Aurelia Butler

One common response to the US’s regional-bank stress is that the country simply has too many banks. That argument, which implies that failures or buyouts of smaller banks won’t matter, definitely used to be true. But it is easy for even the sharpest overseas writers and analysts to forget the US’s large size and diffuse population, which make for a difficult comparison with G7 peers.The US did have a stunning number of banks decades ago, mostly because laws prevented them from operating across state lines. There were nearly 14,500 banks in 1984, according to the St Louis Fed’s blog. To compare, in 1985 the UK had 355 banks and 167 building-society mortgage lenders.Since then, about 10,000 US banks have closed or been taken over, while the US’s population has grown by roughly a third. The rise of interstate banking should prompt mergers and closures, of course. But Congress removed most restrictions on interstate banking almost 20 years ago, according to the Richmond Fed, and the declines have been consistent ever since:

© St Louis Fed

The number of bank branches continued to climb after that deregulation, somewhat predictably. (At risk of stating the obvious, branch numbers don’t include bank headquarters, where Americans did most of their financial business in the days of It’s a Wonderful Life. Branches only started outnumbering banks in the 1960s.)So is the US still over-banked by branch? Well, maybe not anymore. The number of bank branches has declined every year since 2009, according to the FDIC.And for small businesses, service at a large-bank branch probably doesn’t measure up to a smaller local bank, Goldman Sachs economists argued earlier this week. From their note: Economic research suggests that part of the reason that small banks disproportionately lend to small businesses in the first place is because their closer geographic proximity to individual small businesses gives them an informational advantage in gauging the riskiness of those businesses.In many counties across the US, there is no nearby alternative to smaller banks . . . there is no GSIB branch in roughly two-thirds of counties, making up 10% of US GDP . . . for those same counties, the closest GSIB branch is roughly 40 miles away, compared to 3 miles away for other counties.Small businesses — those that employ fewer than 100 people, in Goldman’s categorisation — seem to have a pretty clear preference for smaller banks anyway. While most of them work with banks that have more than $10bn in assets, they tend to prefer the banks fall below that threshold, GS found:

Nearly 70 per cent of those businesses’ commercial and industrial loans come from banks that fall below the $250bn asset cut-off for a bank to be regulated as a globally systemically important institution, or G-SIB. And “the link is much stronger outside of large cities: in over half of US counties, non-GSIB banks provide 90% of loans to small businesses,” the bank finds. The general takeaway? Small businesses probably can’t obtain credit from large banks on the same terms that a regional bank could provide. This is partly because they are riskier borrowers as a general rule:

And also for the ordinary reasons GS cited above. A bank located down the street from two cafés is probably best placed to know which is more creditworthy, meaning geographical proximity can ease access to credit. In fact, a majority of small businesses get their loans from a bank within 10 miles, GS says:

Sceptical readers may argue that small companies have been a shrinking share of economic output and wage growth in recent decades, making them less important for economic growth. But companies with fewer than 100 workers still “employ 35% of the private sector workforce and produce 25% of gross output,” the Goldman Sachs economists found.Small businesses are also more likely to be in the centre of the country or rural areas. This chart from Barclays lays it out nicely:

Remember how diffuse the US’s population is? Its northern neighbour may provide a helpful contrast. Canada has closer to 1.1mn people for each domestic bank, and close to 500,000 for all banks (including subsidiaries of foreign banks). But while it is large, Canada is largely uninhabited, meaning its people are concentrated in city centers along the US border. A quick note on politics (sorry): Readers who are big civil-liberties advocates may find that Canada demonstrates a different downside to financial-system concentration. The country’s government was able to shut down a highly disruptive trucker blockade only by using emergency powers to freeze bank accounts of protesters, who had become a cause célèbre in some conservative corners. In the US, there is a fairly clear political lean among states without much large-bank presence, Goldman Sachs found:

What this really means is when we talk about the US, we should think about it as a large and diverse union, whose political cohesion comes into question periodically.In other words, the best comparison may be the European Union. The 27 countries in the eurozone had 5,263 banks at the end of 2021, while the US had 4,237. That makes one bank for every ~80,000 people in the US, compared to every ~85,000 people in the EU. So the US is slightly more “banked” than the EU. But not by much. Commentators may want to be cautious, therefore, when encouraging regulators to brush off the risk of future small- or regional-bank failures. More

