Although the stock-market panic over regional banks has subsided for now, experts claim that regulators should remain vigilant in ensuring the stability of the sector amidst economic headwinds that could persist for several years. PacWest Bancorp Corp. and other regional banks’ shares have bounced back since news that their deposit bases stabilized, and the SPDR S&P Regional Banking ETF has gained almost 15% from its early March lows. Nonetheless, economists note that banks’ funding costs have surged, and deposits are proving to be less stable than in past eras.
According to economist Richard Portes, long-term regional bank assets such as mortgages and securities don’t pay as much compared to their funding costs, while competition with other savings vehicles has led traditional deposits to become less stable. These factors combined may cause difficulties for regional banks in the future.
The borrowing costs of several regional banks, including Citizens Financial Group Inc., Comerica Inc., Fifth Third Bancorp, PacWest, and Western Alliance Bancorp, leaped following the Silicon Valley Bank’s failure and again as First Republic Bank began to show signs of stress. Although these costs have decreased from recent highs, they remain high compared to previous years and more significant than the perceived too-big-to-fail banks.
Economists estimate that the market value of the US banking system’s assets is over $2 trillion less than their book value. Such accounting rules reduce volatility in bank earnings and can provide a more accurate picture of profitability in normal times. However, Portes and others argue that regulators should scrutinize the market value of bank assets during times of stress.
With new technology, runs on banks could occur faster than ever before, making it essential for federal and state bank supervisors to monitor bank liquidity and risk-management practices. Researchers led by economist Luigi Zingales of the University of Chicago showed that banks with well-functioning mobile applications experienced greater deposit flight than those without digital tools when the Federal Reserve began raising interest rates. These new dynamics mean that Congress must increase deposit insurance for business transaction accounts, and regulators must improve bank supervision and become more assertive when they see behavior that could lead to concerns about bank solvency.
