Although the crisis was overcome in 2023, the suffering of regional banks in the US is not over.
The SPDR S&P Regional Banking Exchange-Traded Fund (ETF) is down about 13% this year. The stock price of New York Community Bank (New York Community Bank) fell 71%, the stock price of Bank OZK fell 16%, and the stock price of Webster Financial (Webster Financial) fell 11%.
Regional banks reported a general loss in profits in the first quarter. PNC Financial's net profit fell about 22% from the same period last year, and M&T Bank and US Bancorp fell 25% and 24%, respectively. Citizens Financial's share price fell 38%.
Their net interest income, an important measure of financial institutions' profitability, has also declined. PNC expects its net interest income in 2024 to be down 4% to 5% from last year. US Bancorp (US Bancorp) lowered its expectations, and Citizens Financial (Citizens Financial) “broadly reaffirmed” its expectations of a 6% to 9% drop in net interest income.
Higher interest rates are hurting regional banks because it means banks must pay more interest on deposits. While this has also put pressure on big banks, their larger size has made them better able to weather the storm. After Silicon Valley Bank (Silicon Valley Bank), Signature Bank (Signature Bank), and First Republic Bank (First Republic Bank) went bankrupt last year, big banks also benefited because customers withdrew their capital from small banks and invested in larger institutions.
This pain is likely to continue. High inflation, a hot job market, and a strong economy have delayed investors anticipating when the Federal Reserve (Federal Reserve) will cut interest rates. Federal Reserve Chairman Jerome Powell said on Tuesday that interest rate cuts may be later than expected. The market currently anticipates that the first rate cut may not arrive until September.
Powell said at an event hosted by the Wilson Center: “Given the strong performance of the labor market and progress in inflation so far, it is appropriate to allow more time for restrictive policies to take effect, and let data and changing prospects guide us.”
The Central Bank closed the Bank Term Funding Program (Bank Term Funding Program) in March. The plan was set up after the regional banking turmoil last year to help banks meet their liquidity needs. Sheila Bayer, the former chairman of the Federal Deposit Insurance Corporation, said she believes Congress should resume another project, namely transaction account guarantees implemented during the financial crisis.
“I'm concerned about a few [regional banks],” Bell told CNBC on Tuesday. “The big question is whether uninsured deposits will be hit again by bank failures. I think this is indeed the biggest challenge facing regional banks right now.”