Why are the big banks in the US laying off thousands of employees?

Changes are coming to the banking sector. As younger clients open accounts, digital banking options are increasing in demand, and automation is leading banks to close local branches.

A higher interest rate environment can change the behavior of banks; this year, many have chosen to lay off employees. According to CNBC, the country’s five largest banks have laid off around 20,000 workers, with Goldman Sachs and Wells Fargo eliminating roughly five percent of their workforce.

JP Morgan Chase, which acquired the failed First Republic Bank in the spring, is the only bank of the big five that has added to its payroll since quarter four of 2022.

The impact of higher rates

When interest rates are higher, banks loan out less money because the risk of making a return on the investment is higher. As fewer loans are made, the revenue can begin to fall. In addition, the ongoing war between Russia and Ukraine, as well as the threat of a wider regional conflict in the Middle East, has investors acting more cautiously.

The Federal Reserve has not indicated that they are looking to cut interest rates soon. On 19 October, Fed Chair Jerome Powell provided an economic outlook where he stated that although the Federal Open Market Commission has increased the federal funds rate “at a historically fast pace,” the central bank has not ruled out further rate hikes. Such news will likely continue to keep banks more modest in their financial outlooks.

Part of a longer trend

The integration of artificial intelligence into the banking sector, as well as the increased prevalence of online banking, has led to major banks closing local branches across the country. According to the National Community Reinvestment Coalition, nine percent of all bank branches have closed since 2017 in the US. Not all of the workers from these branches have lost their jobs, with some being moved to other locations. The Bureau of Labor Statistics projects that around fifteen percent of bank telling roles, around 53,000 thousand jobs, will be eliminated by 2032. This is one example where automation eliminates jobs, and creates a risk for workers if new jobs of the same quality are not created in their place. However, just because jobs have been lost at the branch level does not mean other jobs haven’t been added in other areas of the company.