(Bloomberg) — PacWest Bancorp has become the latest focal point of investor concern about the health of US regional banks, shedding more than half its value just hours after Federal Reserve Chair Jerome Powell said authorities were closer to containing the turmoil that’s claimed four lenders this year.
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The selloff, sparked by a Bloomberg News report that PacWest is considering strategic options including a sale, dragged down shares of the California lender by 60% in after-hours US trading on Wednesday and sent an ETF tracking regional banks to its lowest level since 2020. PacWest later confirmed it has been approached by several potential investors and is evaluating all options.
The moves show market angst over the sector remains high, despite Powell’s assurances that the government seizure and sale of First Republic Bank to JPMorgan Chase & Co. was “an important step toward drawing a line under that period of severe stress” for regional lenders. The First Republic deal effectively wiped out shareholders and bondholders while safeguarding depositors.
Big US banks have so far been insulated from the turmoil and the Fed has said the financial system is sound. Still, PacWest’s plunge may heighten pressure on policy makers to shore up smaller lenders that have struggled to cope with the most aggressive monetary tightening campaign since the 1980s. Financial heavyweights including hedge fund billionaire Bill Ackman and former Federal Reserve Bank of Dallas President Robert Kaplan are among those warning of more banking stress to come.
“Confidence in a financial institution is built over decades and destroyed in days,” Ackman, chief executive officer of Pershing Square, said on Twitter. “As each domino falls, the next weakest bank begins to wobble.”
PacWest has also been considering a breakup or a capital raise, said people familiar with the matter, who asked to not be identified discussing private information. While it is open to a sale, the company hasn’t started a formal auction process, the people said.
An outright sale has been hindered because there aren’t many potential buyers interested in the entire bank, which comprises a community lender called Pacific Western Bank and some commercial and consumer lending businesses, the people said. A potential buyer would also have to potentially book a big loss marking down some of its loans, the people added.
PacWest isn’t the only US regional bank under fire. Western Alliance Bancorp fell as much as 38% in postmarket trading, while Comerica Inc. and Zions Bancorp fell more than 10% each.
PacWest said in a statement dated Wednesday it has not experienced “out-of-the-ordinary” deposit flows following the sale of First Republic and other news. Core customer deposits have increased since March 31, with deposits totaling $28 billion as of May 2. Its cash and available liquidity exceeded uninsured deposits, according to the statement.
Western Alliance also said in a statement late Wednesday that it hasn’t experienced unusual deposit flows following the sale of First Republic and other “recent industry news.” It reaffirmed its guidance that deposits would rise quarter-over quarter.
That update “could help alleviate market concerns,” BI banking analysts led by Herman Chan said in a note. Nearly three quarters of Western Alliance’s deposits are insured, the second-strongest metric among peer banks, Chan added.
Smaller lenders are facing a pinch as rising interest rates lower the value of their longer-term investments while increasing the cost of funding. That’s been spurring depositors to move cash into higher-yielding money market funds.
Additionally, investors worry modern technology means clients can pull money rapidly out of struggling institutions, funneling deposits instead to the biggest banks. Critics of the banking system have called for the Federal Deposit Insurance Corp. to increase the insurance cap, which typically covers up to $250,000 on most accounts. While regulators are mulling a broadening of deposit insurance, no changes have yet been announced.
“A blanket insurance will likely do the job but is being labeled as the last resort by authorities,” Jun Rong Yeap, a market strategist at IG Asia Pte. said. “It seems that the situation could drag on further, with the need for further collapses to force such a move.”
On Wednesday, the Federal Reserve again raised rates by 25 basis points. While Powell hinted this could be the last increase, he also left the door open for officials to keep raising borrowing costs if inflation remains sticky. He also pushed back strongly against market expectations that the Fed will be cutting rates by year-end.
A year of interest-rate hikes has driven unrealized losses for banks to an estimated $1.84 trillion, with trouble in commercial real estate increasing the pain. These stresses are adding to the market focus on smaller banks, which typically have fewer resources to defend themselves.
“It just looks like, you know, the markets are moving from one bank to the other and vulnerable deer in the herd are being kicked off,” Dennis Lockhart, former Atlanta Fed President said in a Bloomberg television interview. “I have to say I worry about this. But I would like to believe that Jay Powell has information that suggest that the situation is contained or containable.”
First Republic Bank, acquired by JPMorgan on Monday in a government-led deal, became the fourth US lender to collapse this year, following Silvergate Capital Corp., SVB Financial Group’s Silicon Valley Bank and Signature Bank in March.
For now, the PacWest slump has had limited market impact outside other US regional lenders. Futures on the S&P 500 Index were little changed in Asia trading hours, while bank stocks in Hong Kong and South Korea rose.
–With assistance from Matt Turner.
(Adds PacWest confirmation, further context throughout)
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