What’s in a Name? The Dangers of Mislabeling Regional Banks
The recent failures of Silicon Valley Bank, Signature Bank and First Republic have once again put the stability of banks in the spotlight for investors and policymakers. As these stability concerns have led to louder calls for an industry-wide review of safety and soundness mechanisms, one thing has become clear – smaller, less interconnected banks have not done enough to communicate to key stakeholders their unique differences and value. Until now, they were always thought of as a safer option, but that segment of the industry is being forced to reassure customers and policymakers that they are not risky, and not systemically dangerous, despite the turmoil. When key stakeholders do not understand the differences between large, community and regional banks, it harms the current policy conversation more than helping it.
The failures of Silicon Valley Bank and Signature Bank are the first notable banking collapses since the Great Recession, Following that financial crisis, large banks were thought of as the risky, systemically dangerous institutions, not their smaller counterparts.[1]
Size is in question once again, but now on the other end of the spectrum. [2] Silicon Valley Bank was the largest bank failure since Washington Mutual, which had USD307 billion in assets when it failed in 2008.[3]
Following the recent failures, regional banks have been hit with their own “meme” stock short selling attacks causing their stocks to drop for the last few weeks. In a little more than a month, short sellers have made USD7.5 billion going after smaller banks and lenders. Regional banks are now top targets of short sellers, with those traders holding up to 20% of publicly traded shares of various regional banks, including 19.7% of PacWest, 17% of Bank of Hawaii and 12% of Zions, to name a few.[4]
Short sellers profited from investor and depositor fears of contagion on the heels of the bank failures, and regulators said they were assessing the possibility of “market manipulation” behind these short selling moves. Several regional banks saw their stocks struggle for a period after the failures and suffered cases of deposit outflows. Moody’s also downgraded the ratings of 11 regional banks, citing “a deterioration in the operating environment and funding conditions.”[5] Banks and their trade groups, including the Consumer Bankers Association and Independent Community Bankers of America, issued statements attempting to reassure the markets about the stability and safety of regional and community banks.[6]
The industry, particularly banks on the West Coast, have struggled with how and when to respond to investor worries and short sellers. Some announcements of asset divestitures and perceived de-risking helped calm institutions, but the market has remained skeptical. For most of the industry assurances worked to calm the market, investors and short sellers. But the reputational damage to the “regional bank” title remains. This characterization and the moral hazards of the recent turmoil will likely remain unless the industry proactively addresses these misconceptions.
How Regional Banks Can Take Control of Their Own Narrative
Industry campaign: As a first step, we recommend the industry, especially industry trade groups, take unified campaign action to correct the record on banks’ stability and their contributions to the economy and the communities in which they operate. Coalitions of industry participants and third-party voices can be effective messengers to decisionmakers both in D.C. and in the national media.
Show rather than tell your value: Rather than choosing the right title for the industry from small bank, community bank, regional bank or globally systemically important bank (“GSIB”), banks need to explain their unique value to the market, consumers and investors. The term “regional” bank has been and is often broadly used to describe what is much different than actual “regional banks.” There is a large difference in PacWest Bancorp with USD41 billion in assets[7] and Truist, the nation’s seventh largest bank with USD564 billion in assets,[8] both of which, at least to the general public, are considered regional banks. But each bank needs to communicate their unique value. The industry should avoid default shorthand explanations or generalizations of the industry. Smaller community banks serve local communities, small business lending and specific sectors. An April survey from the National Federation of Independent Business (“NFIB”) found 67% of small business owners use small, community or regional banks.[9] They provide specialized, valuable services that are often ignored by larger institutions. Larger regional banks provide the benefits and services of a large, global bank, but with a more localized, market-tailored approach. These are unique stories that need to be told to sufficiently clarify the various subsets and sizes of banks.
Education on market fundamentals: The problem now is that the fundamental story of this industry is lacking, and juicy headlines remain the preferred target for the press. Rather than overly loud assurances on an individual’s own stability, the industry instead needs to refocus on the fundamentals and on the market conditions to broaden the story beyond their own viability. Banks have firsthand market data that tell the macroeconomic story beyond just that of their own future. Banks should use this to their advantage and serve as a resource to decision-makers looking for guidance on the general financial landscape.
