In the Market: Fed beware the banking crisis of March

Cadence Bank

18/09/2023 15:40

(Updates Jeff Jackson's comment in paragraph 24 to show his
comments refer to commercial lending)
    By Paritosh Bansal
       Sept 18 (Reuters) - Cadence Bank  CADE.N  CEO Dan
Rollins calls the regional banking crisis from earlier this year
"March madness." Six months on, the craziness has abated, but
the industry is scarred and still dealing with its consequences.
    "We don't want an asset that doesn't come with a full
wallet," Rollins said, referring to a trend since the crisis
where banks want customers who want loans to also bring them
their deposits. "We know that we're going to continue to be
fighting for the dollars."
    Rollins' southeastern regional bank is not alone. Interviews
with half a dozen regional bank executives and economists show
the March banking crisis has had a lasting impact on the
regional banking industry and the economy.
    The upheaval likely tightened credit conditions faster and
beyond what the Federal Reserve's rate hikes alone had done
until then. And while its effect has not been as severe as some
had feared, there still is a risk.
    Taken together, the lingering effects of the crisis
complicate the U.S. Federal Reserve's calculus as it walks a
fine line on interest rates, increasing the chance it might
over-correct. 
    The Fed, which meets this week, has previously said it is
monitoring the conditions in the banking sector.
    Mark Zandi, chief economist at Moody’s Analytics, said the
muted impact of the crisis was perhaps "one of the reasons why
the economy is navigating things more gracefully than many had
feared." But, he added, "The script is still being written.”
    In April, Zandi had forecast that the economic drag from the
banking crisis could have the same effect as a 50 to 75 basis
point increase in the federal funds rate. He estimated so far it
had been about 10-20 basis points but warned it may still be
early innings.
    Torsten Slok, chief economist at Apollo Global Management,
said the banking crisis had "a magnifying effect" on the Fed's
tightening but its full impact would come with a lag. 
    His model shows it could add up to a 1.5% drag on U.S. GDP
over the next four to six quarters.
    Slok said the impact so far can be seen in data: Fed data,
for example, shows while large banks started to pull back on
credit when the central bank started raising rates last year,
small banks continued to increase loans and leases until Silicon
Valley Bank collapsed in March.
    "When Silicon Valley Bank happened, you saw a very dramatic
behavioral change in the small banks," Slok said. 
   
 
    DEPOSIT REPRICING       
    Silicon Valley Bank collapsed after customers, such as
venture funds and startups with corporate accounts, withdrew $42
billion in a single day. The failure triggered a crisis of
confidence, with depositors moving their money from regional
banks to the perceived safety of the largest lenders. The KBW
Regional Bank Index  .KRX  is down about 20% since early March
despite a summer rebound.
    The deposit flight accelerated the transmission of Fed
policy into the economy, the bankers said. It forced the smaller
banks to start offering higher interest on deposits to compete
for funding and charge more for loans to protect margins. 
    Cadence's Rollins estimated the repricing of deposits may
have been pulled forward "by a quarter or two." 
    Steve Wyett, chief investment strategist at Tulsa,
Oklahoma-based BOK Financial  BOKF.O , said their deposit beta,
a measure of the sensitivity of deposit costs to changes in
short-term interest rates, had shot up. 
    "We're a lot more sensitive to what fed funds are now,"
Wyett said. "You're competing with money market funds that are
over 5%." 
    The higher rates have helped banks ramp up deposits and
stopped the bleeding, but not all customers that had left for
the bigger banks have returned, bankers said. 
    
    EFFECTIVE EASING 
    Banks also loaded up on other sources of funding in recent
months as the situation calmed. Borrowings under the Fed's
emergency lending facility, called the Bank Term Funding Program
(BTFP), rose to $108 billion this month.
    Cadence’s Rollins and Randy Chesler, CEO of Kalispell,
Montana-based Glacier Bancorp  GBCI.N , said they had borrowed
under the program because it offered better terms and rates than
alternative sources like the Federal Home Loan Banks (FHLB).
    "It created a very attractive funding source," Chesler said.
"We used it purely from an economic standpoint because we have
plenty of liquidity."
    Moody's Zandi said the BTFP and FHLB lending were "an
effective easing in monetary policy." The BTFP, however, is
temporary, which means its mitigating influence will wear off in
a few months. That could further tighten credit availability. 

    NO LOAN-ONLY DEALS
    The crisis has made banks more selective about the products
they offer, pulling back from purely lending relationships in
favor of deals where borrowers also use the bank for deposits. 
    "We have really stopped doing loan-only deals. All the deals
now that we're doing, we require deposits or require some sort
of ancillary business,” said Jeff Jackson, CEO of Wheeling, West
Virginia-based WesBanco  WSBC.O , referring specifically to
commercial lending.
    That has meant tighter credit for various products, ranging
from financing for boats and recreational vehicles to loans to
home builders and commercial real estate, bankers said,
providing fresh insights into how credit was getting harder to
obtain.
    Raj Singh, CEO of BankUnited  BKU.N , said the focus has
meant that large loans, called shared national credits, that
earlier would see a dozen banks competing for a piece, now see
only half as many interested. 
    All that has added further to higher pricing. Loan spreads
have widened across commercial and industrial (C&I) and
commercial real estate (CRE) loans, Singh said. A loan that
would earlier price at 200 basis points over a benchmark
interest rate like SOFR, now costs 300 basis points, he said.
    The crisis "certainly slowed or at least made borrowing more
expensive," Singh said.     
    

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GRAPHIC-Dramatic Change    https://tmsnrt.rs/3ENFnkh
GRAPHIC-Deposits Rebound    https://tmsnrt.rs/46colbw
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 (Reporting by Paritosh Bansal; Editing by Anna Driver)
 ((paritosh.bansal@thomsonreuters.com;))