Trends in Banking

A "trend" is not a cause. Banks are becoming larger and immune to competition & entry because of regulatory barriers, protection, and fixed costs of regulation. Not obviously more profitable however. Regulated utilities aren't always profitable. Some activity can move to fintech.

The trend has been clear. This may be related to a mix of scale network effects and increases in fixed costs related to IT and regulatory compliance. Regulation has been lighter for smaller banks, but apparently that has not stopped the consolidation.

Depends what dominating means. Private credit has expanded markedly to take on some of the lending banks would otherwise do.

consolidation is likely to continue, but whether profitability rises is less certain. a lot of competition will come from outside the banking industry

It seems unlikely that we will have a wave of M&A among mega-banks. Antitrust issues are an obvious factor

Small banks enjoy substantial subsidies, which would be dissipated in case of large consolidation lowering profitability gains. Consolidating small banks may have little impact on competition between large banks, and between banks and shadow banks, limiting the effect on profits.

Current trends indeed suggest fewer large banks. Whether this continues, and whether these would be "mega banks" is less clear.

GSIBs have regulatory advantages

I could see a consolidation wave resulting in more mid-size banks, with assets under $100B or $50B. With 4000+ US banks, there is lots of scope for consolidation all along the bank size distribution.

Not sure what "digital era" has to do with it. Inadequate capital has caused runs for centuries. "regulations" are not "inadequate," we have hundreds of thousands of pages of those, and Silicon Valley Bank. Capital is inadequate. With capital you don't need regulations.

Problems in supervision under the current regulations are part of the problem. Delayed recognition of book losses in hold to maturity assets is problematic. The treatment of uninsured demand deposits as core deposits also needs updating.

In 2023, the failures of three large "regional" banks triggered runs that caused the government to bail out uninsured depositors. Capital and liquidity regulations were found to be inadequate. New regulations are therefore being proposed.

Run betas have increased given that social media allows for faster transmission of information. Exhibit 1 is SVB. I prefer a restructuring of the system to allow for narrow banks rather than bolting a new fender on an already rusting car.

The runs on SVB and others in the spring of 2023 suggest this is the case, whether because of inadequate capital requirements or less than competent regulators.

You need supervision too and that is what failed at SVB.

Communication styles unique to the digital era likely increased the 'speed' of the SVB run. However, it seems unlikely that an extra few days would have solved SVB's problems.

Liquidity regs are likely adequate to deal with liquidity runs on banks with ILLIQUID assets. They do not prevent franchise value solvency runs on banks with LIQUID assets. Capital regs can do so, but they are likely to small or poorly implemented and enforced.
-see background information here
-see background information here

One example: how interest-rate risk is treated in capital regulation is not adequate

Most bank runs follow from insolvency rather than illiquidity, but even for a pure liquidity, the banking sector does not have sufficient insurance and liquidity to back uninsured deposits, even the amount outside the largest, systemically important banks.

Liquidity requirements are based on historical shocks, as the nature of the industry changes so will the sensitivity of deposits to shocks.

Deposit flight has become a matter of minutes rather than hours of days. Regulation and resolution authority needs to adapt to this technological reality.