Regional Bank Model Still Effective, Says Rating Agency

Community and regional banks’ business models are still valid and strong despite the recent turmoil in the industry, according to credit rating agency KBRA.

In a research note, the company said “well-managed” banks in these sectors can still compete with larger nationwide banks — and often have the advantage of local knowledge over larger rivals.

KBRA’s note stated: “The sector benefits from an enduring governmental preference for decentralized banking; regulatory oversight and a thoughtful legislative underpinning are important elements in the credit equation that will need to keep up with technological innovation, including the speed at which information and misinformation travel through the financial system.”

The company highlighted that governance and strong management was a key factor in banks’ success, regardless of size or capital position. “Banking is a business reliant on stakeholder confidence,” the note stated, which was driven by executive leadership.

Well-managed banks typically had “sensible” growth strategies, good scale at a local level, and “sufficiently diversified risks”. Coupled with a robust balance sheet, KBRA said banks should be able to generate financial returns while also remaining “well regarded in funding and capital markets and in the good graces of regulators and policymakers”.

Many banks have been forced to make statements — sometimes multiple statements — about their financial position in recent weeks in the wake of the collapse of Silicon Valley Bank and Signature Bank.

KBRA said: “While we believe recent bank failures are highly idiosyncratic and do not represent significant weakness in the financial system, we expect financial conditions will tighten heading into the more challenging phase of the credit cycle. We expect well-managed community and regional banks to successfully manage through.”