‘There will be other…’: Aswath Damodaran’s concerning forecast on US banking crisis

The ongoing US banking crisis is continuing to unfold and there are concerns that there could be more casualties before it ends. “AS SVB, Signature and First Republic have fallen, the 2023 banking crisis looks like a slow motion car wreck, but without the systemic consequences of prior crises,” Aswath Damodaran, prominent economist and Professor of Finance at the Stern School of Business at New York University wrote in a series of social media posts. 

Painting a dire picture, Damodaran further wrote, “There will be other dominos that fall, bank concentration (not profitability) will rise, systemic effects will stay small, accounting rules on mark to market will be tightened and regulators will add duration mismatch & deposit stickiness to the rule book.”

“I do believe that there are more dominos waiting to fall in the US banking business, with banks that have grown the most in the last few years at the most risk, but I also believe that unlike 2008, this crisis will be more likely to redistribute wealth across banks than it is to create costs for the rest of us. Unlike 2008, when you could point to risk-seeking behavior on the part of banks as the prime reason for banking failures, this one was triggered by the search for high growth and a failure to adhere to first principles when it comes to duration mismatches,” Damodaran elaborated in a blog post.