The recent tremors in regional banking have reignited a critical debate: how big is too big for banks? While larger institutions appear more insulated from issues like deposit outflows and commercial real estate woes plaguing smaller players, the answer isn't as clear-cut as it seems.
On the surface, consolidation within the banking sector might seem like a path towards stability. Larger banks boast deeper reserves, weathering financial storms easier than their smaller counterparts. However, critics warn of a dangerous trade-off. Increased bank size often translates to a "too big to fail" scenario, placing a tremendous burden on taxpayers if a behemoth falters. Additionally, market concentration can stifle competition, ultimately impacting customer service and loan options.
The pursuit of growth can be a double-edged sword for even established banks. Take New York Community Bancorp (NYCB) as a cautionary tale. This year, NYCB's share price plummeted by 70%, coinciding with a delayed earnings report and leadership shakeup. While NYCB lacks the risky characteristics of banks implicated in the 2023 crisis (e.g., heavy bond exposure and reliance on fickle, uninsured deposits), its rapid expansion raises concerns.
NYCB's recent asset growth – ballooning from $90 billion to over $110 billion within a year – triggered a shift in its regulatory status. This rapid expansion exposed the bank to stricter federal pressure testing, simulating its response to economic shocks. The latest stress test scenarios assume a drastic 40% plunge in commercial real estate prices, highlighting the potential vulnerabilities of aggressive expansion.
NYCB's recent woes extend beyond external factors. Their own internal controls, particularly loan review processes, were flagged for "material weaknesses." This highlights the immense challenge of maintaining robust risk management amidst rapid growth. The bank acknowledged this challenge, vowing to bolster its "risk and compliance framework" under its new leadership.
The implosion of Silicon Valley Bank (SVB) serves as a stark reminder of the dangers of unchecked growth. In a three-year period, SVB's assets more than tripled, fueled by a surge in deposits. This influx of cash, coinciding with a period of low loan demand, led SVB to invest heavily in government bonds. However, the Federal Reserve's post-mortem on SVB's collapse identified a crucial flaw: "core risk-management capacity failed to keep up with rapid asset growth." This underscores the critical need for risk management to evolve alongside bank size.
So, is there a path towards building larger, more stable banks without courting disaster? The Federal Reserve's proposed capital rules aim to establish stricter standards for a wider range of banks. However, current regulations necessitate a "tailored" approach to supervision based on bank size. This could lead to a preference for consolidation, with larger banks acquiring smaller ones. However, such consolidation raises competition concerns, potentially limiting consumer choice in the long run.
