© Reuters. New turmoil on the way?Yellen warns more banks may seek mergers this year
News from the Financial Associated Press, June 25 (edited by Xia Junxiong)Although the industry crisis triggered by the failure of the Silicon Valley bank has temporarily come to an end, regulators are already preparing for another outbreak of banking turmoil in the second half of the year. U.S. Treasury Secretary Janet Yellen has warned that more banks are likely to seek mergers this year as the Federal Reserve raises interest rates and industry turmoil in the first half of the year.
Since March last year, the Federal Reserve has raised interest rates by 500 basis points, raising the target range of the federal funds rate to 5%-5.25%. Some smaller banks say they are paying more interest on savings accounts after the Federal Reserve sharply raised interest rates.
After Silicon Valley Bank and Signature Bank collapsed in March this year, depositors at small and medium-sized banks across the United States have shifted their deposits to large institutions. Yellen pointed out,This trend has continued, and the profitability of small and medium-sized banks has declined due to the high interest rate environment.
Yellen said she doesn’t expect a repeat of the instability seen in March, but the drop in earnings could weigh on stock prices and could prompt mergers at some banks.
Yellen, who did not name the banks she is eyeing, has previously said some banks may be looking for acquisition opportunities.
Fed Chairman Jerome Powell has previously said that policymakers don’t want to see large-scale acquisitions by big banks, but JPMorgan Chase’s acquisition of the failed First Republic Bank was an exception that also brought good results.
Some banking experts say regulators should allow more consolidation to boost market confidence in the financial system.
Yellen said: “We certainly don’t want excessive concentration, we support competition, but that doesn’t mean that mergers are not allowed. Relatively speaking, the United States has more banks than almost any country I know of.”
Commercial Real Estate Loan Risk
While Yellen doesn’t expect falling profits to lead the banking industry back into crisis, federal regulators are watching for signs of possible trouble.
The Financial Stability Oversight Council, led by Yellen, met last week to discuss banking issues, focusing on the risks banks face in lending to commercial real estate. Those risks, Yellen noted, are concentrated in loans made by small banks for office buildings.
The spread of telecommuting, fueled by the pandemic, has sapped the value of office buildings, while rising interest rates have increased the cost of commercial mortgages. That puts the owners of many buildings at risk of default, which could spell trouble for smaller banks that hold large amounts of such debt. About $270 billion in commercial mortgages (held by banks) are due this year, according to data provider Trepp.
Yellen said she did not expect a widespread impact from defaults on commercial real estate loans, but could lead to more bank failures.