In terms of drama, banks roared into 2023 like a lion, with three of the biggest failures ever. With a resilient economy, a continued moderation of interest rates and perhaps a bit of luck, the industry seems likely to exit 2023 like a lamb.
That would be good for consumers and businesses that rely on banks for all sorts of monetary transactions, loans, investments and jobs. After the rough start to the year, most banks have stuck to their knitting, grinding out good, if not great, performance despite a slowing economy and shift to higher interest rates.
No banks have failed after the demise of Silicon Valley Bank, Signature Bank and First Republic Bank over a rocky stretch from March to May. For the most part, profitability and many other indicators remain solid.
A recession likely would drive a cascade of business failures, loan defaults and credit contraction, greatly weakening the banking system. Yet there are few signs of pronounced economic softness now. A panel of economists assembled by the American Bankers Association recently concluded in a Sept. 11 update that a recession doesn't appear likely for at least a few more quarters.
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Most banks profitable and healthy
The banking industry's vital signs are solid. The more than 4,600 banks tracked by the Federal Deposit Insurance Corp. reported $150 billion in combined net income over the first half of 2023, with nearly 96% of those companies profitable — a far cry from the 69.2% profitability rate in 2009, during the depths of the Great Recession.
The number of banks considered by the FDIC to be problems stood at 43 at midyear, among the lowest readings in recent years.
That's less than 1% of the 4,645 banks covered by the FDIC's deposit insurance fund. At the recessionary peak in 2010, 157 banks went under, straining the finances of the fund, which insures accounts up to at least $250,000 per depositor.
Banks are generating a 3.3% average “net interest margin,” or spread, between what they earn on loans and pay on deposits. That key metric is in line with the trend of recent years and often widens a bit as interest rates rise.
The ABA committee of 14 chief economists from some of North America’s largest banks sees economic growth slowing from 2.1% annualized over the first three quarters of 2023 to less than 1% annualized in coming quarters before perking up in the latter part of 2024.
While the economists aren’t predicting a recession, they said a mild downturn could be sparked by the delayed impact of Federal Reserve monetary tightening, less credit availability or other threats such as a prolonged government shutdown.