Potential Challenges Facing Numerous Regional Banks
Regional banks fall somewhere between national banks and community banks. They cover more territory than community banks but are much smaller than national banks. According to FDIC call reports, U.S. regional banks have assets ranging from $10 billion to $100 billion.
These banks play a crucial role in the American banking system, but they’ve faced increasing threats in recent years. While it’s not accurate to say they’re endangered, they are experiencing significant challenges.
### Recent Collapses of Regional Banks
In 2023, Silicon Valley Bank (SVB), a regional bank in California that primarily served the tech sector, collapsed unexpectedly. Within just 48 hours, the bank went from a stable position to complete disarray. This sudden failure raised serious concerns about the stability of banks across the U.S., showing that even successful financial institutions can quickly fall apart.
The rapid collapse of SVB caused widespread doubt among U.S. consumers, making them question the safety of their funds in banks. In response, many regional banks took proactive steps to reassure their customers, often reaching out personally.
More than a year later, regional banks are still vulnerable. In April 2024, regulators closed Republic First Bank, a regional bank operating in Pennsylvania, New Jersey, and New York. The FDIC seized the bank, marking it as the first FDIC-backed bank to collapse in 2024. As of January 31, 2024, the bank had about $6 billion in assets and $4 billion in deposits.
This recent collapse could indicate trouble for regional banks in terms of retaining customers, as it highlights potential weaknesses in their structure.
### Commercial Real Estate Market Exposure
Commercial real estate has long been a challenge for regional banks, and it’s becoming even more problematic. The main issue is the significant amount of money these banks lend to commercial real estate landlords. Since the pandemic, remote work has increased, leading to higher office vacancy rates. Many landlords, who owe money to regional banks, are reducing rents for businesses or selling properties at a loss. According to Trepp, a commercial real estate data and analytics company, $2.2 trillion in commercial real estate loan payments are due over the next three years. The big question is whether those who owe will be able to pay.
If they can’t, regional banks will suffer, as they hold nearly 70% of all outstanding commercial real estate loans, according to Apollo research.
Joel Pruis, a senior director at Cornerstone Advisors, explains that commercial real estate is beneficial when rates are stable and the economy is strong. However, when rates rise, as they did in 2023, banks have little choice but to wait it out and manage the risk. He describes it as a “perfect storm” of rising interest rates, changing market demand for office space, and over-concentration in the lending segment. To address this issue, Pruis suggests that banks should immediately assess their commercial real estate portfolios by evaluating factors like rent per square foot, vacancy rates, interest rates, and cap rates.
### Interest Rate Hikes
The recent increase in interest rates has also posed a problem for regional banks. Nelson Chu, CEO and founder of Percent, notes that a sequence of events typically triggers a banking crisis, and this time, the interest rate hike was the first domino to fall, leading to a cascade of issues.
Chu explains that there was a mismatch between liabilities and durations. Banks had many long-term loans that were earning very little, but when interest rates rose, they had to pay out more to stay competitive. This situation often leads to bank consolidation, where banks take on the liabilities of the companies they acquire.