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May 2023 / INVESTMENT INSIGHTS

What Does the Stress in Regional Banking Mean for US Smaller Companies?

The banking sector is an integral part of the U.S. small-cap investment universe

Key Insights

  • The impact of recent failures in the U.S. banking sector, and the rapid withdrawal of deposits across some regional U.S. banks, has been profound.
  • For smaller company investors, the stress in the U.S. banking sector is acutely relevant given that regional banks represent a key component of the investment universe.
  • While the recent crisis has been destabilizing, at this stage, few regional banks appear to be exposed to similarly severe liquidity and/or concentration risk.

 

March 2023 marked a period of extreme duress in the U.S. banking industry, with ripple effects around the globe. Two U.S. banks, Silicon Valley Bank (SVB) and Signature Bank (SBNY), collapsed after both suffered runs on their deposit base. At the time of writing, a handful of other banks have faced liquidity pressures. On May 1, 2023, First Republic Bank (FRC)1 was seized by U.S. regulators and substantially all assets have been purchased by JP Morgan Bank. The impacts of these failures, and the rapid withdrawal of deposits across some regional U.S. banks, has been profound. For U.S. smaller company investors, recent developments are acutely relevant given that regional banks—there are 216 of them listed on the Russell 2500 Index2—represent a key component of the small‑ and mid‑cap (SMID) company investment universe. With this in mind, we consider the outlook for U.S. regional banks and their potential impact within smaller company portfolios. 

The Issue Today Is Liquidity, Not Credit 

An important distinction between the crisis SVB and SBNY faced in 2023, and what occurred during the global financial crisis (GFC) of 2008 and 2009, is that today’s crisis is driven by liquidity issues, not credit issues in banks’ loan portfolios. The GFC was chronic stress in the loan portfolio that took years to build up. Once the issue was uncovered, banks could identify how much capital was required and raise the capital, and then the crisis was relatively controlled.

No bank can control the outflow of deposits it may face—either the magnitude or the timing.

No bank can control the outflow of deposits it may face—either the magnitude or the timing. The amount of capital needed to fund the sheer volume of withdrawals that SVB, SBNY and FRC faced was more than could be raised in the time they had available.

Not All Banks Face the Same Fate 

The media is focused on a handful of banks under extreme pressure, and the coverage of the issues these banks are experiencing is warranted given the potential for broader impacts on the financial system. That said, the reality is that a large portion of the regional bank universe has not faced material outflows of deposits. In the week following the collapse of SVB and SBNY, the large majority of regional banks had either seen no material change in deposits or had seen positive deposit flows. Larger money center banks, perceived as “too big to fail,” are to some extent gaining deposits at the expense of the regional banks, but the shift has been muted, to date.

Wide Distribution of Bank Performance, Post Collapse 

There are 216 regional banks in the Russell 2500 Index and relatively few of them are currently facing the same financial or stock performance issues as SVB and SBNY. From SVB’s failed capital raising on March 8, 2023, through to the time of writing on March 173:

  • 176 of those banks outpaced the regional banks subindustry average return of ‑19.3%
  • 40 outpaced the Russell 2500 Index return of ‑8.3%

 

Download the full Insight here: (PDF)

IMPORTANT INFORMATION

This material is being furnished for general informational and/or marketing purposes only. The material does not constitute or undertake to give advice of any nature, including fiduciary investment advice, nor is it intended to serve as the primary basis for an investment decision. Prospective investors are recommended to seek independent legal, financial and tax advice before making any investment decision. T. Rowe Price group of companies including T. Rowe Price Associates, Inc. and/or its affiliates receive revenue from T. Rowe Price investment products and services. Past performance is not a reliable indicator of future performance. The value of an investment and any income from it can go down as well as up. Investors may get back less than the amount invested.

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Information and opinions presented have been obtained or derived from sources believed to be reliable and current; however, we cannot guarantee the sources' accuracy or completeness. There is no guarantee that any forecasts made will come to pass. The views contained herein are as of the date noted on the material and are subject to change without notice; these views may differ from those of other T. Rowe Price group companies and/or associates. Under no circumstances should the material, in whole or in part, be copied or redistributed without consent from T. Rowe Price.

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202305-2863907
RELATED FUND
SICAV
Class I
ISIN LU0133096981
An actively managed, widely diversified portfolio of around 150 to 200 smaller capitalisation companies (below US$18 billion market cap) in the US. We have a core style orientation that maintains broad exposure to both growth and value stocks. The fund is categorised as Article 8 under Sustainable Finance Disclosure Regulation (SFDR).
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