Concerns about regional banking sector continues in US

By Dilara Zengin

WASHINGTON (AA) - US regional banks face challenges from rising deposit costs and risky commercial real estate loans, as they try to recover from the failure of Silicon Valley Bank (SVB), the largest bank failure since the 2008 financial crisis.

One year has passed since the SVB went bankrupt, becoming one of the biggest bankruptcies in the country’s history within two days from panic caused by venture capitalists striving to overcome a liquidity crisis.

News of SVB’s failure came at a time when interest rate hikes were still ongoing in the face of high inflation, with recession expectations up.

The failure caused turmoil in the US banking sector and sent shockwaves to the global financial system in March 2023.

SVB’s shares underperformed on the US stock market over the past year, as its bankruptcy and higher interest rates have set roadblocks to reach a fully restored confidence in regional banks.

The KBW Nasdaq Regional Banking Index fell nearly 12% since March 2023, at a time when problems in banking hiked and the S&P 500 gained 28%.

- Signature Bank, First Republic Bank follow suit

The SVB was the 16th largest bank in the US with $209 billion in assets, therefore, its failure on March 10, 2023, attracted attention in the markets.

The bank focused on the technology sector and loaned to entrepreneurs, though it went bankrupt due to rising interest rates and the slowdown in the sector.

The US experienced the largest bank failure since Washington Mutual Bank’s bankruptcy in 2008, and the collapse of SVB was followed by Signature Bank and First Republic Bank.

Triggered by large deposit outflows, the changes led to raised concerns about the banking sector, especially for similar and smaller banks with large amounts of uninsured deposits, unrealized losses and exposures to commercial real estate.

- Bank failures show financial institutions lack preparations for environment riddled with high interest rates

The global financial system experienced the most serious banking stress since the global financial crisis in March and April last year, according to the latest Global Financial Stability Note on the US banking sector published by the International Monetary Fund (IMF).

The Fed raised its interest rate by a total of 525 basis points between March 2022 and September 2023 in the face of high inflation. Additionally, the bank implemented the fastest tightening cycle since the 1980s, changing its policy rate to levels not-before-seen since the global financial crisis.

Bank failures showed that some financial institutions were not prepared for a high-interest environment after a long period of low interest rates.

- Bank managements fail to adequately manage interest rates, liquidity risks

Uncertainties in the markets were further increased by the stress in the banking sector caused by the SVB bankruptcy, as banking stocks fell and market volatility increased.

The stress quickly spread to the short-term funding market, causing financial conditions to tighten.

Despite clear communication from monetary authorities, the pace and the magnitude of interest rate increases posed challenges for some institutions, while some bank managements thought that inflation would be temporary and they failed to adequately manage the interest rates and liquidity risks, as stated in the IMF report.

SVB bankruptcy has also exposed structural challenges in the business models of some US banks.

Last year’s crisis showed that the growing influence of technological advancements, such as the rapid sharing of information on social media, can contribute to the pace of deposit outflows.

- US regulators take steps to prevent stress from spreading in banking sector

The steps taken by the federal regulators to provide emergency liquidity and protect depositors prevented the spread of stress in the banking sector.

In fact, the Fed played an important role, it announced it would provide additional financing to eligible depository institutions to help banks meet the needs, via its Bank Term Funding Program (BFTP).

SVB's failure showed that even a non-global and systemically important institution can pose serious risks to financial stabilities, as bank failures in the US led to strengthened supervision and regulations in the sector, according to the IMF’s report.

- Institutions, banks with high concentration of commercial real estate loans positioned at center of concerns

Concerns over the banking sector in the US continue, despite the recovery of regional banks since March 2023 and stabilized deposit outflows.

In addition to unrealized losses due to rising interest rates, the credit risk of some banks with a high concentration of commercial real estate loans, and other financial institutions, continue to be the center of concerns.

High interest rates, falling property values and deteriorating asset quality pose risks for banks, as uncertainties persist over the timing and pace of interest rate cuts.

- New York Community Bank’s shares fall sharply, reigniting concerns over banking sector

The New York Community Bank’s shares fell sharply upon announcing a surprise loss in its balance sheet published at the end of January, reigniting concerns over the banking sector.

The bank lost more than 60% contrary to its profit expectations, which was due to problematic real estate loans and cut dividends, it said.

The bank changed its top management last week, moreover, it amended its fourth quarter financial results and added a disclosure on internal risk management.

Weaknesses were identified in internal controls over internal credit review resulting from ineffective oversight, risk assessment, and monitoring activities, as the New York Community Bank told the US Securities and Exchange Commission (SEC).

International credit rating agency, Moody’s, downgraded the bank’s credit rating for the second time in a month, putting it on watch for further downgrades, as per the concentration of commercial real estate loans in the bank’s portfolio.

Fitch Ratings, another credit rating agency, also downgraded the long- and short-term credit ratings of the bank and its subsidiary, Flagstar Bank, setting the rating outlook as negative.

- New York Community Bank announces deposits down 7% in February

The New York Community Bank sought cash financing this week and contacted investment firms about a possible equity capital increase, according to US outlets.

The bank announced it increased its capital by more than $1 billion, in addition, the bank’s board of directors was restructured.

After the announcement of the capital increase, shares of New York Community Bank rose toward the closing of markets Thursday.

The bank released an updated version of its financial information, reporting that its deposits declined by about 7% since February, and it has cut its dividend for the second time in 2024.

The New York Community Bank had acquired the assets of Signature Bank, which had gone bankrupt last year, and the US Federal Deposit Insurance Corporation (FDIC) announced that Signature Bank’s loan portfolio consisted primarily of commercial real estate and commercial loans.

*Writing by Emir Yildirim in Istanbul