Regional banks lost momentum when Treasury Secretary and former 15th Fed chair Janet Yellen said on May 19, 2023, the need for more bank mergers.
CNN cited that Yellen laid out the potential requirement for such mergers. This reminded the markets that the regional bank run on the bank risk is not yet over. Commercial Real Estate (or CRE) is a substantial risk ahead. Working from home decreased the demand for office space. Higher supply and lower demand are disrupting lease prices.
Watch regional banks like Pacific West (PACW), KeyCorp (KEY), and Truist Financial (TFC).
Corporations are adamant about bringing workers back. Hybrid work is the optimal compromise. This may cause office space supply to increase. Regional banks risk adding CRE to their balance sheet. This could become a write-off, after decreasing their liquidity.
The small bank liquidity constraints are a positive feedback loop for bank problems. Bigger banks already tightened lending requirements in reaction to the First Republic, Silicon Bank, and Signature Bank failures.
Banks are making the mistake of treating the bank issues specific to California and the drying up of start-up activity as systemic. In time, smaller banks will lose value, creating an opportunity for bigger banks to acquire them.
Listen to Yellen. Bank balance sheets are likely weaker than we think.
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