Sheila Bair, former chair of the U.S. Federal Deposit Insurance Corp, expressed concerns about the potential vulnerabilities that may be exposed in regional bank earnings reports. She highlighted issues such as overreliance on industry deposits, concentrated exposure to commercial real estate, and the instability of uninsured deposits, even for healthy banks. These concerns stem from unresolved issues from 2023, particularly the lack of stability in the banking system in case of another bank failure. Bair called for Congress to reinstate the FDIC’s transaction account guarantee authority to address these challenges.
Regional banks have faced a challenging year so far, with the SPDR S&P Regional Bank ETF (KRE) down nearly 13% and only a few members showing positive performance in 2024. New York Community Bancorp has been the biggest decliner, with a drop of over 71%. Other banks such as Metropolitan Bank Holding Corp., Kearny Financial, Columbia Banking System, and Valley National Bancorp have also experienced significant declines. The main concern for regional banks is the potential impact of another shock to uninsured deposits in the event of a bank failure.
Bair’s warning comes amid a spike in the benchmark 10-year Treasury note yield, reaching over 4.6% and hitting its highest level since November 2023. She cautioned that higher yields could put additional pressure on commercial real estate borrowers, an area where regional banks have significant exposure. With a large number of commercial real estate refinancing scheduled for this year and next, rising rates could lead to increased distress among borrowers and challenges in making payments.
Despite the challenges facing regional banks, Bair suggested that the distress in this sector could benefit larger money-center banks. She highlighted the potential for larger institutions to gain business as a result of the issues faced by regional banks. The implications of regional bank weaknesses could lead to a shift in market dynamics, with larger banks potentially seeing increased opportunities for growth and expansion. This dynamic could have broader implications for the banking sector and financial markets as a whole.
In conclusion, Sheila Bair’s concerns about regional bank earnings and the potential vulnerabilities they may expose underscore the challenges facing this sector. The unresolved issues from 2023, such as overreliance on industry deposits, concentrated exposure to commercial real estate, and instability in uninsured deposits, continue to pose risks to regional banks. With the spike in Treasury yields and the potential impact on commercial real estate borrowers, the challenges facing regional banks are likely to persist. This could have implications for the broader banking sector and create opportunities for larger institutions to capitalize on the distress in regional banks. It remains to be seen how regional banks will navigate these challenges and whether steps will be taken to address the underlying issues that have been highlighted by Bair.
