The economy continues to gain ground, job openings abound, consumer and business confidence are on the upswing, while inflation and interest rates have largely stabilized.
All in all, it’s a highly favorable backdrop for banks, as witnessed by a rising balance in the FDIC insurance fund and a mere two bank failures in 2024, out of more than 4,500 institutions. The industry posted combined net income of $65.4 billion in the quarter ending Sept. 30, the most recent for which information is available, and nearly 93% of banks are profitable.
But still, there’s reason for caution, said Martin Gruenberg, who resigns as chairman of the bank-regulatory Federal Deposit Insurance Corp. at the end of President Biden’s term in January, opening the transition for a new agency chief to be appointed by Donald Trump. Gruenberg has drawn criticism amid complaints the FDIC emerged as a hostile workplace marked by sexual harassment and other misconduct.
In a Jan. 14 talk at the Brookings Institution, Gruenberg reviewed the three most recent banking traumas of the last half century in arguing that many of the same factors that caused so much havoc before could recur.
The first crisis was marked by a slew of failures among banks and thrifts in the early 1980s. The second was the mortgage crisis that brought down more banks and plunged the economy into a deep recession around 2008-2010. Then there was the severe, if shorter-lived, failure of three large regional banks including Silicon Valley Bank, which had offices in Arizona.
“I am struck by how many common threads run through them, even as the specific context and details differ,” he said.
The growing, and worrisome, role of nonbanks
The troublesome factors cited by Gruenberg included interest-rate risks for banks, liquidity risks, too much leverage, inadequate capital, too-rapid growth for some banks, a reliance on high amounts of uninsured deposits and new financial products that weren’t well understood.
Many of the same factors remain prevalent today, including financial institutions that aren’t banks and thus fall outside of their regulatory oversight, with much less transparency and supervision. In some respects, the risks are greater now, Gruenberg said, given that today’s largest banks are bigger, more complex and more deeply intertwined than ever before.
For bank customers and especially depositors, a key takeaway of his discussion reflects the growing role of nonbanks. These entities held $20.5 trillion in assets in the U.S. according to a tally by the Financial Stability Board cited by Gruenberg in a 2023 speech, compared to $23.7 trillion for U.S. banks at the time.
These nonbanks include stock and bond mutual funds, money-market mutual funds, hedge funds, insurance companies and nonbank lenders, many of which have intricate ties to traditional banks.
As for risks, few investors would assume a stock fund comes with the same protections as a bank deposit account, but the differences aren’t always so…
Read More: Outgoing FDIC chief Gruenberg assesses risks to banking industry
