Investing.com - In recent times, the unpredictable nature of the market has compelled banking regulators to make decisions they would typically avoid, such as allowing major US banks to expand even further. This turbulence may force their hand once more.
The Federal Deposit Insurance Corp (FDIC), a primary banking regulator, is one example where this dilemma unfolds. In December 2021, Chairman Martin Gruenberg expressed concerns about increased long-term financial stability risks due to the sale of struggling banks like JPMorgan Chase & Co (NYSE:JPM) during the 2008 financial crisis.
As a result, regulatory bodies became cautious about further consolidation in the industry. When Silicon Valley Bank faced troubles in March and experienced a broader deposit flight for safety reasons, some large US banks were reportedly not encouraged to bid on it by FDIC initially.
However, when First Republic Bank failed just six weeks later, FDIC had no choice but to sell it off to JPMorgan because it was deemed the least costly option for its deposit insurance fund.
An FDIC spokesperson clarified that global systemically important banks weren't excluded from bidding on Silicon Valley Bank; however, delays in setting up data rooms might have hindered their participation. These institutions ultimately chose not to bid due to disinterest in acquiring assets.
A troubled regional banking sector can adversely impact vast segments of the US economy as these institutions provide credit facilities and deposit flights compel them into lending cutbacks. Since early March this year, three American banks have collapsed while shares of others plummeted with a 30% drop observed in Invesco KBW Regional Banking ETF (NASDAQ:KBWR)
Amidst an uncertain economic outlook fueled by tight monetary policies and other factors like falling commercial real estate values or ongoing debates over debt ceilings – continued strain on these institutions could push economies towards recessionary conditions.
Despite an improved market situation since March, investors remain hesitant to consider the crisis resolved. Consequently, regulators and industry experts are contemplating additional measures that could be adopted by Washington to address this ongoing issue.
However, such proposed solutions often lead to undesired outcomes like creating larger banks or encouraging reckless behaviour. Other options, such as restricting short selling practices, have proven ineffective in past scenarios. Additionally, some of these suggestions demand legislative approval – a challenge given the current divided Congress.
This leaves regulators with limited tools at their disposal; while they can help banks maintain sufficient cash reserves for deposit withdrawals during crises of confidence, these methods don't guarantee long-term profitability for lenders.
As one bank fails and another takes its place under scrutiny from the market's perspective – it creates a vicious cycle compelling regulatory bodies into further interventions.
Treasury Secretary Janet Yellen recently stated that although most banks possess adequate liquidity access currently – pressure on earnings might push midsize bank deals forward in future transactions. She believes regulators will likely remain open to exploring those possibilities if necessary.