Days after the third bank collapsed in America, valuation guru Aswath Damodaran on Saturday said that there were more dominos waiting to fall in the country’s banking business.
The banking crisis, which began in March with the fall of Silicon Valley Bank, is not over yet, as several regional banks are facing the specter of rapid withdrawals and share prices crash.
Just days ago, First Republic Bank collapsed and was taken over by JPMorgan.
“I do believe that there are more dominos waiting to fall in the US banking business, with banks that have grown the most in the last few years at the most risk,” said Damodaran, who is also a professor of finance at the Stern School of Business at New York University. “But I also believe that unlike 2008, this crisis will be more likely to redistribute wealth across banks than it is to create costs for the rest of us.”
Damodaran said as Silicon Valley, Signature Bank, and First Republic have fallen, the 2023 banking crisis looks like a slow-motion car wreck but without the systemic consequences of prior crises.
The professor added that the market reaction to the current banking crisis has been sanguine, with the overall market not missing a step and the damage restricted to banks – and within banks, more to regional than national banks.
He said the conventional wisdom that market cap losses have been greater at smaller banks does not seem to hold up to scrutiny, since percentage losses have been greatest at the largest banks.
Breaking down banks based on deposit growth over the last five years, he said, it was clear that the market cap loss has been greatest at the banks that have seen the most growth in deposits.
“There will be other dominos that fall, bank concentration will rise, systemic effects will stay small, accounting rules on market to market will be tightened, and regulators will add duration mismatch & deposit stickiness to the rule book,” he said.