Janet Yellen, the Treasury Secretary, stated that more banks are likely to pursue mergers this year due to higher interest rates and recent banking turmoil, which have made it costlier for them to retain depositors.
Following the Federal Reserve’s swift rate hikes last year, some smaller banks have reported paying higher rates on savings accounts. Yellen noted that this trend has continued after the collapses of Silicon Valley Bank and Signature Bank in March, which led depositors from small and midsize banks across the country to flock to larger institutions they deemed less vulnerable. Paying elevated rates for deposits is now eroding the profitability of those banks, according to Yellen.
Her remarks serve as the clearest indication yet that regulators are preparing for a potential resurgence of the industry tumult experienced earlier this year. While Yellen and other officials safeguarded deposits at SVB and Signature Bank and took measures to stabilize the banking system, the rapid rate hikes by the Fed pose a challenge for many banks. Investors fretted about the viability of midsize banks earlier this year, severely affecting their stocks.
Yellen mentioned that she does not anticipate a return to the same level of instability witnessed earlier in the year, but weaker second-quarter earnings could exert pressure on stock prices and potentially prompt some banks to merge.
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“I don’t think it poses a significant threat to the sector, but it is likely that some banks will consider merging,” said Yellen during an interview in Paris, where she is attending meetings on debt and climate initiatives in the developing world.
Janet Yellen refrained from disclosing the banks she is monitoring. Previously, she had acknowledged the possibility of banks seeking to acquire each other.
Bank regulators have recently been hesitant to allow major lenders to merge. However, some banking experts argue that more mergers need to be permitted to bolster confidence in the system. In May, regulators seized First Republic Bank and sold most of its operations to JPMorgan Chase.
Yellen suggested that further consolidation in the banking industry could be beneficial, although she cautioned against the largest banks becoming even larger.
“We certainly don’t want excessive concentration, and we support competition, but that doesn’t mean no mergers,” she explained. “Relative to other countries, the United States has a greater number of banks, to the best of my knowledge.”
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While Yellen does not foresee any decline in earnings leading the industry back into crisis, federal regulators are closely monitoring for signs of trouble. Last week, the Financial Stability Oversight Council, an interagency panel led by Yellen, convened to discuss the banking sector, focusing on the risks banks face in their lending for commercial real estate.
Janet Yellen stated that these risks primarily stem from loans that smaller banks have extended for office buildings.
The shift towards remote work has undermined the value of many office buildings, while higher interest rates have increased the cost of numerous commercial mortgages. Consequently, many landlords are at risk of default, which could, in turn, create difficulties for the smaller banks holding a substantial portion of that debt. Banks hold approximately $270 billion in commercial mortgages that are set to mature this year, as reported by data provider Trepp.
Yellen expressed her belief that defaults on office-building loans will not cause widespread repercussions, although it may lead to additional bank failures. She noted that smaller banks have generally been prudent in their lending practices.
“There may be some issues arising from this, but I think we can manage them,” she remarked. “I don’t see it as a systemic problem.”