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Your Three Minutes In U.S. VRDOs: Regional Bank Exposure


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Your Three Minutes In U.S. VRDOs: Regional Bank Exposure

U.S. regional banks have exposure to one rating dependent asset: variable-rate demand obligations (VRDOs).  S&P Global Ratings' recent review of the regional banks showed that their exposure (the number of ratings dependent on the banks' creditworthiness) is limited to VRDOs. The banks do not support any asset-backed commercial paper, tender option bonds, or single-tranche repackaging (repack) transactions. The review followed our recent outlook revisions on five regional banks (see "Outlooks On Five U.S. Regional Banks Revised To Negative From Stable On Commercial Real Estate Risks; Ratings Affirmed," published March 26, 2024).


Our rating outlook is not necessarily a precursor of a future rating action (including CreditWatch placement). In general, our outlook on investment-grade ('BBB-' and above) ratings, which include our issuer credit ratings (ICRs) on the five banks, assesses the potential direction of a long-term ICR up to two years.

There were no rating actions on our short-term ICRs on the banks. However, only two banks have them: M&T Bank Corp. and Trustmark Corp. both have 'A-2' short-term ICRs, while First Commonwealth Financial Corp., Synovus Financial Corp., and Valley National Bancorp do not have any. Therefore, the VRDOs are supported by entities rated at least 'A-1' (see table).

Standard and alternative mappings of short- to long-term ICRs
Short-term ICR
Long-term ICR Standard mapping Alternative mapping
AAA, AA+, AA, AA- A-1+ N/A
A+ A-1 A-1+
A A-1 N/A
A- A-2 A-1
BBB- A-3 N/A
BB+ B A-3
BB, BB-, B+, B, B- B N/A
ICR--Issuer credit rating. SD--Selective default.

What's Happening

On March 26, 2024, we revised our rating outlooks on five U.S. regional banks to negative from stable: First Commonwealth Financial Corp., M&T Bank Corp., Synovus Financial Corp., Trustmark Corp., and Valley National Bancorp. Although we did not take corresponding rating action on any VRDOs, we reviewed their exposure to these regional banks.

Why It Matters

Regional banks face significant challenges from the ongoing stress in the commercial real estate (CRE) market.  This includes the sharp rise in interest rates and the resulting decline in CRE prices. We could lower our ratings on these banks if their asset quality deteriorates significantly.

Regional banks provide credit and liquidity support to the VRDOs.  Therefore, a rating or CreditWatch action on any of these banks would likely result in corresponding rating actions on the related VRDOs, which are short-term taxable and tax-exempt products.

What Comes Next

Given the banks' elevated exposure to CRE risks, we will continue to monitor any developments and impact on the VRDOs.  The negative outlooks primarily reflect our view that we could lower our ICRs on the regional banks if their asset quality deteriorates substantially, compared to similarly rated peers.

Related Criteria And Research

This report does not constitute a rating action.

Editor: Georgia Jones

Primary Credit Analyst:Thomas G Dunn, New York + 1 (212) 438 1623;
Secondary Contact:Joshua C Saunders, Chicago + 1 (312) 233 7059;

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