Former FDIC Chair Warns of Potential Weaknesses in Regional Bank Earnings

As the regional bank earnings season kicks off this week, concerns are mounting about the industry's stability. Sheila Bair, former chair of the U.S. Federal Deposit Insurance Corp, has warned that these banks may be facing critical weaknesses that could have significant repercussions.

Bair expressed her worries about the overreliance of some regional banks on industry deposits and their substantial exposure to commercial real estate. These factors, she believes, contribute to the potential instability of their uninsured deposits, posing a threat even to the healthier banks in the event of another bank failure.

Based on her experience during the 2008 financial crisis, Bair expressed unease that the problems faced by regional banks in 2023 have not been fully resolved. She emphasized the need for Congress to reinstate the FDIC's transaction account guarantee authority to stabilize deposits and prevent potential failures.

Market Performance and Challenges

Regional banks have been grappling with a tough year, reflected in the almost 13% decline of the SPDR S&P Regional Bank ETF (KRE). New York Community Bancorp stands out as the biggest laggard, with a staggering drop of over 71% in 2024. Several other members of the KRE have also experienced significant declines, raising concerns about the sector’s overall stability.

Bair highlighted the potential impact of the benchmark 10-year Treasury note yield, which surpassed 4.6% and reached its highest level since November 2023. With a substantial exposure to commercial real estate, regional banks could face increased stress as higher yields may impede borrowers’ ability to meet their payment obligations during refinancing.

Despite the challenges faced by regional banks, Bair suggested that their distress could open doors for larger money-center banks to capitalize on the situation. This could potentially shift business away from regional banks and toward their larger counterparts.

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