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  • Writer's pictureCapital Bridge Partners

Consolidation in the Banking Industry

Updated: Nov 19, 2023

By Daniel and Gavin | Capital Bridge Partners

First Republic Bank occupied a niche in real estate lending, funding luxury purchases and investments with low rates to high net worth individuals. In return for low rates, borrowers were expected to bring deposits, which in turn funded more loans…and so on. The model was highly successful, but ultimately led to the bank’s demise: as the Fed raised rates, the value of First Republic’s loan portfolio dropped. The stock tanked while deposits flew out of the bank in a classic run.

The pressure First Republic faced is said to be “contained” but the pain is still real for other regional lenders and many pundits speculate that the banking universe is about to become much smaller. According to one estimate, 1,040 banks in the US lack the liquidity to handle a bank run similar to that of First Republic. The belief that we are entering an accelerated cycle of consolidation is credible and potentially harmful to small businesses.

First, our economy has in recent history favored consolidation. Starting with The Great Recession in 2008, the number of banks in the United States has declined by over 40%, from 7,088 in 2008 to 4,135 today.

Second, parallels can be drawn between the Savings & Loan Crisis of the late 1980s. S&Ls were stuck holding low-rate mortgages in an inflationary economy and eventually, over 1,000 institutions failed.

The S&L crisis seems strikingly similar to the current market, with one big exception: today we don’t wait in lines to get our money or call our broker to trade a stock. We simply press a few buttons on our phone. Modern technology could contribute to the accelerated demise of our small banks.

Small banks fund over 80% of commercial loans across the United States, for good reason. These local lenders understand their markets, know their borrowers, and can make common-sense loans.

Alternatively, larger banks need to turn each loan into a commodity. Each borrower, property, and deal need to fit into a very specific box. Loan officers and processors follow a checklist and have very little authority to stray from a narrow set of requirements.

We hope that the market calms down and that authorities have the leadership and forethought to quell further panic. Bank consolidation would have a significant effect on real estate lending, and would likely be a hefty blow to small and middle market borrowers.


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