The US banking crisis, which began with the SVB decline, posed a major threat to the US economy and also risked exerting its influence on the financial sectors of other countries. The intervention of the US Federal Bank ensured that the crisis did not spread to other sectors of the economy and affect more banks. Valuation guru, Ashwath Damodaran believes that like the SVB-led crisis, there are more dominoes waiting to fall in the US.
In his latest blog, the New York University professor said he believes “more dominoes waiting to fall” in the US banking business. There will be an increase in the concentration of banks in terms of deposits, with subtle systemic effects, tighter accounting rules and regulators adding term mismatches and deposit stickiness to the rule books.
“There will be other dominoes that fall, bank concentration (not profitability) will increase, systemic effects will remain small, accounting rules on mark to mark will tighten and regulatory rules will add duration mismatches and deposit stickiness,” he tweeted. Sharing the link of your blog on Saturday.
Ashwanath Damodaran also pointed out that the banks which have seen the highest growth in deposits in the last five years are also the ones facing the biggest market cap losses.
“Breaking down banks on the basis of deposit growth over the last five years, it is clear that the market cap loss has been highest in those banks which have seen the highest growth in deposits. Easy come, easy go,” he tweeted Did.
In his blog, the economics expert elaborated on the functioning of banks and highlighted the factors that led to the downfall of ‘too large to fail’ banks. He also tried to present the aspects that differentiate the present banking crisis from the previous ones.
Comparing it to the banking crisis of 2023, he said the SVB-led crisis “looks like a slow-moving car wreck” but lacks the “systemic consequences of prior crises”.
He said that unfolding in the 2023 crisis and others like it “would be more likely to redistribute money to banks than create costs for the rest of us”. Unlike previous banking crises, the recent crisis was led by a “seek for high growth and a failure to follow first principles when the duration is mismatched”.
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