Smaller banks are shedding depositors and shrinking in size, making them unable to compete with megabanks who are boasting huge profits, according to The Wall Street Journal.
Profits at a number of smaller banks dropped double digits year-over-year in their 2023 third-quarter report, including a 44% drop at KeyCorp, a 32% drop at Citizens Financial and a 28% drop at Truist Financial, according to the WSJ. Megabanks — which include JPMorgan Chase, Bank of America, Wells Fargo and Citigroup — collectively notched around $30 billion in profits for the third quarter of 2023.
Depositors, concerned about the greater financial collapse risk associated with smaller banks, seek incentives to retain their funds rather than transferring them to megabanks, prompting banks to raise their return rates, according to the WSJ. Bigger banks can afford to raise their return rates, but can still offer a lower return while gaining customers.
“When deposits are more dear and they’re more costly, then you say, well, I really don’t want to be funding that,” Bruce Van Saun, chief executive officer at Citizen, told the WSJ.
Following their dismal profits, KeyCorp announced it will be laying off thousands of employees to shrink itself, while Truist said that it will downsize other books with lower returns like it did with its student loan portfolio this summer, according to the WSJ. Citizens announced that it was scaling back its mortgage operation and exiting the auto loan industry.
How do Central Banks get away with inflation? By convincing the public it’s necessary.
A core tool of Keynesian economics is an alleged trade-off between inflation and growth. The punchline is if you want an economy to grow, you have to print money.
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— Peter St Onge, Ph.D. (@profstonge) October 21, 2023
The Federal Reserve has raised rates to a range of 5.25% and 5.50% in an attempt to tame inflation, with the hike in rates leading banks to charge more on loans but pay back more on deposits, according to the WSJ. The inflation rate was 3.7% in August and has further incentivized consumers to find higher yield savings to keep up.
The banking sector is still reeling from the effects of a series of bank runs earlier this year that started with a meltdown at Silicon Valley Bank and ended with the collapse of First Republic Bank, raising the alarm for the whole industry about a possible total collapse. Federal regulators ultimately seized the failed banks and paid out depositors in an attempt to stop the bank run.
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