Odd Lots The Massive Shift Underway in the US Banking System
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Jul 27, 2023 Scott Hildenbrand, Chief Balance Sheet Strategist at Piper Sandler, sheds light on the challenges facing community banks in the U.S. since the SVB crisis. He discusses how depositor sentiment is shifting towards larger institutions and the growing pressure on smaller banks. The conversation delves into the risks of traditional banking models, the necessity for technological adaptation, and the inevitable consolidation of the banking sector. Hildenbrand emphasizes the importance of community relationships and innovative strategies to attract younger customers amidst these changes.
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Deposits No Longer a Hedge
- The traditional banking principle of deposits hedging against rising rates was overturned during the March 2023 banking drama.
- The rapid movement of deposits, amplified by technology and social media, exposed the vulnerability of banks to rapid deposit outflows.
Pandemic Deposit Growth
- During the COVID-19 pandemic, banks experienced significant deposit growth due to a lack of lending opportunities and low interest rates.
- This influx of deposits, coupled with the subsequent rapid increase in interest rates, created instability in the banking sector.
Shifting Demographics and Technology
- Historically, banks profited from the difference between the interest earned on loans and the lower interest paid on deposits.
- The shift in demographics and technology has eroded customer loyalty, making deposits less stable and predictable as a hedge.