US regional bank ETFs jumped in trading at the end of last week despite concerns about the overall outlook for the sector.
The SPDR S&P Regional Banking ETF (KRE) was up 5.4% on Friday while the iShares U.S. Regional Banks ETF (IAT) and the Invesco KBW Regional Banking ETF (KBWR) gained 5.5% and 3.7%, respectively.
First Republic was taken over by regulators during the weekend and was auctioned off to JP Morgan. First Republic is the fourth regional bank to collapse over a two-month period. Silicon Valley Bank, Signature Bank and Silvergate Bank were all closed in March.
Furthermore, Pacific Western Bank (PacWest) announced last week it is reviewing strategic options after its shares collapsed more than 78% since March.
The ongoing market volatility, which has seen regional bank shares plummet and the value of related ETFs oscillate this week, has not dissuaded investors. Industry analysts have said the current market provides an opportunity to use ETFs as a tool to both profit and manage risk, which has been borne out in the way ETFs bounced back today.
“When we think about what is happening in the banking sector in the US, many people have found that ETFs can be a very useful tool if you do not believe the current sentiment about a sector as an opportunity to go long on the entire sector,” Deborah Fuhr, founder of ETFGI, told ETF Stream's sister publication etf.com. “Others can see that ETFs can be a tool that you can use to go short, and an opportunity to make money.”
Joanne Hill, chief adviser of research at Cboe Vest, said ETFs could be used to manage risk: “I think that sector and industry ETFs are very useful in combining with positions in the individual stocks to hedge some of the risks in that sector, whether you are long or short.
Regional banks have historically been the backbone of the US banking industry and provide specialised services for local communities and businesses, which gives investors confidence in their long-term stability and importance to the overall financial system.
"They are vital to the economy. Small and medium-sized businesses depend on them for loans, business growth and keeping their deposits,” Hill noted.
Crisis far from over
After the Federal Reserve raised interest rates by 0.25% on Wednesday, banks are facing additional interest rate risks. If an interest rate rise has an impact on the value of a bank’s assets that it holds as reserves, declines in reserve values can leave less capital on hand for customers to withdraw.
Hill believes market volatility will continue to increase as banks are not raising the rates they pay on deposits in line with interest rates.
“Now this sector is in focus, [customers] might be getting less patient with that and wanting to withdraw funds and put it in US Treasury bills or other short-term fixed income products like short-term ETFs instead of keeping it at their bank," Hill added. “In my mind, that is a more ongoing concern that might impact the regional banking sector."
Others are already calling for more drastic changes to save regional banks. Bill Ackman, CEO of Pershing Square Capital Management, said “regional banks are at grave risk” last Thursday.
“We are running out of time to fix this problem. How many more unnecessary bank failures do we need to watch before the FDIC, the US Treasury and our government wake up?” he warned. “We need a system-wide deposit guarantee regime now.”
This article was originally published on ETF.com