The former chair of the U.S. Federal Deposit Insurance Corp, Sheila Bair, has raised concerns about the quarterly earnings of regional banks that are set to be released this week. According to Bair, there are critical weaknesses that may be exposed in these earnings reports. She highlights the overreliance on industry deposits, concentrated commercial real estate exposure, and potential instability of uninsured deposits as key issues that need to be addressed by regional banks.
Bair, who led the FDIC during the 2008 financial crisis, expresses nervousness that the regional bank issues from 2023 have not been fully resolved. She calls for Congress to reinstate the FDIC’s transaction account guarantee authority to help stabilize deposits in regional banks. Despite improvements in the financial sector since the 2008 crisis, Bair believes that there are still vulnerabilities that need to be addressed to prevent another bank failure.
Challenges Faced by Regional Banks in 2024
Regional banks are facing a tough year in 2024, with the SPDR S&P Regional Bank ETF (KRE) down almost 13%. Only four of its members have shown positive performance so far this year, with New York Community Bancorp being the biggest laggard with a significant decline. Other regional banks such as Metropolitan Bank Holding Corp., Kearny Financial, Columbia Banking System, and Valley National Bancorp have also experienced significant losses. The main concern lies in the potential shock to uninsured deposits due to a bank failure, posing a significant challenge to regional banks.
The recent increase in the benchmark 10-year Treasury note yield, surpassing 4.6% and reaching its highest level since November 2023, has raised further concerns for regional banks. Bair warns that higher yields could put additional strain on commercial real estate borrowers, as many regional banks have significant exposure to this sector. The upcoming refinancing of commercial real estate loans may be affected by rising rates, leading to increased distress among borrowers in meeting their payment obligations.
While regional banks are grappling with these challenges, Bair suggests that the distress faced by regional banks could benefit larger money-center banks. The difficulties faced by regional banks may lead to a shift of business towards bigger financial institutions, presenting an opportunity for them to capitalize on the situation. This trend could further consolidate the dominance of larger banks in the financial services industry.
The key issues facing regional banks in 2024 center around their financial stability, exposure to commercial real estate, and potential challenges with uninsured deposits. While these challenges are significant, they also present opportunities for larger financial institutions to expand their market share and strengthen their position in the industry. Regional banks will need to address these issues proactively to ensure their long-term viability and resilience in an increasingly competitive market.