Sheila Bair, former chairwoman of the U.S. Federal Deposit Insurance Corp., said regional banks' earnings could reveal critical weaknesses.
Their quarterly numbers appear on Wall Street this week.
“I'm worried about a handful of them,” Bair told CNBC's “Fast Money” on Tuesday. “I think some of them are still overly reliant on industrial deposits, have heavy exposure to commercial real estate, and then I think the bigger picture is actually the potential instability of their uninsured deposits even for the healthy ones if we had another bank have.” Failure.”
Bair, who led the FDIC during the 2008 financial crisis, is concerned that regional banks' problems will not be fully resolved as of 2023.
“Congress should reinstate the FDIC’s transaction account guarantee authority so that it can stabilize these deposits,” she said. “This is still a problem for the regional banks and I keep my fingers crossed that it is.” [not] another failure. We're just not entirely sure what's going to happen.
Regional banks have had a difficult year so far. The SPDR S&P Regional Bank ETF (KRE) is down nearly 13% and only four of its members are positive about 2024.
The biggest laggard in the KRE is New York Community Bancorp which has plummeted by more than 71% this year. Metropolitan Bank Holding Corp., Kearny Financial, Columbia banking system And Valley National Bancorp have fallen by more than 30% during this period.
“The big question is whether there will be another shock to uninsured deposits due to a bank failure, and I think that's really the biggest challenge facing regional banks right now,” she said.
Their recent warning about regional banks serves as a benchmark 10-year Treasury note yield topped 4.6% this week, reaching its highest level since November 2023.
Bair worries that higher yields could put more strain on commercial real estate borrowers, and regional banks are at great risk.
“Part of the problem with commercial real estate is that a lot of it needs to be refinanced this year and next year,” Bair said. “So the higher the interest rates on these refinances, the more distress borrowers will have to continue making their payments.”
However, regional banks' problems could lead to more business larger institutions.
“The plight of regional banks benefits the large financial banks. There’s no doubt in my mind,” Bair said.
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