Several Federal Reserve officials considered forgoing an interest rate rise last month amid the worst banking turmoil since the 2008 crisis, but ultimately decided to press ahead due to persistently high inflation, according to an account of their most recent meeting.Minutes from the March gathering, at which the US central bank raised its benchmark policy rate by a quarter-point, showed the Fed was chiefly focused on persistent price pressures — even after the recent banking turbulence upended expectations about the trajectory of the economy.The rate rise, which lifted the federal funds rate to a new target range of 4.75-5 per cent, came on the heels of a trio of bank failures in the US as well as the forced takeover of Credit Suisse by UBS.Government authorities including the Fed stepped in aggressively to ward off further contagion, injecting doubt as to whether the central bank would follow through with a rate rise in March.The Fed officials who considered a pause noted that it would give them more time to assess the effect of the banking stress on the economy and financial system, the minutes showed. Their deliberations came as Fed staffers for the first time predicted a “mild recession” starting later this year before the economy recovers over the next two years. However, the officials in question decided the Fed and other agencies had done enough to “calm conditions in the banking sector and lessen the near-term risks to economic activity and inflation”. They cited high inflation and strong economic data as reasons for pressing ahead with the rate increase.During the press conference that followed the March decision, chair Jay Powell acknowledged officials had considered pausing the monetary tightening campaign.But he said policymakers had decided it was more important for the Fed to maintain public confidence in its commitment to rooting out high inflation “with our actions as well as our words”.Before the turbulence engulfed the banking sector, Powell had even floated the idea of reverting to a half-point rate rise following a number of unexpectedly strong economic data that suggested more work needed to be done to damp demand.According to the minutes, some officials said they would have considered a half-point rate rise “in the absence of the recent development in the banking sector”.“However, due to the potential for banking sector developments to tighten financial conditions . . . they judged it prudent to increase the target range by a smaller increment at this meeting,” the record said.In future, several participants said the Fed needed to “retain flexibility and optionality” given the “highly uncertain economic outlook”. For the most part, officials expect the banking stress will lead to tighter credit conditions, which could weigh on business activity, hiring and consumer spending. That has altered expectations about how much more the Fed needs to cool economic activity. Powell last month likened a looming credit crunch to the Fed’s rate rises in its ability to squeeze the economy but said the magnitude of any tightening effect was highly uncertain.To account for this, the Federal Open Market Committee changed its policy statement, removing the oft-repeated warning that “ongoing increases” would be necessary to bring soaring inflation under control. Rather, the committee said “some additional policy firming may be appropriate” to bring inflation back to the bank’s 2 per cent target. Powell later urged reporters to focus on the “some” and “may” in that phrase.

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Prior to the banking turmoil, many officials saw the policy rate path being “somewhat higher” than earlier estimates in light of stronger than expected data, the minutes indicated.Still, most officials pencilled in one final quarter-point rate rise this year, per projections published last month, which would lift the fed funds rate above 5 per cent and maintain that level at least until 2024. Officials have insisted there would be no rate cuts in 2023. In recent appearances, most Fed officials have signalled support for one more rate increase, but divisions have emerged. Speaking on Wednesday, Mary Daly, president of the San Francisco Fed, said she would be monitoring the effect of the banking stress closely but that “the strength of the economy and the elevated readings on inflation suggest that there is more work to do”. That followed comments from John Williams, president of the New York Fed, who on Tuesday said another rate rise was a “reasonable starting point” given there had not yet been a significant tightening of credit conditions.However, Austan Goolsbee, the newly appointed president of the Chicago Fed, recently adopted a much more cautious tone, warning of a “material impact on the real economy” that could suggest monetary policy “has to do less” than initially expected. More

