Regional banks face big hurdles a year after SVB collapse
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[March 07, 2024] By
Ann Saphir, Saeed Azhar and Lewis Krauskopf
(Reuters) - U.S. regional lenders face ongoing challenges from rising
deposit costs and risky office-building loans a year after the biggest
bank failures since 2008.
The unexpected collapses of three banks - Silicon Valley and Signature
in March 2023 and First Republic in May - put a spotlight on how lenders
managed risks to assets and liquidity as the Federal Reserve raised
interest rates aggressively to bring surging inflation under control.
Now that the Fed has stopped raising rates but has signaled cuts may not
come for another several months, investors have shifted their focus to
the potential for customers to pull their deposits in times of stress,
while gauging lenders' exposure to the troubled commercial real estate (CRE)
sector.
"The banking industry needs to make sure it has a strong hold on its
access to liquidity, conduct in-depth deposit stress testing, and ensure
it can withstand significant stress," said Ryan Nash, banking analyst at
Goldman Sachs. "This is something that all banks will need to plan for
in the world ahead.”
The tumult prompted emergency government measures to stabilize the
sector alongside downgrades by credit rating agencies. In recent weeks,
New York Community Bancorp has fueled market jitters about renewed
weakness in the sector after it disclosed major losses and warned of
material weakness in its internal controls.
"Last year’s bank stress underscores the importance of not becoming
complacent," Cleveland Fed President Loretta Mester said in New York
City last week, noting that the bank failures were due not just to poor
risk management but also to weaknesses in supervision.
The following graphics show the impact of Silicon Valley Bank's (SVB)
collapse on the industry, one year after its March 10 failure.
![](http://archives.lincolndailynews.com/2024/Mar/07/images/ads/current/castlemanor_sda_FINANCIAL_2017.png)
In its immediate aftermath, business lending plunged and banks pulled
back on credit more broadly.
In recent months, both measures have improved, but are still below
year-ago levels.
Commercial lending has bumped along in recent months, barely regaining
lost ground after SVB's failure.
Regional banks have relatively large exposure to CRE loans, compared
with larger peers that have more diversified portfolios. Lenders are
under pressure to write down their losses from CRE as offices remain
sparsely populated by workers on hybrid or remote work arrangements.
Growth in CRE lending slowed dramatically after SVB's failure and
continued to decelerate through the year. Loans by regional and
community banks, which account for the bulk of CRE lending, are still
above last year, but the biggest banks have trimmed their CRE loan
portfolios.
Recent Boston Fed research suggests that, even so, it may be the biggest
banks that are more vulnerable to CRE losses, with 40% of their office
building loans in counties with a high share of work-from home, versus
30% for smaller banks.
The turmoil of March 2023 triggered "stress for most, crisis for a few"
banks, said Christopher Wolfe, head of North American Banks ratings at
Fitch. It highlighted the importance of banks maintaining solid insured
and operational deposits to underpin their funding.
"The banks most caught out were material outliers," in terms of their
sources of deposits, he said.
Depositors fled smaller U.S. lenders for the safety of bigger
institutions after SVB failed, but some funds have since flowed back.
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![](../images/030724PIX/busine81.jpg)
A customer leaves after speaking with FDIC representatives inside of
the Silicon Valley Bank headquarters in Santa Clara, California,
U.S., March 13, 2023. REUTERS/Brittany Hosea-Small/File Photo
![](http://archives.lincolndailynews.com/2024/Mar/07/images/ads/current/ldn_lda_BDPROMO_022924.png)
Overall deposits in banks of all sizes are down compared with a year
earlier as households have spent their savings or chased higher
returns in money markets or rallying equities.
More than 90% of Silicon Valley Bank's deposits were not insured by
a Federal Deposit Insurance Corp guarantee, which covers at least
$250,000 in deposit accounts.
SVB's uninsured deposits stood at twice the average of its peers. It
was toppled after clients who were concerned about the bank's health
pulled their money, regulators found.
Since last year, the proportion of uninsured deposits in the
industry has declined, FDIC data shows.
"When your customer deposit base is making big withdrawals over the
short term, it will definitely cause a liquidity squeeze," said
Stephen Biggar, analyst at Argus Research.
"No amount of capital levels will be able to save a bank that has
40% of their deposits leave in 24-48 hours."
Investors generally expect regional bank stocks to be more volatile
than stocks of bigger banks and larger financial institutions.
For this reason, there tends to be a gap between the implied
volatility of regional stocks and larger banks. This gap, which
widened sharply during the March turmoil, has not gone back to
pre-crisis levels. The spread reflects investors' lingering
perception that regional banks are a less safe bet than bigger
lenders.
"The risks facing regional banks right now would be an environment
of higher-for-longer rates," said Richard Saperstein, chief
investment officer of Treasury Partners. As banks pay more to retain
customer deposits, the money they earn from interest payments is
eroded, he said, referring to a measure called net interest margin.
Saperstein expects more banks to set aside reserves for potential
losses on CRE loans, particularly related to offices. He also
predicts ratings agencies will continue to downgrade regional
lenders.
Regional banks in particular saw a decline in net interest income as
they had to pay more to depositors versus larger peers while demand
from borrowers stays subdued.
The stocks of regional lenders were hit when SVB's troubles first
emerged, and have lagged the overall U.S. equity market over the
past year.
The KBW Regional Banking index has slumped roughly 12% since the
banking issues first flared in March 2023, while the S&P 500 - the
benchmark for the U.S. stock market - has gained 28% in that time,
fueled by huge gains for megacap technology and growth stocks.
The S&P 500 banks index, which includes major banks such as JPMorgan
Chase and Wells Fargo, has fared better, rising some 12% over the
past year, though still trailing the overall S&P 500.
(Reporting by Ann Saphir in San Francisco, Saeed Azhar and Lewis
Krauskopf in New York; additional reporting by Saqib Iqbal Ahmed and
Niket Nishant in Bengaluru, editing by Lananh Nguyen, Megan Davies
and Nick Zieminski)
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