The end of 2022 cannot come soon enough for many in the banking industry. Sputtering capital markets, job losses, raging inflation, the collapse of cryptocurrency and rising interest rates have marked a year of turmoil. Whether 2023 brings a revival is largely up to the Federal Reserve, Bloomberg writes.
"Odds are high for a recession next year as the central bank continues — albeit at a slower pace — to boost borrowing costs in an effort to bring price pressures under control. While that typically means credit quality will suffer, the country’s biggest banks are in a strong position to weather a downturn, including one that further crimps the mortgage industry.
In fact, traditional banks might even get a respite on some fronts, as the expected economic headwinds force some of their upstart competitors in the fintech industry to retreat.
What will not abate is the pressure to deliver on diversity promises and for banks to show they are making progress by providing more transparency about the composition of their ranks.
"Their capital position is strong, their liquidity position is strong,” said Todd Baker, a senior fellow at Columbia Business School who specializes in banking and financial technology, among other things.
While capital levels are high, a recession would force lenders to put much more aside in reserves to cover bad loans, hurting net income and potentially increasing layoff lists. At the same time, higher interest rates should continue to increase banks' net interest income - the difference between what lenders get on loans and what they pay depositors.
In 2022, interest rates collapsed on the housing market, and the number of new mortgages fell sharply. This is expected to continue next year, as TransUnion predicts that the number of purchases this year will be just over 4 million - about half what it was in 2021.
“I think 2023 looks a lot like the second half of 2022,” Rocket Cos chief executive officer Jay Farner said in an interview.
As lenders struggle with a falling mortgage market, they should focus on interacting with consumers in other ways, offering a range of banking services long before customers start looking for homes, Farner said.
Financial-tech firms have expanded rapidly over the past few years, aided by venture capital investment and lower borrowing costs. That's changing, and quickly, as some of the "fintech tourists," as LendingClub’s Anuj Nayar calls them, are leaving the space.
Fintech stocks are down about 65% this year. As venture capital funding dries up, prepare for takeovers or store closures, Nayar says.
With the collapse of FTX and high-profile investigations into Sam Bankman-Fried’s operations, cryptocurrency is an area ripe for regulation. Financial regulators are already targeting the collapse and its aftermath, and senators, including Massachusetts Democrat Elizabeth Warren and Kansas Republican Roger Marshall, recently introduced legislation to rein in the industry.
On Thursday, Securities and Exchange Commission (SEC) Chairman Gary Gensler said the agency is running out of patience with digital asset exchanges and other firms that evade its rules.
Over the past year and a half, the SEC head has argued that most tokens are really just unregistered securities traded on blockchain. He says they must follow the agency's strict trading and investment rules.
Some intermediaries are predicting a recovery from this year's downturn in 2023 as they expect the Fed's prime rate to peak.
Saba Nazar, co-head of financial sponsors at Bank of America, said that once that limit is reached, capital and debt risk can be priced accordingly and credit market liquidity will return.
While no one can be sure what the Fed will do next year or where inflation and unemployment levels will turn out, Jim Langston, one of the U.S. mergers and acquisitions executives at Cleary Gottlieb Steen & Hamilton LLP, said the outlook is becoming somewhat clearer. “We believe next year will be more active than this year. The pipeline is full.”
