U.S. REGIONAL BANKS STRUGGLE TO BREAK FREE FROM GOVERNMENT LIFE SUPPORT / THE FINANCIAL TIMES

US regional banks struggle to break free from government life support

Lenders still tapping hundreds of billions of dollars of funding that shored industry up during recent crisis

Stephen Gandel and Joshua Franklin in New York

Usage of the Federal Reserve’s new loan facility continues to rise, with banks borrowing $105bn as of July 26 © Reuters

US banks are still relying on hundreds of billions of dollars in government financing that was crucial in shoring up the industry after the collapse of Silicon Valley Bank almost four months ago.

Regional lenders are tapping the support despite a recent rebound in their share prices and second-quarter earnings that were deemed to be positive by investors.

One source of the funding comes from 11 government-sponsored wholesale regional lenders known collectively as the Federal Home Loan Banks, which would likely be bailed out by Washington if they were to fail.

Data last week from the FHLB Office of Finance reported that US banks and credit unions had $880bn in outstanding loans at the end of June from the entities, which specialise in providing financing to banks.

That was down from just over $1tn at the end of the first quarter, when FHLB borrowing hit an all-time high, but still up more than 150 per cent compared with the end of 2021.

“We served to stabilise the system and as long as rates remain where they are, you are going to see elevated FHLB advances to banks,” Teresa Bazemore, the head of the FHLB of San Francisco, told the Financial Times.

However, the FHLB has faced renewed calls from critics who think the network should be reined in having long argued that the government sponsorship encourages excessive risk taking. 

Failed lenders SVB and Signature Bank both borrowed from the network before they collapsed.

“Yes there is an implied government guarantee, but the likelihood of it being tapped is super remote,” said Bazemore, who added that the FHLBs have a history of low loan losses and are well capitalised.

Banks are not required to tell investors if or how much they have borrowed from the FHLBs. 

However, during the recent earnings season some banks touted their ability to repay FHLB loans as a sign of financial strength.

For instance, Western Alliance chief executive Kenneth Vecchione last month noted that the Phoenix-based lender had been able to “rapidly reduce reliance on higher-cost FHLB borrowings”, which fell to $5bn at the end of the second quarter from $11bn three months earlier.

“Even if you’re paying relatively high rates on your interest bearing deposits, it’s generally lower than what the FHLB advances would be costing,” Citizens Financial’s chief executive Bruce van Saun told the FT last month.

Rhode Island-based Citizens cut its borrowing from the FHLBs by nearly 60 per cent in the second quarter. 

“If you can cleanse that, if you can bring that volume of borrowing down, and replace it with deposits, it’s a good substitution effect,” van Saun said.

Many other banks, though, including a number that saw their share price plunge early this year, have only slightly reduced their reliance on the funding.

Commercial lender Comerica had $13.5bn in FHLB advances at the end of the second quarter, down from just over $15bn at the end of March.

FHLB funding accounted for 15 per cent of Comerica’s overall assets, three times higher than its peers, according to data from BankRegData. 

It was also greater than the $10bn of total cash on hand at the bank at the end of the quarter.

Another source of funding has come from the Federal Reserve, which in late March hurriedly introduced a loan programme that allowed banks to swap highly rated long-term securities that were under water in exchange for a 12-month cash loan equal to the face value of the paper.

Usage of that loan facility continues to rise, with banks borrowing $105bn as of July 26, up $2bn from the previous week and a new record high.

“I am a little surprised that Fed special assistance programme balances haven’t come down,” said CFRA Research bank analyst Alexander Yokum. 

“One might have thought they would have given the fact that industry has stabilised in terms of fear.”

Comerica has pledged $17bn, or 98 per cent, of its securities holdings to other lenders, including the Fed, according to Federal Deposit Insurance Corporation data. 

Just 14 per cent of the bank’s securities were pledged a year ago.

Comerica’s stock has rebounded 65 per cent from its early May low to just over $50 a share. 

On a conference call with analysts after its earnings, Comerica’s chief said the bank had repaid “maturing FHLB advances” and that it had a “strong liquidity position”.