Investors’ worries over regional banks were supposed to ease after JPMorgan Chase’s emergency acquisition of First Republic Bank.
But anxiety quickly returned on Tuesday, with a stock market rout that left few unscathed and several seeing double-digit declines. The drops raised new questions about what steps policymakers should take next to stem a panic that has thus far claimed three banks.
The banks that have failed were all unusual. Silicon Valley Bank was concentrated in the tech sector. Signature Bank dug out a niche in crypto. And First Republic’s focus on catering to the wealthy proved to be ill-fated, as regulators took it over on Monday and then sold it to JPMorgan Chase.
But worries have now re-emerged about several regional banks with more straightforward business models. The market is “trying to identify who’s next” and at risk of failure, said Jeff Davis, managing director of Mercer Capital’s Financial Institutions Group.
“The price action like this should not be ignored,” Davis said. “As much as I think everything’s fine, the market’s telling us that there’s some more weeds among the grass to be ferreted out.”
The hardest hit regional bank on Tuesday was PacWest Bancorp in Beverly Hills, California, the stock of which fell nearly 28% to $6.55 per share.
Others seeing large declines included Metropolitan Bank Holding in New York, which fell 20%; Western Alliance Bancorp. in Arizona, which lost 15%; Dallas-based Comerica, which dropped 12%; and Zions Bancorp. in Salt Lake City, which shed nearly 11%.
The declines came as Federal Reserve officials prepared to make their latest interest rate decision on Wednesday and observers wondered whether the central bank will signal an imminent pause in its rate increases. While investors expect another 0.25% rate hike on Wednesday, many are also preparing for officials to stop there or even cut rates later this year.
The Fed’s aggressive hikes over the past year were a key driver of the failed banks’ problems, as they made the low-yielding bonds and mortgages they accumulated during the pandemic far less valuable. Other banks now face similar, if less severe, headaches.
Fed officials may be wary of loosening their policies too quickly, for fear that inflation could gain speed again. The flip side is that keeping rates high may mean more volatility for banks is ahead.
The steep decline in bank stock prices on Tuesday likely isn’t too worrying to bank regulators on its own, according to Isaac Boltansky, director of policy research at the financial services firm BTIG. The concern is that bank customers could grow worried and pull their deposits, even if recent earnings reports from the banks in question show that their deposits have been largely stable.
“We’re still dealing with numerous banks that have upside-down balance sheets and concerns that, at any moment, there can be massive deposit outflows causing stress,” Boltansky said.
Ian Lyngen, a rates strategist at BMO Capital Markets, predicted that the headlines about bank stock declines on Tuesday will drive the agenda at Fed Chairman Jerome Powell’s post-meeting news conference on Wednesday,
In comments this week, the CEOs of some of the nation’s largest banks have sought to reassure the public about regional banks’ health.
After JPMorgan swooped to the rescue of First Republic on Monday, CEO Jamie Dimon said while “no crystal ball is perfect,” the industry is stable and regional banks’ deposits have remained steady. “This part of the crisis is over,” he said.
And on Tuesday, Wells Fargo CEO Charlie Scharf said the banks that have failed are “very, very different” than regional banks as a whole and that it “makes absolutely no sense” to lump them all together.
A couple of other banks with “questionable models” could be at risk of failure, Scharf said during a panel discussion at the Milken Institute conference. But “the reality is the majority of the banks that we look at are still extremely strong and have great franchises,” he said.
JPMorgan’s purchase of First Republic was intended to calm fears, but investors are thinking that the crisis “isn’t behind us,” said Clifford Rossi, a professor at the University of Maryland School of Business.
“We’re in an environment where deposits are willing to move at a moment’s notice at the first sign of panic,” he said, adding that banking executives and regulators may not have fully grasped the “instantaneous” impact of deposit runs in an era of digital banking.
The FDIC on Monday laid out some longer-term options for the country’s deposit insurance program, including a recommendation to raise insurance limits for business accounts.
In the meantime, regulators should work with Congress to “enact some form of temporary deposit insurance, particularly for business and transactional accounts,” said John Popeo, a former FDIC and Fed official.
He pointed to transaction deposit account guarantees the FDIC implemented during the 2008 crisis as a model.
“This would go a long way toward stabilizing banks’ deposits until an updated deposit insurance regime is introduced,” Popeo, who is now a partner at The Gallatin Group, said in an email.
The large stock price declines on Tuesday did not affect the entire industry, but the SPDR S&P Regional Banking ETF still fell more than 6%.
With earnings season wrapping up, analysts note that deposits largely held up at every bank outside of First Republic. Even PacWest and Western Alliance, which saw significant outflows during the initial stages of the banking panic, reported that those outflows had stabilized.
Jon Arfstrom, an analyst at RBC Capital Markets, wrote Tuesday in a note to clients that “we would be buyers of the weakness” in PacWest and Western Alliance, given the stabilization in deposits.
“In general, the large declines across our universe today do not reflect the strong and healthy balance sheets and minimal disruption in deposits in recent months, and for investors that favor other regional banks, we believe there is a bullish case for many names given recent moves,” Arfstrom wrote.
Bradley Rinschler, managing partner at the hedge fund Down Range Capital Management, still sees risk in certain bank stocks. He raised concerns about lenders that have larger exposure to commercial real estate, less stable deposit bases and exposure to the pain that higher interest rates have inflicted.
Still, Rinschler sees opportunities in well-managed bank stocks. Recent stock price declines show that investors are throwing the “baby out with the bathwater” and punishing bank stocks broadly, he said. Some banks are trading at steep discounts despite having strong deposit bases, significant levels of capital and healthy dividends and buybacks, he noted.
“This is a challenging environment, but I do think that there’s some stuff here that is attractive,” Rinschler said.