Regional bank indexes soared this week after the Fed signaled it would potentially cut interest rates next year. This is a significant moment for an industry recovering from one of the worst years since the 2008 economic crisis.
Regional Bank ETFs are back to their levels before the collapse of the Silicon Valley Bank. The SPDR S&P 500 regional bank ETF(KRE) and the KBW Nasdaq US Regional bank ETF(^KRX) had their best single-day performance in the last month on Wednesday.
Another index, KBW Nasdaq US Bank Index(^BKX) also closed Thursday above the level it was last recorded on March 9, before the fall of the Silicon Valley Bank.
Zions Bancorp(ZION), Western Alliance Bancorp(WAB), and Citizens Financial(CFG) were all up more than 14%, before the Fed’s announcement.
This surge is largely due to the Federal Reserve’s signaling that it is done raising interest rates after its most aggressive campaign since the 1980s. Fed officials said that now expect the Central Bank to cut interest rates at least three times in 2024.
While higher interest rates help increase the bank’s profitability, they can also weigh on demand for loans as borrowing becomes more expensive. Moreover, rate cuts would benefit regional banks as many have been under pressure to offer higher interest rates on deposits to attract new consumers.
Following the Fed’s announcement, falling treasury yields also helped boost regional banks, which rely on a borrow short, lend long business model. High treasury yields also contributed to the regional banking crisis in March as the Fed’s campaign to raise interest rates affected existing bonds, devalued by the issuance of debt paying higher interest.
With these gains, regional bank ETFs reached above where they were before the Silicon Valley Bank collapsed on March 9. As of Friday’s close, the SPDR S&P Regional Banking ETF was just 0.1% off its level, while the iShares U.S. Regional Banks ETF was 2% lower.