Use data to protect the industry from bad policy: Tailoring of capital rules from a 2018 law did not cause the failures of Silicon Valley Bank or Signature , thus, policymakers should resist calls for ultimately harmful overhauls of those capital rules. Those banks’ failures should not be used as an excuse to raise regulatory and supervisory standards on the entire industry. A data driven advocacy campaign is needed to correct this false narrative. As the Federal Reserve report first stated, “Silicon Valley Bank (SVB) failed because of a textbook case of mismanagement by the bank.”[10] Generalizations on supervisory standards ignore this core tenant. The industry needs third parties in Washington to advocate the unique value they provide communities and emphasize that they should not be inadvertently grouped together in broad strokes in an effort to affect counterproductive policy changes.
As the turmoil in banking calms down, the need to correct the narrative on regional banks is crucial. Unfortunately, the reality of the failures and the hysteria of the response rhetoric are at opposite ends of the conversation. Now, more than ever, regional banks must take control of the debate to ensure that their unique size and activities profile is adequately understood by stakeholders and policymakers so that misguided policy and tougher implementation of prudential standards don’t take center stage.
[1] Greg Ip, “SVB-Fueled Turmoil Junks Lessons of the Global Financial Crisis,” The Wall Street Journal (March 21, 2023), https://www.wsj.com/articles/svb-fueled-turmoil-junks-lessons-of-the-global-financial-crisis-e3240816 (subscription required)
[2] Jeanna Smialek, “Fed Slams Its Own Oversight of Silicon Valley Bank in Post-Mortem,” The New York Times (April 28, 2023), https://www.nytimes.com/2023/04/28/business/economy/fed-silicon-valley-bank-failure-review.html (subscription required)
[3] Karl Russell and Christine Zhang, “3 Failed Banks This Year Were Bigger Than 25 That Crumbled in 2008,” The New York Times (May 1, 2023), https://www.nytimes.com/interactive/2023/business/bank-failures-svb-first-republic-signature.html (subscription required)
[4] Andrew Ross Sorkin, Ravi Mattu, Bernard Warner, Sarah Kessler, Lauren Hirsch and Ephrat Livni, “Calls to Investigate Short Sellers Intensify as Bank Crisis Deepens,” The New York Times DealBook (May 12, 2023), https://www.nytimes.com/2023/05/12/business/dealbook/jamie-dimon-short-sellers-banks.html (subscription required)
[5] Jason Karaian and Stacy Cowley, “Smaller U.S. Banks Say the Crisis Is Contained, but Fears Persist,” The New York Times (April 24, 2023), https://www.nytimes.com/2023/04/24/business/regional-banks-crisis.html (subscription required)
[6] “CBA urges policymakers to address unethical behavior fueling anxiety across banking sector,” Consumer Bankers Association (May 4, 2023), https://www.consumerbankers.com/cba-media-center/media-releases/cba-urges-policymakers-address-unethical-behavior-fueling-anxiety
[7] “PacWest Bancorp Issues Updated Financial Figures; Reiterates Capital and Liquidity Strategy and Financial Position in Light of Industry Developments,” GlobeNewswire (March 10, 2023, source: PacWest Bancorp), https://www.globenewswire.com/en/news-release/2023/03/11/2625269/13824/en/PacWest-Bancorp-Issues-Updated-Financial-Figures-Reiterates-Capital-and-Liquidity-Strategy-and-Financial-Position-in-Light-of-Industry-Developments.html
[8] Matthew Goldberg, “The 15 largest banks in the US,” Yahoo Finance (June 7, 2023), https://finance.yahoo.com/news/15-largest-banks-us-160040404.html
[9] “New NFIB Survey: Small Businesses Rank Banking Operations and Confidence in Banking System,” NFIB (May 3, 2023), https://www.nfib.com/content/press-release/economy/new-nfib-survey-small-businesses-rank-banking-operations-and-confidence-in-banking-system/
[10] Michael S. Barr, “Re: Review of the Federal Reserve’s Supervision and Regulation of Silicon Valley
Bank,” Governors of the Federal Reserve System (April 28, 2023), and “Review of the Federal Reserve’s
Supervision and Regulation of Silicon Valley Bank,” Board of Governors of the Federal Reserve System (April 2023), https://www.federalreserve.gov/publications/files/svb-review-20230428.pdf
The views expressed in this article are those of the author(s) and not necessarily the views of FTI Consulting, its management, its subsidiaries, its affiliates, or its other professionals.
©2023 FTI Consulting, Inc. All rights reserved. www.fticonsulting.com
