As Cash Reserves Fell Below Restrictive Levels, Has the Crisis for Regional Banks Not Ended Yet?

As the financial reports of many major banks in the first quarter of this year fell short of expectations, regional banks with less competitiveness are facing a more difficult operating environment.

Fed's weekly data shows that the cash reserves of small banks in the United States plummeted sharply in April, falling below what is considered to be the constraint levels. This does not include the $126 billion still remaining in the Federal Reserve's emergency loan program set to expire in March.

■ The number of problem banks is rising

Back in March, a report by FDIC showed a confidential tally of lenders with financial, operational or managerial weaknesses had grown by eight banks to 52, representing 1.1% of the institutions it oversees. The total assets held by those firms increased by $12.8 billion last quarter to $66.3 billion.

Despite the count of firms on the FDIC's watchlist being comparatively low against historical peaks, the number has been on an upward trajectory since early last year.

The always-friendly Senator Liz Warren delivered a scathing critique of Fed Chair Jay Powell, accusing "greedy bank executives" of precipitating bank failures and urging the Fed to properly regulate such entities. In his defense, Powell highlighted the Fed's proactive engagement with banks harboring substantial amounts of uninsured deposits and sizable commercial real estate debt. He further noted that the Fed is scrutinizing whether these banks are engaging in self-deception regarding their financial status. Echoing earlier reports, many loans listed on the banks' balance sheets are significantly overvalued.

Warren countered by suggesting that Powell has become timid in the face of necessary bank oversight, sharply remarking that the American public deserves a Fed leader who dares to confront these financial institutions head-on.

Meanwhile, Martin Gruenberg, the chairman of the FDIC, acknowledged that the banking industry is facing formidable risks, which could impinge upon credit quality, profitability, and liquidity. He particularly highlighted apprehensions concerning commercial real estate lending.

■ The repayment pressure on U.S. residents continued to increase

Consumers are ever more strapped for actual cash, as the personal savings rate in the US has collapsed from over 5% to 3.2% - the lowest since 2022 - in just a few months. In contrast, the US total credit card debt reaches a record high.

Fed also reported that in Q1, the average rate across all commercial banks on all credit card amounts just hit a new record high of 21.59%. Soaring interest rates and falling savings rates have made residents’ repayment burdens heavier and heavier. Correspondingly, banks’ net charge-offs continue to rise.

■ Overall interest income declined in the first quarter

The latest quarterly earnings reports show that Q1 net interest income (net II) decreased 3% q/q compared with a 2% drop in 4Q. This was the 5th quarter in a row of declining net interest income (which has declined 1-3% during this time). The q/q drop was mostly driven by lower net interest margins reflecting continued pressures from deposit repricing and remixing, as well as a modest decline in average loans. Meanwhile, Core costs (per bank disclosures) increased by 1% q/q and 2% yoy.

Higher-for-longer rates could be a mixed bag for the banks. Although large banks like BAC and WFC noted fewer rate cuts would be a positive/benefit during their earnings calls, regional banks such as RF, TFC and USB suggested higher for longer would be a negative/drag.

■ Republic First Bank shuts down, marking 2024's first FDIC-insured bank failure

US regulators took over Philadelphia's Republic First Bancorp in late April and agreed to sell it to Fulton Bank, another regional bank with total assets of $6 billion. The decision marks the latest U.S. regional bank failure following the unexpected collapses of three lenders - Silicon Valley and Signature in March 2023 and First Republic in May. Republic First Bank is a regional lender operating in Pennsylvania, New Jersey and New York.

The Federal Deposit Insurance Corporation expects the bank’s failure to cost its fund about $667 million. The failure also reflects the continuing pressure on the U.S. banking industry, which has seen an average of 4-5 bank failures despite strong economic years.