US Regional Banking Crisis Follow-up: Maybe Far From Over?

While contagion risk from recent bank failures has eased as industry deposits have stabilized, a series of challenges remain, including rising funding costs, inadequate capital and increased regulation.

Since the SVB and Signature failures, money-market fund balances have grown by $558 billion, up 11% overall. In contrast, banks still haven't fully recovered from the deposit outflow.

Following recent bank failures, regional lenders are operating with a defensive mindset, with priorities including building capital, and reining in lending. The number of banks with tightening standards is increasing for prudential purposes, but that means credit growth will be slower, affecting banks' profits.

Online savings account providers are now passing on more of the recent interest-rate hikes to their customers, following a period of regional bank failures and a resurgence in depositors seeking high-yielding alternatives. For instance, with money market yields hovering around 5%, New York Community Bank currently offers a 5% savings rate.

FRED data shows delinquency rate of consumer loans and credit card loans rose, although the asset quality of real estate now remains at a low level. Slow lower economic activity may translate into even higher loan losses.

Tougher rules seem inevitable for regional banks following the collapse of SVB and First Republic, and any regulatory changes could focus on funding and the deposit assumptions embedded in liquidity ratios and stress testing. Unrealized available-for-sale losses in capital ratios might be in store.

In general, though the acute stage of the banking turmoil may be over for now,sentiment might not rebound until the yield curve flattens and the Fed reaches the end of rate hikes.