There are more dominoes waiting to fall in the US banking business, with banks that have grown the most in the last few years at the highest risk, according to valuation guru and Professor of Finance at the Stern School of Business at New York University, Aswath Damodaran.
“There will be other dominoes that fall, bank concentration (not profitability) will rise, systemic effects will stay small, accounting rules on the market will be tightened, and regulators will add duration mismatch and deposit stickiness to the rule book,” Damodaran tweeted. .
“But I also believe that unlike 2008, this crisis will be more likely to redistribute wealth across banks than it is to create costs for the rest of us. Unlike 2008, when you could point to risk-seeking behavior on the part of banks as the prime reason for banking failures, this one was triggered by the search for high growth and a failure to adhere to first principles when it comes to duration mismatches, he said in a blogpost.
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Damodaran said the 2023 bank failures will accelerate this consolidation, especially as small regional banks, with concentrated deposit bases and loan portfolios are assimilated into larger banks, with a more diverse structure.
For some, that consolidation is worrisome since it raises the specter of banks facing less competition and thus charging higher prices. I may be naive, but I think that as banks consolidate, they will struggle to maintain profitability, and perhaps even see profits drop, as disruptors from fintech and elsewhere eat away at their most profitable segments. In short, the biggest banks may get bigger, but they may not get more profitable,” he added.