Is the US heading towards another regional banking crisis?

US regional banks are back in the headlines amid fears that recent history is repeating itself.

It was only last March when three regional lenders – Silicon Valley Bank (SVB), Signature Bank and First Republic Bank – failed over just five days amid a sharp rise in interest rates, after which the government raced to prevent global contagion.

SVB’s collapse was triggered by waves of its clients, mainly tech start-ups, withdrawing money over concerns about the bank’s liquidity after it sold its Treasury bonds at a major loss.

The clients mostly held deposits in excess of $250,000 that were not insured by the Federal Deposit Insurance Corporation.

The latest concern centres around the country’s $5.8tn (£4.6tn) commercial real estate market, which has slumped due to tumbling property valuations and a post-Covid shift to remote work and shopping.

The US Federal Reserve has left interest rates at a 23-year high of 5.25 to 5.50 per cent since last July, adding further pressure to the sector as borrowers struggle to refinance.

US banks hold around $2.7tn in commercial real estate loans, around 80 per cent of which is carried by regional lenders, according to Goldman Sachs.

Regional lender New York Community Bancorp’s (NYCB) stock has cratered nearly 60 per cent to its lowest level in more than two decades since it posted a fourth-quarter loss of $252m last week, from a $172m profit during the same period in 2022.

The bank reported $552m in provisions for credit losses, up from $62m in the previous quarter, which it said was partly driven by expectations of defaults in the commercial real estate market.

There are also concerns emerging about the bank’s exposure to multi-family residential units, notably New York City’s rent-regulated market. In this market, landlords are constrained in how much they can increase prices each year and thanks to recent legislative changes, it’s become harder for landlords to hike rents.

The impact this is having on property prices is becoming increasingly apparent. As Bloomberg has reported, in one recent transaction, a building in Harlem was sold for 59 per cent less than its 2016 price tag.

With storm clouds building over the bank, Moody’s on Wednesday cut its credit grade on the bank by two notches to “junk” and said that it could go further still.

The news has reignited fears over other banks’ ties to the sector and financial contagion.

The Dow Jones US Regional Bank index has fallen more than five per cent since NYCB’s results.

Morgan Stanley analysts have highlighted Bank OZK and Valley National Bancorp’s high exposure to commercial real estate loans, which represent around 63 per cent of OZK’s earning assets.

Japan’s Aozora Bank last week recorded its first loss in 15 years, partly due to bad loans extended to US offices.

Deutsche Pfandbriefbank said in an unscheduled trading statement on Wednesday that the situation was the “greatest real estate crisis since the financial crisis,” with its bonds slumping on concerns about its exposure.

Deutsche Bank, Germany’s biggest lender, more than quadrupled its provisions for US commercial real estate loans last quarter compared with the same period in 2022.

“New York Community’s issues are more idiosyncratic in nature, as strategic actions to create a more conservative balance sheet stem from tougher regulatory scrutiny after the bank exceeded $100bn in assets,” Herman Chan, an analyst at Bloomberg Intelligence, told City A.M.

“Credit worries centre more on the risk in rent-regulated apartment lending, a niche business dominated by NYCB. Nonetheless, broader market concerns over commercial real estate will continue to dog regional bank lenders over the intermediate term.”

Still, analysts at Capital Economics said the risk to the UK was “low”.

“The rise in aggregate loan-to-value ratios to date looks manageable and with interest rates also trending down we doubt there will be a surge in forced sales as investors look to refinance,” they added.