MORAM Capital - US Regional Banks crisis

US Regional Banks Crisis

Zoom of the Week – US Regional banks

A few weeks ago, on January 25th, the Fed announced that on March 11th, it would end the emergency bank funding service (BTFP), which since March 2023, had safeguarded troubled regional banks.

This service, called BTFP (Bank Term Funding Program), is designed to provide liquidity to eligible depository institutions such as banks, savings associations, credit unions, and others, ensuring they can meet the needs of all their depositors.

The program offers loans with maturities of up to one year, using high-quality assets as collateral such as US Treasury bonds, agency securities, and agency mortgage-backed securities, which will be valued at par to avoid the need for institutions to quickly sell these securities in times of financial stress.

From late March 2023 to November, BTFP usage increased slightly and steadily. However, starting in mid-November, it surged to $167 billion because the rate allowing borrowing funds for up to a year was lower than the interest on reserve balances. In other words, banks were engaging in arbitrage and benefiting from it.

With the announcement of the end of BTFP on March 11th, 2024, the Fed also completely eliminated the possibility of arbitrage, and BTFP usage has normalized.


The important question we must ask now is, has the situation of regional banks improved during this year to the point where they no longer need BTFP?

Interest rates have increased from 4.50%-4.75% in March 2023 to 5.25% – 5.50% by March 2024. Meanwhile, the unrealized banking losses of US banks at the end of the third quarter of 2023 (the last known data) amounted to $684 billion.

The issue is that these unrealized losses drastically reduce a bank’s liquidity. And as shown in the following graph, the situation of small banks (reserves / total assets) without BTFP is even worse than in March 2023. Unlike large banks, which have improved their situation.

Regional Banks

Therefore, as we approach March, several possibilities emerge:

  1. Reinstating BTFP by the Fed, or another similar facility, possibly by the Treasury.

  2. Encouraging troubled regional banks to be acquired by larger banks, leading to further bank consolidation.

Another point affecting regional banking, which has recently caused concern, is commercial real estate (CRE):

  • More than $1 trillion in commercial real estate loans are scheduled to mature before the end of next year.

  • This presents a significant problem as these properties have lost much of their value (especially offices, with losses nearing 40%), and many property owners could be forced to sell if they cannot refinance their debt due to less favorable market conditions.

  • US regional banks are particularly exposed to this problem, representing nearly 70% of all outstanding commercial real estate loans.

  • With property values declining, these banks face the risk of dealing with significant holes in their balance sheets if property values continue to fall and loans default.

  • The graph shows commercial real estate (CRE) reserve ratios among banks, organized by regulatory category (classifications used by regulatory authorities to assess and supervise banks based on their size, complexity, and risk).


In general, outside of Category 1 and 2 (which have limited exposure to CRE), the larger the bank, the higher the reserves it holds against its CRE loans.

Week in the market - regional banks

In summary, the termination of the Federal Reserve’s Emergency Bank Funding Program (BTFP) on March 11, 2024, raises concerns about the stability of regional banks in the U.S., particularly in a context where interest rates remain high and significant unrealized bank losses exist. Smaller banks appear more vulnerable, especially in the face of imminent challenges in the commercial real estate sector, where a large number of loans are nearing maturity and property values have decreased. This situation may require additional measures to ensure the resilience of the regional banking sector and to prevent macroeconomic strains in such an important election year.

Its potential impact on the CRE sector has been one of the reasons why we mentioned weeks ago that we closed our exposure to companies like SL Green, which was trading at bargain prices when the crisis of regional banks unfolded last March. From our perspective, sector prices have already recovered significantly given the risks we see of triggering a wave of bankruptcies if the Fed does not lend a hand (which, on the other hand, is what we think it will do).

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