Regional bank failures could be in the offing, former FDIC head Bair warns

Regional banks’ earnings could expose critical weaknesses, said Sheila Bair, former chairman of the U.S. Federal Deposit Insurance Corp.

Their quarterly results start appearing on Wall Street this week.

“I’m concerned about a handful of them,” Bair told CNBC’s “Fast Money” on Tuesday. “I think some of them are still overly reliant on industry deposits, have a lot of concentrated commercial real estate exposures, and then I think the bigger picture really is the potential instability of their uninsured deposits, even for the healthy ones, if we have another bank. failure.”

Bair, who headed the FDIC during the 2008 financial crisis, is nervous that the problems with regional banks won’t be fully resolved as of 2023.

“Congress should reinstate the FDICs guarantee authority for transaction accounts so they can stabilize those deposits,” she said. ‘This is still a problem for regional banks, and fingers crossed there will be [not] another failure. We’re just not quite sure what will happen yet.”

Regional banks have had a difficult year so far. The SPDR S&P Regional Bank ETF (KRE) is down almost 13%, and only four of its members are positive for 2024.

The biggest laggard in the KRE is Community Bancorp of New York which has fallen 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 that period.

“The big question is whether there will be another shock to uninsured deposits from a bank failure, and I think that is really the biggest challenge facing regional banks right now,” she said.

Her latest warning for regional banks serves as a benchmark The yield on ten-year government bonds peaked at 4.6% this week, reaching its highest level since November 2023.

Bair is concerned that higher yields could put more pressure on commercial real estate borrowers, and regional banks have a lot of risk.

“Part of the problem in commercial real estate is that a lot of it is being refinanced this year and next year,” Bair says. “So the higher the interest rates for those refinancings, the more difficulty there will be for borrowers to continue making their payments.”

However, regional banks’ problems could mean more business larger institutions.

“Regional banking problems favor the big money center banks. I have no doubt about it,” Bair said.

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