Sheila Bair, the former chair of the U.S. Federal Deposit Insurance Corp, has expressed concerns about the upcoming regional bank earnings. She believes that these quarterly numbers could shed light on critical weaknesses within the industry. Bair specifically pointed out that some regional banks are still heavily reliant on industry deposits, exposed to concentrated commercial real estate, and facing potential instability with uninsured deposits, even for those considered healthy.
Having led the FDIC during the 2008 financial crisis, Bair is worried that the regional bank issues from 2023 have not been fully resolved. She emphasized the importance of Congress reinstating the FDIC’s transaction account guarantee authority to stabilize deposits in order to prevent potential failures in the future. Despite progress in the industry, Bair remains cautious about the uncertain future for regional banks.
Challenges Faced by Regional Banks
Regional banks have experienced a challenging year thus far, with the SPDR S&P Regional Bank ETF (KRE) showing a nearly 13% decline. Only a few members of the index have managed to stay in positive territory for 2024. New York Community Bancorp stands out as the biggest underperformer, plunging over 71% in the current year. Other notable decliners include Metropolitan Bank Holding Corp., Kearny Financial, Columbia Banking System, and Valley National Bancorp, each down by more than 30%. The looming threat of another shock to uninsured deposits due to a potential bank failure remains a major concern for the industry.
Impact of Rising Treasury Yields
Amidst the backdrop of the benchmark 10-year Treasury note yield surpassing 4.6% and reaching its highest level since November 2023, Bair is worried about the implications for regional banks. Higher yields could place additional stress on commercial real estate borrowers, a sector in which regional banks have significant exposure. Refinancing activities in the commercial real estate market are particularly vulnerable to rising rates, potentially leading to increased distress among borrowers.
Despite the challenges faced by regional banks, Bair noted that the distress within this sector could prove advantageous for larger money-center banks. The issues plaguing regional banks may redirect business opportunities towards bigger institutions, offering them a competitive advantage in the current market environment.
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