US banking sector confronts major drop in profits amid regional banking catastrophe

(MENAFN) During the final quarter of 2023, the US banking sector experienced a significant setback, with profits plummeting by nearly 45 percent on an annual basis. This downturn, amounting to USD38 billion, marks the most substantial year-over-year drop in quarterly earnings since the turbulent second quarter of 2020. Rig Data Bank, a reputable data provider compiling reports filed with the Federal Deposit Insurance Corp, revealed these concerning figures. Despite a backdrop of reduced pressure on consumers and growing economic confidence suggesting avoidance of a near-term recession, the sector faced unprecedented challenges.

The decline in profits can largely be attributed to the aftermath of a regional banking crisis that unfolded in the preceding year. Subsidiaries with deposits insured by the Federal Deposit Insurance Corporation bore the brunt of exceptional costs, primarily stemming from the collapse of Silicon Valley, Signature, and First Republic banks. The response to this crisis included a governmental imposition of a "special assessment" system, compelling the country's largest banks to allocate USD16 billion towards replenishing depleted deposit insurance fund balances.

Moreover, the data highlights several other contributing factors to the quarterly profit decline. A significant portion of funds, amounting to USD5 billion, was allocated towards provisions for bad debts, while banks also incurred a USD4 billion loss in their securities portfolios. In response to these financial strains, lenders implemented cost-cutting measures, including workforce reductions and operational restructuring. Notably, the number of full-time workers in US bank branches saw a staggering decline of over 45,000 throughout 2023, with Wells Fargo announcing a substantial expenditure exceeding one billion dollars for sudden workforce reductions specifically in the fourth quarter.

Amidst growing economic optimism, the stark reality of the banking sector's struggles underscores the lingering impacts of the regional banking crisis and the subsequent efforts to stabilize the financial landscape. The challenges faced by major banks reflect a broader narrative of adaptation and resilience within the US financial system, as institutions navigate turbulent waters to maintain stability and viability in an ever-evolving economic environment.


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