Regional banks under scrutiny: What makes them different?
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These are not the big, household names like Bank of America and Citigroup, nor small community banks with a few branches. They’re pretty much everything in between.
This week, the ratings agency Moody’s said it’s reviewing half a dozen midsize banks for a possible downgrade, including First Republic Bank and Western Alliance Bancorp. These and others have taken a bruising in the stock market.
But unless you live in their regions, you’ve probably never heard of some of these banks — at least until the last few days.
“Regional” is a bit of a loose term, said Lakshmi Balasubramanyan, a professor of finance at Case Western Reserve University.
“It’s not incredibly well defined,” she said. “When you talk about a region, is it a state or contiguous states or a certain district?”
Texas-based Comerica Bank has branches in Arizona, California, Florida and Michigan. First Republic, headquartered in San Francisco, is scattered throughout eight states, including Wyoming, New York and Massachusetts.
“Especially as you go up in size, the geographic footprint of these banks can get pretty broad — to the point where the large regionals are almost at a national scale,” said Eric Compton, an analyst at Morningstar.
There’s one main reason regional bank stocks have been in turmoil this week, Compton said: “The government’s never going to let, like, a JPMorgan fail.”
“However, regional banks are not viewed as systemically important,” he added. “Maybe the government does let them go under, and there’s an off-chance that maybe your deposits are at risk.”
In the cases of Silicon Valley Bank in California and Signature Bank in New York, the government did step in to insure all deposits. “But that doesn’t always happen,” Compton said. “There have been banks that have gone under or depositors were not made whole, and so I think that’s why regional banks are getting penalized more right now.”
SVB and Signature had unique characteristics that put them in unusually risky circumstances. But investors and bank customers are suddenly wary of any banks with similar issues, including a high percentage of uninsured deposits and large holdings of bonds that lost value as interest rates climbed.
“The concern would be that as flight of deposits moved to the biggest banks, then the smaller banks are made more vulnerable,” said Mark Williams, a former bank examiner who teaches finance at Boston University.
Regional banks play an important role in the economy, he said — sometimes offering more flexibility and personalized service than larger banks while lending to small and medium-sized businesses that might otherwise be ignored. “They represent important niches in the marketplace.”
Balasubramanyan said the situation has shown that when it comes to systemic risk, size isn’t the only factor.
“We don’t want the regulatory burden to be excessive on smaller institutions, but if it’s complex or overexposed or if it’s off a certain risk profile that makes it more susceptible to, say, bank runs, it becomes important for us to be cognizant of that,” she said.
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