Regional Bank Turmoil In The U.S. Is Far From Over

Interest rate hikes by key central banks around the world and tightening credit conditions will put pressure on U.S. regional banks’ capital, credit quality, and profitability. Globally systemically important banks (G-SIBs) are benefiting from the diversity of business lines they have, as well as from the various sources of funding they can access. However, many regional banks, by definition, do not have the asset diversity and funding advantages that G-SIBs enjoy.

Investors still have not regained trust in regional banks as evidenced by regional bank indices. The S&P Regional Banks Select Industry Index, for example, has declined 36% since the beginning of this year. I can understand the desire to blame short-sellers for this decline; yet, banks’ financials are showing that they are still vulnerable to this elevated interest rate environment.