NEW YORK: Shares of US regional banks PacWest Bancorp and Western Alliance Bank plunged on Tuesday (May 2) as the demise of First Republic Bank triggered investor concerns about the financial health of other mid-sized lenders.
JPMorgan Chase agreed on Monday to acquire a majority of First Republic's assets in a US$10.6 billion (RM47 billion) deal after regulators seized the lender, which became the largest US bank failure since the 2008 financial crisis.
Investors fear the latest turmoil, which began with the failures of Silicon Valley Bank and Signature Bank in March, could spread to other regional banks.
The KBW Regional Banking Index fell 5.52%, hitting its lowest since December 2020.
“If a ‘confidence crisis’ can happen to First Republic, it can happen to any bank in this country,” said Jake Dollarhide, CEO of Longbow Asset Management.
“This is potentially a big deal, which hopefully won’t materialize to anything significant,” he added.
Los Angeles-based PacWest tumbled by more than 27%. It is ranked 53rd among US lenders with US$41.2 billion in assets as of the end of last year, according to Federal Reserve data.
Phoenix, Arizona-based lender Western Alliance, the No. 40 US bank with US$68 billion in assets, sank 15% while Cleveland, Ohio-based KeyCorp, the 20th largest bank with US$188 billion in assets, fell 9%.
Comerica, a Dallas, Texas-based bank ranked 37th among US lenders with US$86 billion in assets, shed 12%. Columbus, Georgia-based Synovus Financial Corp, with US$60 billion in assets and ranked the 42nd US biggest bank, lost nearly 7%.
Valley National Bankcorp, which owns Valley National Bank based in Passaic, New Jersey and is the 43rd largest lender with US$57 billion in assets, closed 3% lower after shedding more than 20% on Monday.
“Historically, once you see a resolution of one institution, the market tends to go after who they view as the next weakest link,” said Goldman Sachs regional banks analyst Ryan Nash.
The exposure of regional banks to the commercial real estate sector, particularly office buildings that currently have high vacancy rates, has further heightened investor concerns that loan losses could pile up and exacerbate the current crisis amid rising interest rates.
Regional banks with up to US$250 billion in assets held about US$1.1 trillion of commercial real estate loans with maturities through 2027 as of the end of last year, according to real estate data analytics firm Trepp Inc.
“There could be some haircuts on office loans and that’s a market where regional banks have a lot of exposure,” Nash said.
JPMorgan Chase’s deal for First Republic’s assets has ended risks of a contagion, some analysts said. But others noted the deal makes the biggest US bank even bigger, raising the risk of a heightened “too-big-to-fail” problem that regulators have been trying to solve for years.
“While we think this deal underscores all of JPM’s key strengths, we can’t help but try to read into what it means if our biggest bank is the government’s first line of defence,” analysts at Evercore ISI wrote in a note.
The US Federal Reserve is expected to comment on the regional bank crisis at the end of its Federal Open Markets Committee meeting on Wednesday, with markets expecting a 25 basis point increase.
The selloff was driven by the threat of higher interest rates making the situation worse, said Phil Blancato, CEO of Ladenburg Thalmann Asset Management.
Meanwhile, Wells Fargo & Co CEO Charlie Scharf said on Tuesday the banking industry is “extremely strong” but added he expects more volatility as market participants assess the health of financial institutions.
“Talking about regional banks as one – it just makes absolutely no sense,” he said at the Milken Institute Global Conference in Beverly Hills. “Unfortunately, there will be a lot of volatility and turmoil,” he said, adding that “the majority of the banks that we look at are still extremely strong”.
He did not expect more bank failures comparable to the recent collapses of Silicon Valley Bank, Signature Bank and First Republic Bank. Despite the turmoil, consumers and businesses remain in good financial health, Scharf said.
Peter Orszag, CEO of financial advisory at Lazard Ltd , called on officials to signal their intentions to guarantee uninsured deposits at banks for a six-month period, echoing actions during the 2008 financial crisis.
Such moves would shore up confidence and stop depositors from pulling out money from small and mid-sized banks, said Orszag, who previously served as director of the office of management and budget in the Obama administration.
Lazard advised First Republic Bank before it was seized by regulators and sold to JPMorgan on Monday.
Protections for bank depositors under the Federal Deposit Insurance Corp should be raised to US$25 million from a current US$250,000 per person, per bank, former Treasury Secretary Steven Mnuchin said.
Increasing the backstop for bank accounts used for business purposes was a promising potential reform, the FDIC said on Monday.
“I’m all for raising the level of FDIC insurance premium, but I would not go too far,” Scharf said. “This insurance that exists, it’s not the government insurance, it’s the rest of the banking industry coming together and there’s no reason why the banks should subsidize the ills that happened at all of the banks across the system unconditionally.” – Reuters