The Fed Relief: Regional Banks Breathe a Sigh of Relief

Regional banks in the USA are facing a significant transformation as they prepare for stricter capital requirements. However, the recent decision by the US Federal Reserve to substantially cut interest rates provides the banks with welcome relief. This could potentially reduce the financial strain from unrealized losses in bond portfolios in the coming weeks, which have previously been seen as an obstacle to future profits. These regulatory measures aim to address weaknesses in the banking sector that led to the failure of three regional banks last year. It is estimated that mid-sized banks will need to increase their capital base by about 3 to 4 percent in the future. In the short term, analysts view the eased monetary policy as advantageous for regional lending institutions. Chris McGratty of Keefe, Bruyette & Woods calls them the "disproportionate beneficiaries" of these measures. The already rising stock prices of regional banks confirm this assessment. A much-noted example is Comerica, which could achieve a comfortable capital position through the rate cuts in the coming years. KeyCorp has also taken measures: By selling a stake in Scotiabank and reducing low-yield investments, it has successfully significantly reduced paper losses. The recovery trend shows that the total unrealized losses on securities for US banks have decreased from a peak of $690 billion to $513 billion. It is expected that this figure will continue to decline with further Fed rate cuts. Meanwhile, the new regulations threaten the previous freedom of medium-sized lenders, while large banks like JPMorgan Chase and Wells Fargo are already required to hold capital to cover their bond portfolio losses.