The Banking Sector Is Going Through A Turbulent Period
Last summer, Jamie Dimon, Chairman and CEO of JPMorgan Chase, issued a stark warning to be prepared for an economic hurricane in the banking sector. His statement stirred up Wall Street with caution about the financial consequences should there be further escalations in the war between Ukraine and Russia combined with a more stringent monetary policy from the US Federal Reserve.
How are the Banking Sector and Business World Affected by Rising Interest Rates?
A giant in the banking sector, JP Morgan was able to persevere through this crisis with incredible results – a billion-dollar profit last year due to increased interest rates. Their fourth-quarter profits skyrocketed by 6%, up to $11 billion! The bank further reported that loan defaults remain low and US companies are in good standing, unlike their competitors Goldman Sachs who suffered huge losses from private customers.
Volker Brühl, a professor at the Center for Financial Studies at Frankfurt Goethe University, states that while interest rates on deposits must be increased to satisfy investors, this has triggered an elevated growth in the banking sector. Interest margins have ballooned and allowed banks to once again gain profit on construction financing, investment capitalization, and consumer loans.
The Other Side of the Coin: Recession Is Hurting Business
While higher interest rates may seem beneficial for the banking sector, they can, in fact, reduce the demand for credit from businesses and consequently stunt economic growth. Early signs of this are already visible; according to a study by the Ifo Institute, companies today face more adversities when it comes to obtaining loans as banks have become increasingly more cautious with their lending practices. In December alone, insolvencies in Germany climbed up by three percent compared to November figures.
According to Tim Oechsner, market analyst at Steubing Wertpapierhandelsbank, a decrease in financial support from the banking sector for companies could cause Germany’s economy to suffer and potentially lead to a recession. He states, “in the event of an economic downturn, many corporate customers are likely to require fewer loans as their businesses will collapse due to lack of demand.” This would then result in reduced lending operations in the banking sector, leading them toward decreased business volume.