Sheila Bair, former chair of the U.S. Federal Deposit Insurance Corp, has raised concerns about the potential vulnerabilities of regional banks as their quarterly earnings are unveiled on Wall Street. She expressed worries about certain banks that still heavily rely on industry deposits and have significant exposure to concentrated commercial real estate. Bair, who led the FDIC during the 2008 financial crisis, believes that unresolved regional bank issues from previous years could pose a threat to the stability of uninsured deposits, even for the healthier banks, in the event of another bank failure.
In 2024, regional banks have been facing a challenging year, with the SPDR S&P Regional Bank ETF (KRE) experiencing a nearly 13% decline. Only a few members of the ETF have managed to stay in the positive territory. Notably, New York Community Bancorp has seen a significant drop of over 71% this year, while other banks like Metropolitan Bank Holding Corp., Kearny Financial, Columbia Banking System, and Valley National Bancorp have also suffered losses exceeding 30%. The uncertainty surrounding uninsured deposits due to potential bank failures remains a key issue for regional banks, adding to their current challenges.
The recent increase in the benchmark 10-year Treasury note yield, surpassing 4.6% and hitting its highest level since November 2023, has further raised concerns for regional banks. Bair highlighted that higher yields could escalate the pressure on commercial real estate borrowers, an area where regional banks have substantial exposure. As many commercial real estate loans are up for refinancing this year and the next, the rising rates could lead to distress among borrowers who may struggle 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 shift of business towards these bigger institutions could be a consequence of the difficulties faced by regional banks in navigating the current economic environment. The uncertainties surrounding the performance of regional banks in 2024, coupled with external factors such as rising Treasury yields, highlight the need for careful monitoring and proactive measures to mitigate potential risks in the banking sector.