In the Market: Why US regional banks are doomed to a doom loop

First Republic Bank

15/05/2023 06:00

By Paritosh Bansal
       May 15 (Reuters) - Banking regulators have been pushed
by market volatility in recent weeks into doing things that they
haven't really wanted to do, like letting the largest U.S. bank
get even bigger. Their hand may be forced again. 
    Take the case of the Federal Deposit Insurance Corp (FDIC),
one of the main banking regulators. In a December 2021
statement, Chairman Martin Gruenberg said the sale of some
troubled banks to the likes of JPMorgan Chase & Co  JPM.N 
during the financial crisis of 2008 had arguably "increased
long-term financial stability risk."
    That had regulators wary of more consolidation. The weekend
in March when the FDIC took over Silicon Valley Bank after a run
on the lender triggered a broader deposit flight to safety, some
of the largest U.S. banks initially got the impression that
their bids would not be welcome, according to two sources
familiar with the matter. 
        They weren't allowed into the data room until it was too
late to come up with a bid, one of the sources said.
    A month and a half later, however, when First Republic Bank
failed, the FDIC had to sell it to JPMorgan as it was the least
costly option for the deposit insurance fund.
        An FDIC spokesperson said the agency did not exclude the
so-called global systemically important banks (G-SIBs) from
bidding on Silicon Valley Bank and invited them to do so. The
speed of the collapse meant it took the agency some time to set
up a data room, delaying the process. The G-SIBs chose not to
bid, indicating lack of interest in the asset, the spokesperson
said.
        Gruenberg did not comment. 
    A dysfunctional regional banking sector is deeply
problematic. These banks provide credit to vast sections of the
U.S. economy, and deposit flight has forced them to pull back on
lending. Three U.S. banks have collapsed and the shares of some
others have been hit in their wake, with the KBW Regional
Banking Index  .KRX  down some 30% since March 8. 
    An uncertain economic outlook on the back of tight monetary
policy and other risks, such as falling commercial real estate
values and the U.S. debt ceiling debate, are adding to the
pressure. Continued stress on these banks could well push the
economy into a recession. 
    
    Although things have calmed down substantially since March,
investors have refused to draw a line under the crisis. 
    So regulators, bankers and other experts are floating ideas
for additional steps Washington could take to stamp out the
crisis. These ideas range from accelerating the pace of
approvals of bank deals to increasing the deposit guarantees and
scrutiny of investors who bet stocks will fall.
    But those options either encourage things that regulators
don't want, like the creation of bigger banks or irresponsible
behavior, or are steps that have not really worked in the past,
like restricting short selling, according to banking experts.
Some would also require legislative approval, which is hard to
do in a divided Congress.  
    
    That leaves regulators with tools that treat the symptoms,
but have unwanted side effects and don't provide the cure. 
    They have provided banks with lifelines that give them
enough cash to meet deposit withdrawals, for example. But the
problem now is a crisis of confidence, with some investors
questioning the ability of some of these lenders to make money
in the longer term. 
    So as one bank fails, another comes into the market's focus,
creating a vicious cycle and putting pressure on regulators to
intervene again. 
    Treasury Secretary Janet Yellen said on Saturday that nearly
all banks had access to sufficient liquidity but pressure on
earnings may lead to some midsize bank deals.
        "That's something I think the regulators will be open
to, if it occurs," she said.
     

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Overall bank credit    https://tmsnrt.rs/40vb8Yw
Bank tremors and SVB    https://tmsnrt.rs/3LZ6nk4
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 (Reporting by Paritosh Bansal, Additional reporting by Nupur
Anand; Editing by Anna Driver)
 ((paritosh.bansal@thomsonreuters.com;))