rates, their profits will fall accordingly. The deterioration in economic activity and the threat of a recession in the United States over the coming year are also prompting banks to select and restrict their customers to avoid a cascade of defaults that would make them even more vulnerable. Despite possible rate cuts by the Fed, the pressures they face today will not go away but, on the contrary, intensify in an uncertain global environment.

Faced with this situation, public authorities would do well to decentralize the banking system to ensure the necessary stability and sustainability. As a first step, they should give more power not only to the regional banks, but also to the smallest banks, which make a major contribution to the real economy, distributing nearly 40% of the country's total loans. This requires not only financial support, but also the creation and expansion of new intermediary banks and savings banks in every US state. At the same time, this transition must be accompanied by political measures aimed at forcing the largest banks to finance genuinely useful and productive activities, and penalizing destructive investments. Last but not least, this decentralization can only be sustained by a profound change in monetary policy, with a gradual liberation from the debt system and the evils it generates, and a return to limited money creation that continually stimulates trade.

If nothing is done in this area, then the status quo will continue to naturally concentrate wealth and power in the hands of a minority of banks, which will end up distributing credit only to the winners of this same system. In 2023, for example, the systemic bank Goldman Sachs stopped lending to so-called "ordinary" consumers in order to increase lending (+12% year-on-year) to its private clients, who hold an average of $60 million with the bank. In this way, inequalities will continue to grow until, as history has always shown, they lead to the most tragic disasters.