PacWest Bancorp and Western Alliance Bancorp led the big selloff in regional lenders Tuesday, as renewed fears over the health of the financial system hit Wall Street after the second-largest US bank failure ever.
(Bloomberg) — PacWest Bancorp and Western Alliance Bancorp led the big selloff in regional lenders Tuesday, as renewed fears over the health of the financial system hit Wall Street after the second-largest US bank failure ever.
Trading in both firms triggered multiple volatility halts after PacWest fell as much as 42% while Western Alliance plunged 27%. The KBW Regional Banking Index dropped as much as 7%, the most since the crisis that engulfed Silicon Valley Bank in March.
Charles Schwab Corp., a brokerage with a banking arm that’s come under pressure in the recent rout, sank 5.3%. Comerica Inc. and Zions Bancorp. each fell more than 10%.
The turmoil comes a day after JPMorgan Chase & Co.’s Jamie Dimon said the current banking crisis is nearing its end after his bank’s purchase of First Republic, though he acknowledged it’s possible another small lender could fail. The regional bank gauge is already down 29% so far this year.
“Wall Street is wondering which bank could be the next one that needs a rescue and that is making it easy to pick on the other regional banks,” said Edward Moya, Oanda senior market analyst. “It looks like JPMorgan’s deal for FRC gave us one day of calm for the banking sector. Regional banking stocks are still looking vulnerable until we see clear signs that emergency lending programs can go away.”
Western Alliance and PacWest are among a number of regional banks that investors have zeroed in on after the collapse of Silvergate Capital Corp., SVB Financial Group’s Silicon Valley Bank, and Signature Bank in March. The turmoil demonstrated the threat posed to commercial lenders by asset-liability mismatches and uninsured deposits. Still, both Western Alliance and PacWest posted earnings results in April that appeared to appease investors, while indicating their deposit bases had stabilized or recovered after initial outflows in March.
Part of what’s driving bank shares down is the fact that many regional bank investors assumed the Federal Deposit Insurance Corp. would announce a change to deposit insurance alongside its announcements about the First Republic receivership process, said Gary Tenner, an analyst at DA Davidson. The level of uninsured deposits at Silicon Valley Bank and Signature played a key role in the bank runs that led to their downfall.
“A lot of banks were recovering deposits or growing deposits at this point,” Tenner said in a telephone interview. “This is not fundamentally driven. It’s more pressure on names now that there was no clear change in the deposit insurance.”
Regulatory Response
While idiosyncratic factors are at play in the recent collapse of regional lenders, their troubles can be traced back to higher interest rates — raising their cost of funding while eroding the value of assets. As deposits have left the system for higher-returning vehicles like money-market funds, banks have loaded up on liquidity provided by the Federal Reserve and the Federal Home Loan Bank system. Those funds have kept banks liquid, but the high cost of funding is set to hurt profitability.
“While FRC resolution is a good sign, we haven’t had a clear solution to the lack of confidence across regional banks and may need a more holistic response from regulators or the government,” Bloomberg Intelligence analyst Herman Chan said in a message.
Investors will start to take a “pretty hard” look at banks that have “bellied up to the Fed and the FLHB,” said Abbott Cooper, an activist investor who worked on deals for failed banks during the Global Financial Crisis.
–With assistance from Jenny Surane.
(Updates with sector-wide context and quotes starting in the first paragraph.)
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