America’s biggest banks appear to be battening down the hatches as many companies in the financial sector are laying off workers, shutting down branches, and failing to recover from the banking crisis this past spring. Some market analysts wonder if the industry is preparing for a recession or a prolonged anemic economic landscape.
This year, the largest U.S. financial institutions have been trimming their payrolls, and the expectation on Wall Street is that the worst is yet to come.
Aside from JPMorgan Chase, the country’s biggest and most profitable bank, many companies are trimming employee counts.
So far, in 2023, Wells Fargo and Goldman Sachs have reduced their workforce numbers by approximately 5 percent. The former has engaged in a three-year-long, $10 billion cost-cutting initiative that has included terminating 50,000 jobs. The latter plans to let go as much as 2 percent of its workers in the coming weeks.
Citigroup launched another round of job cuts after slashing 7,000 positions in the first nine months of 2023.
Morgan Stanley cut its headcount by 2 percent since the beginning of 2023 and plans to eliminate 3,000 jobs from its global workforce by the end of the year.
But this is not just a problem in the United States. According to an exclusive report from Reuters, British bank Barclays became the latest bank to engage in a cost-savings initiative by cutting as many as 2,000 jobs. This is part of the firm’s $1.25 billion plan to bolster efficiency and alleviate bloated workforce numbers. Over the years, Barclays has attempted to decrease expenses by reducing bonuses and eliminating retail and investment banking jobs.
“Banks are closing branches faster than they’re opening new ones,” wrote Rodrigo Sermeno, a market analyst for The Kiplinger Letter. “The trend will likely continue as banks face staunch competition for deposits and younger customers from online banks, fintech firms and Big Tech.”
It is not only the big banks that are laying off workers. This year, a whole host of fintech firms, lenders, and finance companies have cut jobs.
In October, San Francisco-based Lending Club fired 172 employees, totaling 14 percent of its payroll. Hippo Insurance also cut payrolls by 20 percent. This past summer, trading platform Robinhood laid off 7 percent of its staff. Fintech organization SmartAsset trimmed its headcount by 19 percent in June.
Bank BranchesEarlier this month, several banks filed to shut down dozens of branches in a single week.
PNC Bank, America’s sixth-largest financial institution, for example, filed to close 19 branches in February, including five in Pennsylvania, four in Illinois, and three in Texas. This comes months after PNC said it would close more than 200 brick-and-mortar banks this year.
The company says that it is responding to evolving customer needs.
“PNC recognizes that branches play a key role in how we provide solutions to our clients, alongside our other channels,” the bank said in a statement. “At the same time, we also make decisions to close branches as customer needs evolve. As always, we will continue to invest in—and optimize—our branch network alongside our other core banking channels to serve our customers in the most effective way we can.”
Meanwhile, JPMorgan Chase filed to shutter 18 branches across the country, such as Connecticut, Florida, Illinois, and New York.
Stocks in the RedMany banks have failed to recover from the banking crisis earlier this year. On a year-to-date basis, various financial institutions have struggled to come out of the red.
Citigroup stock is down more than 2 percent year to date. Goldman Sachs has slumped nearly 3 percent. Barclays has fallen roughly 8 percent. Morgan Stanley has plunged 11 percent. Royal Bank of Canada is down 9 percent. Bank of America has plummeted close to 13 percent.
One of the few bank stocks to have a strong 2023 has been JPMorgan Chase, which has rallied about 13 percent.
The culprit? Higher interest rates.
Over the last 19 months, the Federal Reserve has lifted the benchmark federal funds rate by more than 500 basis points, to a range of 5.25–5.50 percent. Since then, the Nasdaq Bank Index, a benchmark stock index, has crashed about 40 percent.
In a climate of rising rates, credit conditions are tighter for businesses and consumers, and this was highlighted in the Fed’s latest Senior Loan Officer Opinion Survey (SLOOS) on Bank Lending Practices.
“Regarding loans to businesses, survey respondents, on balance, reported tighter standards and weaker demand for commercial and industrial (C&I) loans to firms of all sizes over the third quarter. Furthermore, banks reported tighter standards and weaker demand for all commercial real estate (CRE) loan categories,” the Fed said.
Bank Term Funding ProgramIn the aftermath of the Silicon Valley Bank and Signature Bank failures, the Federal Reserve launched the Bank Term Funding Program (BTFP), an emergency lending facility that extended one-year loans to stressed companies. The Fed agreed to protect the borrowers from losses by extending swaps at the same value while ignoring losses. The program was created to prevent a broader and more painful financial crisis by halting bank runs.
According to the U.S. central bank’s H.4.1 data, which show usage of the Fed’s liquidity facilities, the program reached a fresh record high for the week ending Nov. 22, topping $114 billion.
But while it might appear that the worst of the March meltdown is over, economist Mike Shedlock says, “the paper losses are still real, even if hidden in reports.”
“This has an impact on banks willingness to make loans in a rising interest rate environment,” Mr. Shedlock said.
The lending facility will be open until at least Mar. 11, 2024, and some observers are concerned about what will happen when the loans are due.
“Mar. 2024 is shaping up to be a total disaster,” wrote E.J. Antoni, a Heritage economist, on X.
Recession FearsAll this then begs the question: Are banks bracing for a recession?
Economists had been anticipating a downturn this year, but the economy’s resilience has cooled recession talk in recent months.
According to the Federal Reserve Bank of Atlanta’s GDPNow model estimate and the New York Fed’s Nowcast, the economy will expand about 2 percent in the fourth quarter.
At the same time, top metrics are flashing recession signals.
The Conference Board’s Leading Economic Index (LEI), for example, declined again in October, sliding 0.8 percent. The LEI has contracted by 3.3 percent over the six-month span between April and October 2023.
“The U.S. LEI trajectory remained negative, and its six- and 12-month growth rates also held in negative territory in October,” said Justyna Zabinska-La Monica, senior manager, Business Cycle Indicators, at The Conference Board, in the report. “The Conference Board expects elevated inflation, high interest rates, and contracting consumer spending—due to depleting pandemic saving and mandatory student loan repayments—to tip the U.S. economy into a very short recession.”
Neil Shearing, the group chief economist at Capital Economics, thinks it is a bit more complicated as the scale of one is vital.
“But the scale of the downturn in a recession is also an important qualifier: there is a vast difference between a 2007/08-style recession, whose effects persist for several years, and a 2001-style recession that is over before you know it,” Mr. Shearing wrote in a note. “Distinguishing between different types of recession and identifying their likely consequences is therefore more important than simply making a recession ‘call.’”
The consensus on Wall Street is that the United States will experience a short and shallow recession.