The failure of the First Republic sent the region’s banking sectors into a tailspin

PacWest The Bancorp and Western Alliance Bancorp led a deep selloff in regional lenders on Tuesday, as renewed fears about the health of the financial system hit Wall Street after the second-largest US bank failure ever.

Trading by the two companies triggered several stops in the sequence as PacWest fell 28% to close at a record low while Western Alliance fell 15%. The pair has shed more than $5 billion in market value so far this year. The KBW Regional Banking Index fell 5.5% on Tuesday, the most since the crisis that engulfed Silicon Valley Bank in March.

Charles Schwab Corp., a brokerage with a banking arm that has come under pressure from recent losses, fell 3.3% amid a broader selloff in financial stocks. Comerica Inc. and Zions Bancorp. each fell more than 10% while The Metropolitan Bank Holding Corp. dropped 20%.

Chaos comes a day later JPMorgan Chase & Co.’s Jamie Dimon said the current banking crisis is about to end after his bank’s purchase of First Republic, although he acknowledged it’s possible another small lender could fail. The regional bank gauge has dropped by 28% this year.

“The resolution of the First Republic will help alleviate concerns but not eliminate them,” Wells Fargo & Co. analyst Mike May said in an interview. “A triple dose of negative sentiment affects the regions: commercial real estate, diversity and regulation.”

Western Alliance and PacWest are among several regional banks targeted by investors following the collapse of Silvergate Capital Corp., SVB Financial Group’s Silicon Valley Bank, and Signature Bank in March. The turmoil reflects the threat posed to commercial lenders by asset-liability mismatches and unsecured deposits.

However, Western Alliance and PacWest posted earnings results in April that showed comfort to investors, while indicating that their deposit bases had stabilized or recovered after initial outflows in March.

“Wall Street is wondering which bank will be the next one to need a rescue and that makes it easier to choose other banks in the region,” said Edward Moya, senior market analyst at Oanda. “It looks like the JPMorgan deal for the FRC gives us a day of calm for the banking sector. Regional banking stocks still look weak until we see clear signs that the programs in emergency lending may disappear.”

RBC Capital Markets analyst Jon Arfstrom wrote that Tuesday’s changes in regional banking stocks were unusual and his conversations with investors did not indicate any new concerns. He recommends buying dips in stocks including Comerica, PacWest and Western Alliance.

“In our view, unwarranted negative sentiment continues to drive upward movement in these stocks,” the analyst wrote. “Our sense is that today’s action is an amplification of ongoing fears as the market looks to digest the implications of the First Republic resolution and an overall more challenging longer term earnings in profit for the industry.”

Part of what’s driving the bank’s shares is the fact that many regional bank investors believe the Federal Deposit Insurance Corp. The level of unsecured deposits at Silicon Valley Bank and Signature played a key role in the bank runs that led to their downfall.

“A lot of banks are recovering deposits or growing deposits at this point,” Tenner said in a telephone interview. “It’s not fundamentally driven. There’s a lot of pressure on names now that there’s no clear change in deposit insurance.

Speaking Tuesday at the Milken Institute Global Conference, Wells Fargo & Co. Chief Executive Officer Charlie Scharf said regulators are acting as they should in the recent turmoil. He said most of the banks his company oversees are “FIRM.”

Regulatory Response

While idiosyncratic factors played into the recent collapse of regional lenders, their woes can be traced back to higher interest rates — raising their funding costs while eroding the value of assets. As deposits leave the system for higher return vehicles such as money market funds, banks load up on liquidity provided by the Federal Reserve and the Federal Home Loan Bank system. Those funds keep banks liquid, but high funding costs are set to hurt profitability.

“While the resolution of the FRC is a good sign, we do not have a clear solution to the lack of confidence in regional banks and may need a more holistic response from regulators or the government,” the analyst Bloomberg Intelligence’s Herman Chan said in a message.

Investors will start taking a “pretty hard” look at banks that are “defying the Fed and the FLHB,” said Abbott Cooper, an activist investor who works on deals for failed banks. during the Global Financial Crisis.



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