The US regional bank sector has been hit by the collapse of three banks in the past week, exposing its vulnerabilities to liquidity and capital risks.
Silicon Valley Bank, Signature Bank and Silvergate Capital were shut down by regulators after experiencing bank runs and failing to meet capital requirements. The failures have triggered rating downgrades and stock sell-offs for other regional banks, which are typically less diversified and more exposed to market fluctuations than their larger counterparts.
The US Federal Reserve has stepped in to provide emergency funding to the banking system, announcing the new Bank Term Funding Program that allows banks to pledge various types of assets to the Fed at par value. The program is aimed at preventing banks from selling securities at losses to raise liquidity, which would erode their capital levels.
“Now that banks can pledge many types of assets to the Fed at par against the new Bank Term Funding Program, the risk that other banks could be forced to sell securities at losses … and thereby impact capital levels has been minimized,” said Ken Usdin, an analyst at Jefferies.
However, some analysts warn that some regional banks still face significant challenges. Morningstar has identified five regional banks that face above-average liquidity and/or capital risks: First Republic Bank, Huntington Bancshares, KeyCorp, Comerica and Truist Financial. First Republic Bank is facing the biggest questions, as it has seen its deposits drop by $10 billion in the past week. The bank is reportedly in talks with some of the country’s biggest banks to receive up to $30 billion in deposits in a government-supported attempt to buoy the bank.
Other analysts have upgraded some regional banks that they see as offering a strong pair of hands, such as PNC Financial Services Group, Wells Fargo and JPMorgan Chase.
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