When Silicon Valley Bank and Signature Bank failed in March, amid hemorrhaging deposits and shrinking investment portfolio values, dire predictions were rife that regional lenders would take down the economy. Well, such a catastrophe is a nonstarter and small banks should be fine, according to Natixis.
“We’re not totally out of the woods, but there’s not a banking crisis,” says Garrett Melson, a portfolio strategist at the Paris-headquartered investment firm. In the firm’s view, the problems were “confined to a handful of banks.”
Western Alliance, one regional lender that investors have fretted over, just announced that its deposits had grown more than $2 billion this quarter to date. Its shares jumped 12% in response, rising along with shares of other beaten-up small lenders such as PacWest, Zions and Comerica.
The KBW Nasdaq Regional Banking Index increased 7.3% on Wednesday after the Western Alliance news broke, although the index remains off one-third from its 2023 high. One persisting question is whether any more bank failures will occur, even if they are outliers. The most recent was First Republic, which the federal government seized and sold to JPMorgan Chase on May 1—the second largest bank failure in U.S. history after the 2008 collapse of Washington Mutual.
Deposits at small banks started to slide in early March and lost some $200 billion, Federal Reserve data show. Then the decline stopped. Overall deposits have been steady since mid-April. Meanwhile, Fed stats indicate that lending has not flagged among these banks at all.
Chasing away deposits at the likes of SVB was the recent swelling of “unrealized losses”—bonds and other assets that had lost value, as interest rates have soared over the past 14 months. But Melson dismisses this as a problem affecting just a handful of regional banks. “It’s the unintended by-product of the tightening cycle,” he says. To extend that phenomenon to the entire small-bank category is “a red herring,” he adds.
To be sure, regional banks still face challenges, Melson says, notably competition for investors’ dollars from money market funds and Treasurys, which pay higher yields. Banks’ one-year certificates of deposit pay 1.67% on average, according to Bankrate. Money funds yield 4.84%, Crane Data indicates, and one-year Treasury bills 4.92%, per the U.S. Treasury Department.
Long term, another worry is that commercial real estate loans will sour. At the moment, there is no sign of widespread defaults. The CRE loan delinquency rate (a broader category for bad loans than defaults alone) is just 0.68%, down from the recent peak of 1.13% in 2020, during the pandemic’s onset.
Problems with CRE loans could occur if a recession hits, of course. “That could be a drag on growth,” Melson notes. Still, he points out, these loans constitute just 2.5% of gross domestic product.
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Tags: certificates of deposit, CRE loans, deposits, Federal Reserve, Interest Rates, KBW Nasdaq Regional Banking Index, lending, money market mutual funds, Natixis, regional banks, Stocks, Treasury bills