Should you withdraw your money from a regional bank?

With the ongoing regional banking crisis sparked by problems in the commercial real estate sector, it may be time to reconsider the security of your deposits with regional banks.

The sector has yet to stabilize following the collapse of Silicon Valley Bank and Signature Bank earlier this year and the seizure of First Republic by regulators in May due to the rush of uninsured depositors to withdraw their money.

Despite some positive signs, such as regional bank executives buying shares in their own companies, underlying problems remain and cracks are beginning to form.

The regional banking sector’s significant exposure to the commercial real estate (CRE) market, particularly in the office and retail sectors, is an Achilles’ heel. In the current interest rate environment, where interest rates are higher over the longer term, assets have fallen. The crisis is deepening as commercial real estate loans – which make up a significant portion of small and medium-sized banks’ assets – approach maturity while interest rates are still high and demand for office space is falling.

“Nobody’s going to put money in a regional bank if they know it could be one of those that goes to zero next week,” Shark Tank star Kevin O’Leary said in a recent interview with Bloomberg Originals. “Why would you do that?”

The situation is dire; With interest rates remaining at turn-of-the-century levels, the attractiveness of new loans is decreasing and existing loans are at higher risk of default, particularly given the looming 50 percent office vacancy rate.

The crisis in the CRE market is not only a ticking time bomb for regional banks, but a potential maelstrom for the overall economy. As banks struggle to cope with the heat, small businesses also rely on the financial support of these institutions.

If the commercial real estate default rate reaches 10 percent, the same level as the Great Recession, the banking sector could suffer losses of up to $80 billion. In addition, the cumulative effect of the Federal Reserve’s interest rate hikes has weighed on banks’ net interest income and further pressured their financial stability.

There is also a growing disconnect between larger banks and their regional counterparts. While giants like JP Morgan Chase & Co can weather the storm by keeping interest rates low for depositors, regional banks are under pressure to raise interest rates to retain anxious depositors.

However, this tactic affects their ability to pay.

The dilemma worsens as depositors demand higher interest payments, a phenomenon Kellogg’s Gregor Matvos has observed. It is a doom-loop; As regional banks attempt to appease their depositors with higher interest rates, their solvency is further jeopardized.

Experts suggest a recapitalization solution. By restricting equity payments and raising additional equity, banks could strengthen their financial base. Although the Fed has encouraged mergers – regional bank PacWest is completing a merger with Banc of California next month – and is considering raising capitalization requirements, tougher measures are strongly recommended to avert a slow-motion catastrophe.

The proposed policy changes, while painful in the short term, are aimed at arming regional banks against ongoing and impending financial crises.

Since the storm is far from over, the shocks in the regional banking sector are a signal for depositors. The troubling environment between rising interest rates, a struggling commercial real estate sector and the solvency of regional banks is a sign of financial discord that could resonate with depositors for a while.

Disclaimer: The content of this article is for informational purposes only. Neither Newsweek nor the authors involved in the production of this article are licensed financial advisors. The information presented here does not constitute financial advice. We strongly recommend that you consult a professional financial advisor before making any investment decisions.

Available office space in San Francisco
There is an office vacancy in San Francisco, California as of October 27, 2022. The city of San Francisco has a record 27.1 million square feet of office space as the city struggles to recover from the COVID-19 pandemic, according to a report from commercial real estate firm CBRE.
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