A group of regional banks scrambled on Thursday to convince the public of their financial strength, even as their share prices plunged and investors bet on which one might be next to fall.
The melee raised doubts about the future of lenders, suggesting a new phase in the crisis that began two months ago with the collapse of Silicon Valley Bank and Signature Bank, and was marked Monday by the seizure and sale of First Republic. Bank.
PacWest and Western Alliance were in the eye of the storm, despite protests from the companies that their finances were sound. PacWest shares lost 50 percent of their value on Thursday and Western Alliance fell 38 percent. Other midsize banks, including Zions and Comerica, also posted double-digit percentage declines.
Unlike banks that failed after depositors rushed to withdraw their money, lenders now under pressure have reported relatively stable deposit bases and are not sitting on mountains of sour loans. They are also much smaller than Silicon Valley Bank and First Republic, which each had about $200 billion in assets when they collapsed. Los Angeles-based PacWest has about $40 billion in assets, and Phoenix-based Western Alliance has $65 billion in assets. Both banks have fewer than 100 branches.
The most immediate threat facing banks, analysts said, is a crisis of confidence. Headlines about their spiraling share prices could spook depositors and disrupt banks’ ability to operate normally.
“How do we get out of this?” said Christopher McGratty, head of US banking research at Keefe, Bruyette & Woods. “I think we’re still looking for that answer.”
Shares of PacWest and Western Alliance stopped trading dozens of times on Thursday as their huge price swings breached stock exchange safety measures put in place to prevent a sell-off from getting out of hand. The turmoil also raised the specter of concerted action by short sellers, traders who bet on falling stock prices and are sometimes blamed for stoking market volatility.
The Biden administration was closely monitoring the markets, “including short-selling pressures on healthy banks,” White House press secretary Karine Jean-Pierre told reporters on Thursday. Gary Gensler, chairman of the Securities and Exchange Commission, said in a statement on market conditions that the agency was “focused on identifying and prosecuting any form of misconduct that could threaten investors, capital formation, or the markets.” in general”.
Justin D’Ercole, founder of ISO-mts Capital Management, a bank-focused fund, said Thursday’s trading felt “unusually panicked” and “overdone.”
“There was extreme anxiety about these banks without much reasoning,” he said.
The trade was a reminder that the crisis may still continue, belying predictions that the situation would calmer after JPMorgan Chase struck a deal with government officials to acquire the ailing First Republic.
Regulators agreed to take on billions of dollars of potential losses lurking on First Republic’s books, and JPMorgan CEO Jamie Dimon declared immediately after the acquisition that “this part of the crisis is over.”
On Wednesday, Federal Reserve Chairman Jerome H. Powell said during a news conference that conditions had calmed since the collapse of Silicon Valley Bank, noting that it and the two other failed banks “in the middle of stress” had been resolved. Hours later, PacWest shares began their latest nosedive.
Since then, it has become clear that investors are not convinced that the regional lenders left standing can remain viable. And while there’s no reason for any company to be ousted immediately by falling stock prices, the outlook remains uncertain, with investors still hurt by the initial round of turbulence in March.
“Institutional investors have lost confidence in banks,” said Julian Wellesley, banking analyst at Loomis Sayles. “I’ve heard from a lot of people that stock prices don’t make sense, but no one wants to go in and buy.”
That’s puzzling for the banks themselves, indicating that their claims of strong financial health have yet to make the desired impact.
There is a limit to how long a public company can limp along with a collapsing share price before creating fear among depositors and drawing the ire of shareholders.
Even before this week’s shock, depositors were increasingly concerned about the safety of their money, following the collapse of Silicon Valley Bank. according to a gallup In a survey conducted through the end of April, 48 percent of American adults said they were concerned about the money they had on deposit at financial institutions.
The Federal Deposit Insurance Corporation, which insures bank accounts up to $250,000, released a report this week saying it would consider changes to its rules. The agency suggested that it could try to provide higher levels of insurance to companies’ pay accounts, which would allow companies to feel comfortable continuing to pay workers without creating the “moral hazard” problems that could occur if all deposits were fully guaranteed.
It would require legislation from Congress to amend the current deposit insurance system.
Amid the relentless declines in stocks, some blamed a different bogeyman: investors betting on a stock price drop. Short sellers have made nearly $7 billion this year betting against regional banks, according to estimates by S3 Partners, a data provider, and they can direct those gains toward new targets.
PacWest appeared more directly in their crosshairs, at least for the moment. Nearly 20 percent of the bank’s shares are currently on loan to short sellers, who sell them and hope to buy them back later when the shares have fallen, according to S3 data. Nearly 8 percent of Western Alliance shares are similarly loaned.
Before First Republic was seized, more than 36 percent of its shares were on loan.
On Thursday, Western Alliance blamed those short sellers for the turmoil, suggesting they were behind “false narratives about a financially sound and profitable bank,” as it issued a statement denying a report it was considering a sale.
Such attacks rarely work against short sellers, and disclosures by banks on Wednesday and Thursday that their depositors were not fleeing and their capital base was strong did not appear to work either.
One proposed solution to end such attacks would be to ban short selling, which regulators did in 2008 as the financial crisis was erupting. It’s unclear whether such bans worked as intended, and when asked about it Thursday, a Securities and Exchange Commission spokesman said the agency was not envisioning any limits on short selling of regional bank shares.
“I’m still not sure Washington is going to do anything,” said Ian Katz, a policy analyst at consultancy Capital Alpha Partners. He underscored the concern: “What is this going to stop at this point?”
In a show of confidence, executives at Zions, a Utah-based lender with about $90 billion in assets, spent nearly $2 million in recent days investing in the bank’s falling shares, according to regulatory filings.
Lenders now under pressure also seem eager to open their books to try to reassure investors. First Republic remained mostly silent as its business collapsed.
PacWest issued a statement late Thursday saying it had been “approached by a number of potential partners and investors.” Hours earlier, a report that he was exploring his options caused his share price to plunge 50 percent in after-close trading on Wednesday.
The bank said it had not seen “out of the ordinary” deposit outflows since the First Republic collapse, saying deposits stood at $28 billion as of Tuesday, down slightly from the end of April.
Western Alliance also released updated financial details on Wednesday, noting that it “has not experienced unusual deposit flows” in recent days. He said deposits had risen by $1.2 billion since the end of March.
Western Alliance shares still floundered, particularly after The Financial Times reported that the bank had hired advisers to guide it through a potential sale, an indication the lender needed help. Stocks rebounded from their worst losses after Western Alliance denied the report, but still ended the day significantly lower.
“The stock is not the company, and the company is not the stock,” said Timothy Coffey, banking analyst at Janney Montgomery Scott. “But the loss of trust in a financial institution can be difficult to repair.”
The report was contributed by Juana Smialek, alan rapport, Maureen Farrell, Stacy Cowley and lauren hirsch.