In March 2023, the U.S. banking system hit a bump in the road.
Several commercial banks failed and the Federal Reserve, even while it continued its program of quantitative tightening, worked with the banking system in order to keep the U.S. financial system working and the U.S. economy growing.
In keeping the banking system moving smoothly along and in keeping the economy advancing, the Federal Reserve saw to it that economic conditions did not deteriorate, or, collapse.
It seems as if the “failures” were connected with commercial banks that tried to improve their net interest margins by investing in longer-term market securities.
The problem was that when interest rates began to sharply rise, many of these longer-maturity securities lost market value, and the commercial banks involved were faced with absorbing market losses which threatened the solvency of the banks.
That time is over.
Furthermore, even though interest rates have moved higher since then, the commercial banking system seems to be adapting right along with the markets, protecting themselves from underwater market securities.
Hopefully, the possible losses on financial securities due to rising interest rates have become less of a problem.
In terms of the banking system as a whole, the statistics from the third quarter of 2023 look really good.
The word of caution comes when a financial analyst realizes that the overall performance of the total industry is closely tied to the performances accumulated by the largest banks in the industry.
The behavior of these banks is dominated by one, JPMorgan, Chase & Co. whose leader, Jamie Dimon, has attempted to build a “fortress” institution, an institution that will be able to survive through some pretty tough times and thereby help to stabilize the industry.
I will be concentrating on three statistics that I believe are very important in an analysis like this.
First of all, in the third quarter of 2023, JPMorgan, Chase earned a 16.9 percent return on equity. A return like this could be considered to be an excellent performance in good economic times, but to produce a return in excess of 15.0 percent during times like we have experienced this year is truly phenomenal.
The second number that is truly remarkable is the amount of cash that JPMorgan is carrying on its books. At the end of the quarter, the bank held $1.44 trillion in cash assets. Wow!
And, the third statistic to report: the standard capital ratio was 14.3 percent.
JPMorgan, Chase & Co. (JPM) has really built a fortress…
And, it is still producing a ROE of just about 17 percent.
But, one can look at the other three “biggest” banks and can find strong financial statistics.
Bank of America (BAC), for example, has a ROE of 11.2 percent. It has close to $900 billion in cash assets. And, its standard capital ratio is 11.9 percent.
Wells Fargo (WFC), in the third quarter of 2023, earned a ROE of 13.3 percent It has close to $450 billion in cash on its balance sheet, and its standard capital ratio was 11.1 percent.
And, the Citigroup (C), Inc. followed up the group.
Citigroup earned a ROE of 6.7 percent in the third quarter of 2023 and had a standard capital ratio of 13.3 percent. If held case of right around $1.0 trillion.
My purpose in presenting the information on these four banks is to show you how the banking industry has changed in recent years.
There is no question that JPMorgan, Chase & Co. is the leader. Jamie Dimon set out to construct “a fortress” and he seems to have accomplished this.
In doing so, Mr. Dimon has set the standard for the other three banks and, over the past three- to five-year period, these other organizations have substantially changed their operating practice.
The “fortress” model… a high ROE with a high capital ratio and lots of cash on hand.
How much the Federal Reserve has contributed to this latter point is open to question.
The Federal Reserve, as you know, in the early 2020s have been pumping lots and lots and lots of “cash” into the banking system.
“Excess reserves” in commercial bank vaults is now, according to the Fed’s H.8 statistical release, around $3.4 trillion.
This is a huge amount!
But, what is all the more amazing is how much of these “excess reserves” rest in the biggest four commercial banks in the system.
And yet, with the exception of Citigroup, which is a little behind the others, these large banks are earning a very, very good return on equity.
To me, this is saying a lot about the stability of the banking system.
The banking system has a substantial part of its assets in the hand of four very large banks and serve as a foundation for the banking system should it start to have more problems with bank failures.
But, this seems to be a part of the process for the whole banking system.
The biggest banks are getting bigger. And, over time, the biggest banks will be absorbing more and more of the smaller banks.
For one reason, the biggest banks can set aside the most amount of money to develop and expand upon computer information systems. The banking system is becoming more and more digital. The biggest banks discussed here have the “cash on hand” to underwrite the growth and expanse of the information systems.
The biggest bands will continue to achieve the benefits of scale economies far exceeding the smaller banks.
And, if there happens to occur a financial disturbance, the biggest banks appear to be in the best shape to weather the turmoil and actually come out ahead in the longer run.
Yes, “keep your eyes on the Big Four” in the banking system.
They will carry a lot of the load of the banking system going forward.
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