Rising Interest Rates Prompt Mergers Among US Banks

US Treasury Secretary Janet Yellen has predicted an increase in mergers between banks in the United States, citing the difficulty that many smaller financial institutions face in settling deposits for customers, particularly in light of current high federal interest rates.

In recent times, small banks have been offering higher interest rates on savings to attract customers, but this isn't always possible, particularly with the ongoing moves by the US Federal Reserve (Fed) to raise interest rates. This trend continued after the bankruptcy of Silicon Valley and Signature Bank in March 2023, leaving depositors worried, causing them to shift their investments to more reliable financial institutions. This shift in finances has led to a significant drop in the profits of small banks.

Yellen's prediction seems to support what some analysts believe is the regulator's preparedness for the possibility of a return to financial crises. However, the Secretary of the Treasury stated that she does not anticipate a relapse but warns that low second-quarter US Gross Domestic Product (GDP) might raise the pressure on stock prices, meaning that small-scale banks may consider merging to absorb the pressure.

The potential consolidation of small banks would help to stabilize financial markets. But would also make the wealthiest financial institutions even more dominant.

Last week, the Financial Stability Oversight Council held a meeting to discuss the risks that banks face when lending to commercial real estate projects. The current risks are concentrated in small banks that have extended loans for the construction of office buildings. This real estate group has been significantly affected by the shift of workplaces during the boom period outbreak of COVID-19.

As businesses have become more flexible about their workplaces or switched to teleworking, the value of office buildings has severely declined. Property owners are now at risk of default, putting significant pressure on lenders and exacerbating risks.

Yellen's prediction of an increase in mergers between banks in the US is likely to happen as smaller banks struggle to keep up with interest rates and customer expectations. While this consolidation will help stabilize financial markets, it would make the wealthier financial institutions even more dominant in the sector. Small-scale banks will have to adapt and prepare for the future to avoid further negative consequences.