(Investopedia) - Regional bank stocks surged this week after the Federal Reserve signaled it would potentially cut interest rates next year, helping bring regional bank exchange-traded funds (ETFs) back to their levels before the collapse of Silicon Valley Bank.
Zions Bancorp (ZION), Western Alliance Bancorp (WAL), and Citizens Financial (CFG) were all up more than 14% Friday from Tuesday's close, before the Fed's announcement.
While higher interest rates can help raise banks’ profitability, they can also weigh on demand for loans as borrowing becomes more expensive, and rate cuts would particularly benefit regional banks, as many have been under pressure to offer higher interest on deposits to attract and retain customers.
Falling Treasury yields following the Fed’s announcement also served to boost regional banks, which tend to rely on a borrow short, lend long business model. High Treasury yields had contributed to the regional banking crisis in March, as the Fed’s campaign of rate hikes to combat inflation impacted existing bonds, devalued by issuance of debt paying higher interest.
The rally for regional bank stocks brought the SPDR S&P Regional Banking ETF (KRE), which follows the S&P Regional Banks Select Industry Index, up 9% from Tuesday's close before the Fed meeting. The iShares U.S. Regional Banks ETF (IAT), which tracks the Dow Jones U.S. Select Regional Banks Index, gained more than 8% in the same period.
With these gains, the regional bank ETFs reached just above where they were before Silicon Valley Bank collapsed Thursday before edging below those levels Friday. As of Friday's close, the SPDR S&P Regional Banking ETF was just 0.1% off its level from March 9, before the failure of Silicon Valley Bank, while the iShares U.S. Regional Banks ETF was 2% lower.
By Naomi Buchanan
