How can regional banks manage the industry’s troubles?
How can regional banks manage the industry’s troubles?
Things are not looking good for regional banks after the collapse of First Republic. News that Los Angeles-based PacWest is exploring “strategic options,” including a sale, sent its stock sliding. First Horizon, Western Alliance and Zions Bancorp saw notable declines, too.
So with confidence in the banking system shaky, what is a regional bank to do?
Some of what’s happening in banking right now is actually pretty normal. For starters, interest rates are always a part of banking strategy. Those ebbs and flows affect business, and analyst Joseph Wang at Monetary Macro said “business” is a key word here.
“Banks are like any other businesses. Some of them fail,” he said.
In fact, banks have failed in 15 of the last 20 years. Most have been regional and small banks, ones that aren’t “too big to fail.”
As for other normal banking things? Borrowing money from other banks or the Federal Reserve. And selling assets. But at a certain point, Wang said, this list of everyday bank procedures becomes kind of irrelevant “because ultimately banking is a confidence game.”
Confidence is waning among investors. Peter Conti-Brown, a professor of financial regulation at Wharton, said banks need to keep that from spreading to depositors.
“As banking stress becomes a banking crisis, it’s very hard to send the signal so that depositors, investors and others can separate the sheep from the goats, so to speak,” he said.
The “sheep” are banks that have managed risk well. The “goats” — well, the goats have not. Conti-Brown said those make up around 5% of the U.S. banking system, which is not a lot unless they all fail at once.
“What we’re trying to do is strengthen the mediocre and good banks, so that they can be in a position to buy up the worst banks,” he explained.
In other words: industry consolidation. And there’s room for it. The U.S. has over 4,000 banks, more than any other nation.
These individual acquisitions are supposed to add up to this grand confidence in the banking system. Bank A provides stability by buying Bank B. Bank C buys bank D and so on. But Darius Palia, a finance professor at Rutgers University, said a pattern of saves by lenders and regulators can instead make depositors nervous.
“It’s like crowd philosophy, you know. When does the crowd suddenly turn?” he said.
So, this comes down to you. How confident do you feel?
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