By Paritosh Bansal
Cadence Bank CEO Dan Rollins calls the regional banking crisis from earlier this year "March madness." Six months on, the craziness has abated, but the industry is scarred and still dealing with its consequences.
"We don't want an asset that doesn't come with a full wallet," Rollins said, referring to a trend since the crisis where banks want customers who want loans to also bring them their deposits. "We know that we're going to continue to be fighting for the dollars."
Rollins' southeastern regional bank is not alone. Interviews with half a dozen regional bank executives and economists show the March banking crisis has had a lasting impact on the regional banking industry and the economy.
The upheaval likely tightened credit conditions faster and beyond what the Federal Reserve's rate hikes alone had done until then. And while its effect has not been as severe as some had feared, there still is a risk.
Taken together, the lingering effects of the crisis complicate the U.S. Federal Reserve's calculus as it walks a fine line on interest rates, increasing the chance it might over-correct.
The Fed, which meets this week, has previously said it is monitoring the conditions in the banking sector.
Mark Zandi, chief economist at Moody’s Analytics, said the muted impact of the crisis was perhaps "one of the reasons why the economy is navigating things more gracefully than many had feared." But, he added, "The script is still being written.”
In April, Zandi had forecast that the economic drag from the banking crisis could have the same effect as a 50 to 75 basis point increase in the federal funds rate. He estimated so far it had been about 10-20 basis points but warned it may still be early innings.
Torsten Slok, chief economist at Apollo Global Management, said the banking crisis had "a magnifying effect" on the Fed's tightening but its full impact would come with a lag.
His model shows it could add up to a 1.5% drag on U.S. GDP over the next four to six quarters.
Slok said the impact so far can be seen in data: Fed data, for example, shows while large banks started to pull back on credit when the central bank started raising rates last year, small banks continued to increase loans and leases until Silicon Valley Bank collapsed in March.
"When Silicon Valley Bank happened, you saw a very dramatic behavioral change in the small banks," Slok said.
DEPOSIT REPRICING
Silicon Valley Bank collapsed after customers, such as venture funds and startups with corporate accounts, withdrew $42 billion in a single day. The failure triggered a crisis of confidence, with depositors moving their money from regional banks to the perceived safety of the largest lenders. The KBW Regional Bank Index is down about 20% since early March despite a summer rebound.
The deposit flight accelerated the transmission of Fed policy into the economy, the bankers said. It forced the smaller banks to start offering higher interest on deposits to compete for funding and charge more for loans to protect margins.
Cadence's Rollins estimated the repricing of deposits may have been pulled forward "by a quarter or two."
Steve Wyett, chief investment strategist at Tulsa, Oklahoma-based BOK Financial, said their deposit beta, a measure of the sensitivity of deposit costs to changes in short-term interest rates, had shot up.
"We're a lot more sensitive to what fed funds are now," Wyett said. "You're competing with money market funds that are over 5%."
The higher rates have helped banks ramp up deposits and stopped the bleeding, but not all customers that had left for the bigger banks have returned, bankers said.
EFFECTIVE EASING
Banks also loaded up on other sources of funding in recent months as the situation calmed. Borrowings under the Fed's emergency lending facility, called the Bank Term Funding Program (BTFP), rose to $108 billion this month.
Cadence’s Rollins and Randy Chesler, CEO of Kalispell, Montana-based Glacier Bancorp, said they had borrowed under the program because it offered better terms and rates than alternative sources like the Federal Home Loan Banks (FHLB).
"It created a very attractive funding source," Chesler said. "We used it purely from an economic standpoint because we have plenty of liquidity."
Moody's Zandi said the BTFP and FHLB lending were "an effective easing in monetary policy." The BTFP, however, is temporary, which means its mitigating influence will wear off in a few months. That could further tighten credit availability.
NO LOAN-ONLY DEALS The crisis has made banks more selective about the products they offer, pulling back from purely lending relationships in favor of deals where borrowers also use the bank for deposits.
"We have really stopped doing loan-only deals. All the deals now that we're doing, we require deposits or require some sort of ancillary business,” said Jeff Jackson, CEO of Wheeling, West Virginia-based WesBanco.
That has meant tighter credit for various products, ranging from financing for boats and recreational vehicles to loans to home builders and commercial real estate, bankers said, providing fresh insights into how credit was getting harder to obtain.
Raj Singh, CEO of BankUnited, said the focus has meant that large loans, called shared national credits, that earlier would see a dozen banks competing for a piece, now see only half as many interested.
All that has added further to higher pricing. Loan spreads have widened across commercial and industrial (C&I) and commercial real estate (CRE) loans, Singh said. A loan that would earlier price at 200 basis points over a benchmark interest rate like SOFR, now costs 300 basis points, he said.
The crisis "certainly slowed or at least made borrowing more expensive," Singh said.
(Reporting by Paritosh Bansal; Editing by Anna Driver)