According to Yahoo News, US regional banks are experiencing permanently elevated funding costs compared to their major competitors following the March turmoil that disrupted the sector and financial markets, says Torsten Slok at Apollo Management. Eight months after Silicon Valley Bank's collapse, large banks continue to benefit from significantly lower funding costs and higher profit margins than regional banks, according to Slok, the firm's chief economist.
The spread on regional bank bonds increased in March compared to diversified lenders and has remained much wider than before the crisis. Tighter lending conditions due to Federal Reserve rate hikes, combined with headwinds from commercial real estate holdings, underwater held-to-maturity portfolios, and regulatory uncertainty, indicate that it will take some time for regional banks to repair their balance sheets, Slok wrote.
This ongoing issue affects the macro economy, as banks ranked 5 to 4000 by assets make up 60% of all assets in the banking sector. To maintain profitability amid compressing net interest margins, banks have had to raise loan rates and tighten lending standards, increasing the risk of slowing economic activity. Bank lending has experienced the largest annual decline on a percentage basis since 2009, according to Fed data.
Slok noted in a Bloomberg Television interview that rates for high-yielding loans have risen quickly in the past six months, and bank lending has slowed down, which is consistent with the Fed's process of slowing the economy. In the minutes from the Fed's recent meeting, policymakers observed that the banking system was sound and resilient, but many participants commented that unrealized losses on assets, significant reliance on uninsured deposits, and increased funding costs at banks warranted monitoring.