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Regional Bank Stocks Threatened by Soon-to-Expire Fed Facility

By:Thomas Westwater

Regional Bank Stocks in Focus: Fed Lending Facility, Commercial Real Estate, Higher Rates

  • Regional banks are in focus after the problems at New York Community Bank.
  • Tightening Fed rate cut bets threaten commercial real estate loans.
  • The end of a Federal Reserve program offers potential trade on KRE.

Regional bank stocks have been under the microscope since the implosion of Silicon Valley last year. The bank’s collapse sent shockwaves through the market, with regional bank stocks at the epicenter suffering stunning losses.

KRE—the regional bank ETF—fell 28.75% in March 2023, the largest drop since the Covid pandemic’s onset.

Fears of contagion from the event slowly subsided in the subsequent months, and traders and economists started to breathe a little easier, although most regional banks failed to trim the bulk of the resulting losses. Still, the risks to the banking system, and the broader market for that matter, appeared contained.

NYCB Collapse reignites concern about regional banks

Then comes January 30 when a concerning earnings report sent New York Community Bank (NYCB) plunging by more than 37%. That reignited fears about a banking crisis and rekindled the conversation about the health of America’s banking system.

A tool the Federal Reserve launched last year to help banks counter a steep drop in bond prices that effectively sapped liquidity, known as the Bank Term Funding Program (BTFP), helped to calm fears. However, that program, which accepts bonds at face value, is set to close on March 11.

The facility has been used heavily by regional banks, and there wasn’t much concern about its scheduled end until the problems at NYCB surfaced. Now, investors are concerned that it will bring more issues with regional banks to the surface.


While that may be true, the Federal Reserve would likely step in again, as it has many times before, to act as a lender of last resort if the banking sector faces another round of potential collapses like early 2023. Meanwhile, other issues are brewing.

Fed rate cut odds and commercial real estate pose headwind to sector

The recent calculus shift in the outlook for rate cuts from the Federal Reserve has pushed bond prices higher. That's good news for the balance sheets of regional banks that hold a lot of Treasuries, but it also brings up another issue—commercial real estate.

A lot of regional banks hold a heavy amount of commercial real estate loans (CRE). tastylive’s Ilya Spivak spotlighted the issue last year. Since then, the value of CREs has increased, and higher rates have also increased the default risk on those loans.

A recipe for disaster? It may be. According to the Mortgage Bankers Association (MBA), delinquency rates rose in the fourth quarter of 2023 for commercial properties, with the rate increasing to 6.5% for office property-backed loans.


Trading regional bank stocks

The SPDR S&P Regional Banking ETF (KRE) offers options that expose you to the sector and are liquid to trade. If you’re expecting the end of the BTFP to expose rifts across the sector, then a long strangle or long straddle strategy could pay off, especially given that volatility is relatively subdued, with an implied volatility rank (IVR) of 28.2.


Thomas Westwater, a tastylive financial writer and analyst, has eight years of markets and trading experience. @fxwestwater

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