Time to Steer Clear of Regional Bank ETFs With Renewed FRC Crisis?
Once again, the U.S. regional banking crisis, which had initially surfaced in early March 2023 following the collapse of Silicon Valley Bank and Signature Bank, resurfaced and continued to cause problems despite a brief period of relief.
The First Republic FRC, which is ranked as the 14th largest bank in the United States and mainly serves affluent clients, also received a $30 billion bailout from the country's largest banks when it was struggling in March. However, it is currently facing another crisis of confidence. FRC is off about 60% this week.
Notably, Invesco KBW Regional Banking ETF KBWR, SPDR S&P Regional Banking ETF KRE and iShares U.S. Regional Banks ETF IAT have lost in the range of 5% to 7% past week.
First Republic's Struggle for Survival
First Republic is currently trying to persuade JPMorgan Chase, Bank of America, and other major financial institutions to help it stay afloat by purchasing underwater bonds at above-market rates. In exchange for their help, big banks could receive equity warrants and the satisfaction of rehabilitating one of the country's largest regional lenders.
The Argument for the Deal
First Republic's advisers argue that by taking initial losses, the banks could save money in the long run, as the troubled assets recover value over time and they get to keep their $30 billion in deposits. Initial losses would be less than what banks might have to pay if regulators were to seize First Republic and charge a levy to recoup costs.
Big Banks' Hesitation
However, the big banks remain unconvinced. Some big banks worry they could end up subsidizing First Republic's survival, only to see it get seized by regulators and sold to a rival, per a Yahoo Finance article.
Limited Options for First Republic
After disclosing a loss of over $100 billion in deposits in March, First Republic is left with limited options. They hope that the U.S. government will facilitate a solution by bringing the banks together.
Government Intervention and Possible Outcomes
As the situation unfolds, big banks are waiting for the government's intervention. Some bank executives believe a seizure by the FDIC is increasingly likely, while others think First Republic may try to resolve its issues independently. The government's decision to protect uninsured deposits will have significant implications for the banking industry.
Implications for Regional Bank ETFs
As First Republic struggles to stay afloat, investors may want to reconsider their exposure to regional bank ETFs. The outcome of the crisis will not only impact First Republic but also the wider banking sector, potentially leading to regulatory changes and industry consolidation.
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
First Republic Bank (FRC) : Free Stock Analysis Report
SPDR S&P Regional Banking ETF (KRE): ETF Research Reports
iShares U.S. Regional Banks ETF (IAT): ETF Research Reports
Invesco KBW Regional Banking ETF (KBWR): ETF Research Reports
