There will be other dominos that fall, Aswath Damodaran on US banking sector
The US banking crisis, which began with the SVB fallout, posed a major threat to the American economy and also carried the risk of spiralling its effect on other countries’ financial sectors. US Federal Bank intervention ensured that the crisis doesn’t spiral into other sectors of the economy and affected more banks. Valuation guru, Aswath Damodaran, believes that just like the crisis led by SVB, there are more dominos waiting to fall in the US.
In his latest blog, the New York University professor said he believes that “more dominos are waiting to fall in the US banking business”. The concentration of banks, in terms of deposits, will increase, with minute systematic effects, tightened accounting rules and regulators adding duration mismatch and deposit stickiness to the rule books.
“There will be other dominos that fall, bank concentration (not profitability) will rise, systemic effects will stay small, accounting rules on mark to market will be tightened and regulators will add duration mismatch & deposit stickiness to the rule book,” he tweeted, while sharing the link of his blog, on Saturday.
Aswanath Damodaran also explained that the banks that have seen the most growth in deposits over the last five years are also the ones who have faced the greatest market cap loss.
“Breaking down banks based upon deposit growth over the last five years, it is clear that the market cap loss has been greatest at the banks that have seen the most growth in deposits. Easy come, easy go,” he tweeted.
In his blog, the economics expert elaborated on the functioning of banks and threw light upon the factors which lead to the demise of ‘too large to fail’ banks. He also tried to present the aspects which differentiate the current banking crisis from the previous ones.
Comparing the 2023 banking crisis, he said that the SVB-led crisis “looks like a slow motion car wreck” but lacks “systemic consequences of prior crises”.
He opined that the 2023 crisis and similar others left to be unfolded will “be more likely to redistribute wealth across banks than it is to create costs for the rest of the people”. Unlike the previous banking crises, the recent crisis was led by the “search for high growth and a failure to adhere to first principles when it comes to duration mismatches”.
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