Banking in Flux: How New Regulations Could Reshape the U.S. Financial Landscape

I’d like to revisit the topic of banking. Last week, I took note of the impressive Q1 2023 profits of the banking sector, which have surged by 33.6% YoY. Notably, the number of profitable banks has grown compared to their less successful counterparts. This happened despite the high-profile bankruptcies of SVB and Signature Bank. The FDIC chief hailed this as a testament to the robust resilience displayed by our country's banking system during these challenging times.

And yet, as we began this week, The Wall Street Journal hinted at an impending trial for the system – a proposed 20% hike in capital requirements set to come in June. This move indicates that regulators remain persistent in their mission to enhance the resilience of the US financial system. Furthermore, it seems the $250 billion balance sheet asset threshold, which attracts the sternest requirements, may be lowered to $100 billion, implicating a broader range of banks.

So, does this mean “something is rotten in the state of Denmark,” or is it a different scenario altogether?

Are such stringent regulations warranted? In my opinion, there's no necessity for them. Firstly, it's the banks primarily driven by commission income that will be hit hardest. Sure, the big players might weather the storm, but the smaller regional banks are bound to bear the brunt of these changes.

Secondly, the heightened cost of services for borrowers is likely to suppress lending volumes, which poses another threat to revenue.

Thirdly, the premiums for operational risks will experience a significant surge, especially if banks are harboring minor business process flaws or cleverly concealed gaps in their risk management strategies. This could eat into their profit margins, or even lead to further bankruptcies.

It appears we're bracing ourselves for a new installment of the banking crisis saga. The latest chapter of the US national debt ceiling tale has come to a close, and the narrative is shifting. We may well witness the downfall of smaller players, their absorption by the bigger fish in the pond, and perhaps even the consolidation of major players themselves.

A daunting prospect? Or merely an intriguing turn of events?

Only time will tell.