Today’s top storiesChina has U-turned on plans to block some of the world’s busiest airspace near Taiwan for three days, causing confusion over Beijing’s priorities in handling its stand-off with Taipei and Washington.Carmakers in the US will be forced to make 67 per cent of their American models electric by 2032, under tough new emissions limits proposed by the Environmental Protection Agency. Speaking in Belfast, Joe Biden publicly called on Northern Ireland’s political leaders to end a long-running stalemate at Stormont. The US president met Rishi Sunak this morning to discuss the economic potential of Northern Ireland, and how the US — its largest investor — can support development in the rudderless region. For up-to-the-minute news updates, visit our live blogGood evening and welcome back to Disrupted Times. Darren is on holiday, so I am with you for today’s edition. The World Bank and IMF met for the start of their spring jamboree in Washington yesterday. But the latest forecasts published as part of the annual meeting were more ominous than sunny — projecting Britain’s growth this year to be the worst among G20 economies.Despite chancellor Jeremy Hunt’s efforts to revitalise the economy, the IMF forecast that the UK economy would shrink by 0.3 per cent in 2023, even after a significant upgrade to the forecast of a contraction of 0.6 per cent in January. “With the recent increase in financial market volatility, the fog around the world economic outlook has thickened,” the IMF said. While the fund’s forecasts hadn’t changed much since the start of the year, it warned of a “hard landing” for the global economy if ever-higher interest rates are needed to bring down sticky inflation and cause financial sector stress to flare. But data today showing US inflation at its lowest level in nearly two years offers glimmers of relief. The consumer price index for March rose by 5 per cent year-on-year — down from the 6 per cent recorded in February, according to the Bureau of Labor Statistics. US stock futures shot up and Treasuries rallied following the data drop. However, core CPI, which excludes volatile energy and food costs, rose by 5.6 per cent year-on-year following a 0.4 per cent monthly jump, suggesting the Federal Reserve still has work to do. The US central bank appears divided on whether to call time on rate hikes, ahead of its policy meeting next month. New York Fed president John Williams said another quarter-point interest rate increase was a “reasonable starting point”. But Chicago Fed President Austan Goolsbee called for “prudence and patience” and urged caution on raising rates. Fears around the collapse of Silicon Valley Bank, as well as the rescue and takeover of Credit Suisse, are still swirling among finance system regulators. Klaas Knot, chair of the Financial Stability Board, has urged officials to tighten rules after the banking panic exposed holes in oversight. At the sidelines of the IMF meeting today, Bank of England governor Andrew Bailey told the Washington-based Institute of International Finance we are not “facing a systemic banking crisis”, but warned that regulators may need to rethink how much cash banks are forced to set aside following the SVB bank run. Join the FT’s Stephen Bush and Peter Foster, as well as Jane Green, professor of political science at Oxford university, for the first live event hosted by Inside Politics, Stephen’s award-winning newsletter. The live webinar on April 19 at 1pm BST will ask if a Labour victory at the next general election is inevitable. FT subscribers can register for free here. Need to know: UK and Europe economyEuropean aviation faces more than €‎800bn in extra costs to reach net zero emissions by 2050, according to industry estimates that highlight the challenge facing the sector as it decarbonises. Swiss lawmakers have voted against a SFr109bn government-backed liquidity package underpinning UBS’s takeover of Credit Suisse in symbolic protest against the deal.The UK has cracked down on several financial fixers supporting Russian oligarchs such as Roman Abramovich and Alisher Usmanov, the government revealed in a statement.The chief of Holiday Inn owner InterContinental Hotels Group has warned that the UK stock market is “not a very attractive place” for listed companies and called on authorities to get on the “front foot” to arrest further decline.A senior Dutch minister has warned fellow politicians in Europe of waning public support for the region’s climate policies as showcased by a continuing stand-off between farmers and the government over greenhouse gas limits in the Netherlands.Need to know: Global economyLow-income countries will receive their biggest bills for servicing foreign debts in a quarter of a century this year. Sri Lanka faces the steepest schedule of external repayments, equal to 75 per cent of government revenues.

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Australia will suspend a complaint against China with the World Trade Organization after Beijing agreed to review steep tariffs on Australian barley, in the latest breakthrough that signalled the easing of trade tensions between the countries.China is leading the rise in export restrictions on critical minerals that are restricting the availability and raising the price of raw materials needed for a green energy transition, according to an OECD report.Hongkongers who moved to the UK are being blocked from accessing as much as £2.2bn of pension assets, with activists accusing the city’s government of retaliating against those deemed “unpatriotic” following a political crackdown.Need to know: businessEY’s US business will launch a $500mn cost-saving programme after its opposition torpedoed plans for a historic split of the Big Four firm.Here’s why EY executives decided to scrap the break-up.Silicon Valley investors are touring the Middle East, seeking to build long-term ties with sovereign wealth funds during the worst funding crunch for venture capital firms in almost a decade.Thoma Bravo, the acquisitions-hungry private equity group, lost out in the race to buy a highly prized technology company that was eventually sold for $12.5bn amid fears that US authorities would stymie the deal on competition grounds.Volvo Group overcame worries about waning demand and supply chain problems for truckmakers as the Swedish company posted record results more than a week earlier than scheduled.The World of Work JPMorgan has told managing directors to be in the office five days a week and warned other employees not to fall short of their “in-office attendance expectations”, according to a memo sent to staff. What makes a good leader in 2023? Grace Lordan, associate professor at the London School of Economics and director of the Inclusion Initiative, shares her insights here. In the latest Working It podcast, host Isabel Berwick investigates why closing the gender pay gap has made little progress over the past 20 years and assesses what needs to change. Some good newsWomen make up half of New Zealand’s government cabinet for the first time in its history. The country’s decision-making body of ministers reached gender equity as MP Willow-Jean Prime, minister for conservation, joined the cabinet, meaning a 50/50 split between men and women.

