Sheila Bair, former chair of the U.S. Federal Deposit Insurance Corp, recently expressed worry about the upcoming earnings reports of regional banks. In an interview with CNBC’s “Fast Money,” Bair highlighted several critical weaknesses that could pose a threat to the stability of these financial institutions. She pointed out that some regional banks still heavily rely on industry deposits and have significant exposure to commercial real estate. Additionally, she raised concerns about the potential instability of uninsured deposits, even for the healthier regional banks, in the event of another bank failure. Bair’s apprehensions stem from the fact that issues faced by regional banks in 2023 may not have been fully resolved.
The year has been particularly challenging for regional banks, with the SPDR S&P Regional Bank ETF (KRE) experiencing a nearly 13% decline. Only a handful of its members have managed to stay in positive territory for 2024. Notably, New York Community Bancorp has been the worst performer in the KRE, plummeting more than 71% this year. Other regional banks such as Metropolitan Bank Holding Corp., Kearny Financial, Columbia Banking System, and Valley National Bancorp have also seen their stock prices drop by over 30% during this time period. One of the major concerns highlighted by Bair is the potential shock that uninsured deposits could face in the event of a bank failure, posing a significant challenge for regional banks.
Bair’s warnings come amidst the surge in the benchmark 10-year Treasury note yield, which recently surpassed 4.6% and reached its highest level since November 2023. The former FDIC chair expressed concerns that the increase in yields could further strain commercial real estate borrowers, an area where regional banks have substantial exposure. As many commercial real estate loans are set to be refinanced in the coming years, higher interest rates could lead to increased distress among borrowers struggling to meet their payment obligations.
Despite the challenges faced by regional banks, Bair noted that their distress could potentially benefit larger money-center banks. The current environment of uncertainty and instability in the regional banking sector may drive customers towards bigger institutions perceived as more stable and secure. This shift could further widen the gap between regional banks and their larger counterparts, ultimately consolidating more business in the hands of the big players in the banking industry.