NY Fed Study: Small Lenders Weathered the Banking Crisis

Smaller lenders emerged from the recent banking crisis relatively unscathed, according to new research.

A study released Thursday (May 11) by the New York Fed found that withdrawals from banks in the wake of Silicon Valley Bank’s (SVB) failure in March were primarily centered around 30 “super-regional” banks.

These lenders had deposit bases of between $50 billion to $250 billion, making them roughly similar in size to SVB, per the study, titled “Bank Funding during the Current Monetary Policy Tightening Cycle.”

“Notably, deposit funding amongst the cohort often referred to as community and smaller regional banks (that is, institutions with less than $50 billion in assets) were relatively stable by comparison,” the report said.

The study also found that banks — primarily larger ones — have replaced deposit funds with other sources of borrowing for cash, including Federal Home Loan Banks and the Fed itself.

“This pattern suggests demand for precautionary liquidity buffers across the banking system, not just among the most affected institutions,” the study said.

The study comes days after the release of the Federal Reserve’s “April 2023 Senior Loan Officer Opinion Survey on Bank Lending Practices,” which warned that the failure of banks like SVB and First Republic had prompted a “sharp contraction” in credit that threatened to “drive up the cost of funding for businesses and households.”

Why are banks expecting contraction? According to the Fed survey, it’s because lenders are awaiting a “deterioration in the credit quality of their loan portfolios and in customers’ collateral values, a reduction in risk tolerance and concerns about bank funding costs.”

Additional concerns include banks’ liquidity position and deposit outflows, all building up to a season of stricter lending standards that could persist through the end of 2023.

Also Thursday, Jon Gray, president of private equity firm Blackstone, said he wants to give regional banks more lending power.

In an interview with the Financial Times, Gray said his company was in discussions with large regional banks in the U.S.

“The discussions we are having is to potentially partner with a regional bank,” Gray said.

He added regional banks were still well-positioned to Decide whether to lend to commercial and real estate customers, arguing they had “powerful origination capabilities and relationships.”

Gray added firms like his could be a “valuable partner” by helping lessen some of the risk after a loan has been secured.