In 2020, Nanaia Mahuta was made New Zealand’s first female foreign minister, the second Māori to hold the role © Hagen Hopkins/Getty Images More

One of China’s most senior development finance officials has said that multilateral institutions must retain a status that limits their losses in sovereign debt restructurings in the longer term, amid calls from Beijing for these lenders to share the burden with other creditors.Jin Liqun, president of the Beijing-headquartered Asian Infrastructure Investment Bank, said lenders such as the World Bank and IMF needed to maintain their so-called preferred creditor status as they had a unique role to play in providing loans to developing countries in financial distress.The AIIB is also classed as a multilateral lender and enjoys preferred creditor status. Jin said that while he could not “speak on behalf of” other multilateral lenders, “the important mission of the MDBs [was] to provide new money to sustain [highly indebted countries’] economies particularly in very difficult times”.“It’s an issue that we need to balance for the MDBs [multilateral development banks]. They enjoy preferred credit status and they enjoy very high rating[s] so that they can raise capital at the lowest cost. That is the advantage,” Jin told the Financial Times. “Looking way ahead I think it is important to keep all this.”On the other hand, he acknowledged, there was the question of “to what extent MDBs should help those highly indebted countries in partnering with the major creditors”. He declined to take a position on whether multilateral institutions should participate directly in restructurings. Jin’s comments come ahead of a joint IMF, World Bank and G20 global sovereign debt roundtable event in Washington aimed at breaking the deadlock in negotiations over sovereign debt restructurings. China wants to use the IMF and World Bank’s spring meetings to argue that multilateral institutions must participate with other creditors in a debt restructuring for Zambia. However, expectations of a breakthrough are low, with the World Bank refusing to put its preferred creditor status on the table for discussion.Anna Bjerde, managing director of operations at the World Bank, told the Financial Times that the multilateral lender’s role was as “a convener”, helping to facilitate discussions that would lead to “collective engagement by bilateral and commercial creditors” on debt relief.A number of sovereign debtors are in distress besides Zambia, including Ghana and Sri Lanka, with last year’s surge in global borrowing costs raising debt burdens worldwide. Fitch, the rating agency, has said that nine sovereign debtors have defaulted since 2020. Restructurings, meanwhile, are taking three times as long as in previous decades in part because of highly complex negotiations between China, the world’s largest bilateral lender, other bilateral and multilateral creditors and private bondholders.China last year agreed in principle to give Zambia relief on its debt in tandem with other official creditors through a G20 process known as the common framework.But in January, China’s foreign ministry called for multilateral financial institutions to participate in the restructuring, saying they accounted for 24 per cent of Zambia’s debt. However, that stance would throw into doubt their preferred creditor status and is opposed by many other G20 members.China’s reluctance to agree a deal on debt relief without participation from MDBs has been one factor that has led negotiations to stall. The IMF has warned that it cannot disburse a $188mn tranche of a $1.3bn bailout programme for Zambia until the restructuring plan is approved.Fitch said this month that China’s proposal could include some compensation to multilateral institutions from their shareholders to partially offset their participation in any restructuring, as happened during multilateral debt relief in the 2000s. The AIIB was launched in 2016 as a Chinese-led alternative to the World Bank and other western-led multilateral organisations. Its membership has rapidly grown to 106 members, including important shareholders such as India, the UK, France, Australia and South Korea. The US and Japan are not members. China is the largest shareholder with 26.6 per cent voting rights. More