The U.S. banking sector experienced a significant drop in profits during the fourth quarter of 2023, with a year-over-year decrease of an unprecedented 45 percent. This resulted in a loss of over $38 billion in profits, marking the largest year-over-year quarterly profit decline since the onset of the COVID-19 pandemic in the second quarter of 2020.
One key factor contributing to this loss was the one-off charges associated with the previous year's regional banking crisis. During this crisis, some of the country's largest banks expensed $16 billion to replenish a deposit insurance fund that had been strained by the failures of Silicon Valley Bank, Signature and First Republic banks. As reported by Financial Times, bad loans also led to a $4 billion loss on banks' security portfolios. Concurrently, lenders reduced their workforce as part of company restructuring efforts.
Wells Fargo, for instance, allocated nearly $1 billion for unexpected severance costs during Q4 2023. The lack of voluntary employee departures compelled the company to lay off 7,000 staff members and spend $186 million on severance during just the third quarter. Wells Fargo CEO Charles Scharf stated, "We have seen turnover come down, and with turnover dropping, unfortunately, we're going to have to be more aggressive about our own internal actions." Currently, Wells Fargo employs approximately 230,000 individuals nationwide.
The profit decline across the banking sector underscores the impact that rising interest rates have had over the past two years. Despite these challenges, American banks collectively managed to increase their earnings by 2 percent in 2023 to $256 billion after experiencing a sharp drop in Q4 profits. Larger banks were not as severely affected as smaller ones throughout 2023 but still saw their profits diminish.
