There is no end in sight to the turmoil surrounding regional banks. SVB and Signature’s collapse paved the way for J.P. Morgan’s acquisition of First Republic, the near-death experience of PacWest, and growing concerns over other regionals, including Zions BanCorp, Western Alliance, and others.
Regional banks maintain a rather precarious position in the U.S. banking market—the ‘middle tier.’ It is not so implausible to imagine a scenario where the U.S. banking market bifurcates into large cap ‘supermarket’ banks, and tiny community banks. Heavy concentration ( some might use the term ‘monopoly’) already plagues plenty of U.S. industries, from Social Media to Agriculture to Beer Distributors—so why should Banking be any different?
The problem is, regional banks serve a valuable purpose: they provide moderately-sized loans to small and middle market businesses. Large supermarket banks prefer to focus on capital markets and investment banking, rather than relationship banking, which can be extremely important to growing companies. A loan isn’t a one-size-fits-all product, so the ability to collaborate with a lender on the optimal debt structure, capacity and use of funds is a benefit. Plus, it helps to have someone in your corner should you brush up against a covenant violation, which is looking more and more likely given the current environment.
Alas, the future does not look so bright for regionals at the moment. Some are seeing a significant decline in net interest margins, which is the difference between interest earned on loans and interest paid on deposits. That compression will likely continue, as regionals raise the interest they pay on deposits to keep customers from fleeing to the mega banks. Of course, regionals must also maintain a conservative stance on issuing credit, given the macroeconomic concerns, their own liquidity challenges, and their positioning vis-a-vis large banks, which can provide capital at more attractive rates. There are also calls to increase the regulatory scrutiny of regionals, after the Fed’s failure to address the threats posed by SVB’s bond investment strategy, and First Republic’s jumbo loan offerings.
“As banking stress becomes a banking crisis, it’s very hard to send the signal so that depositors, investors and others can separate the sheep from the goats, so to speak.”
– Peter Conti-Brown, Professor of Financial Regulation at Wharton
In the past, bank failures have often been caused by a loss of confidence among depositors, rather than underlying problems with the bank’s financial position or balance sheet. In other words, we could be entering the start of a vicious downward spiral where some depositors flee regionals, which triggers a loss of confidence, and in turn spurs more depositors to flee…
How Does This Impact Borrowers?
In two ways:
- The lending standards of regional banks will tighten, as their net interest income continues to decline. These banks will have no choice but to pull back on loans they would have made pre-crisis.
- The lending standards of the large banks may actually loosen for the most creditworthy deals, given that they are experiencing net deposit inflows. Their NII is increasing, so they will look to put that extra capital to work.
At time of writing (early May, 2023), the Fed’s weekly numbers on overall business loans outstanding has fallen 2% since their March peak. Business loans from smaller banks are down 4.2%. And, according to the Fed, lending standards were already at near-recessionary levels by the end of last year.
Another way of framing this is to say that lenders are anticipating a recession. Ironically, as they pull back on lending, they might in fact help trigger one. Of course, not all lenders are pulling back, and those that are, are not all doing so at once. There is still a record amount of dry powder out there, so lenders are under pressure to issue loans. And, given that large banks are seeing NII inflows, they are likely to remain very active in the market.
This is great news for any borrower looking to refinance existing non-bank debt. If you’re paying exorbitant rates, now is the time to connect with large banks for a refi.
Bottom Line: If you’re considering a loan, now is the time to act.
We may be in something of a calm-before-the-storm period for borrowers, as overall lending activity is still meaningful, and large bank activity is on the incline. There’s no telling when the storm might come (if it ever does), but if you’re considering a loan before year-end, it might behoove you to accelerate your process and go out to lenders as quickly as possible, if only to ascertain the market for your deal.
A digital platform like CAPX makes it easy to do just that. We instantly scale lender outreach across the country, providing access to lenders you might otherwise overlook. And we do all this at zero cost to the borrower.
So, there is no risk in leveraging the CAPX platform to discover the market for your deal. And thanks to the power of digitization, you can quickly and efficiently know where your deal stands—we are averaging 4 business days to first term sheet after deal launch.
- While lending standards are tightening overall, there are still pockets of activity out there, thanks to excess dry powder and NII inflows at large banks
- There is no telling who the next SVB or First Republic will be, so it’s best to go out to as many lenders as possible to diversify your options and achieve certainty of close (including the direct lending market, which can facilitate deals that banks pass on)
- Large banks are offering attractive rates—perfect for any borrower looking to refinance existing non-bank debt