First Republic’s bailout this week failed to halt a selloff in regional bank stocks, which plunged Tuesday morning as investors digested JPMorgan’s takeover of the troubled California lender.
Trading in PacWest, considered one of the weakest mid-sized regional banks, was briefly halted due to volatility and was down 25% at midday New York. The fall put PacWest on track for its worst daily decline since March 10, when Bank of Silicon ValleyThe collapse of has put pressure on the entire sector. Western Alliance lost more than 20%.
Both banks have come under scrutiny for their similarities to the SVB and First Republic, which were taken over by the Federal Deposit Insurance Corporation after suffering huge deposit outflows and large losses. of paper on long-term assets.
JPMorgan bought First Republic’s deposits and most of its assets on Monday, but shareholders were wiped out entirely.
“They go from the weakest bank to the weakest bank. And it’s not just short sellers, but also clients who are asking if their deposits are safe,” said Chris Whalen, president of Whalen Global Advisors. “The market focuses on the weakest links and looks for vulnerable banks.”
A KBW index of regional bank stocks slid more than 5% in morning trading. Utah-based Zions Bancorp was the biggest loser on the S&P 500 index, falling 13%.
A banking analyst pointed to a caveat in comments by JPMorgan Chase chief executive Jamie Dimon after the First Republic takeover. Although he said Monday’s bailout of the California bank “solves just about all of them,” he prefaced his remarks by warning that “there could be another smaller one” to come.
“People are clinging to that commentary,” the analyst said.
Michael Metcalfe, head of macro strategy at State Street Global Markets, said “the nervousness in the market is understandable” after the failure of First Republic.
However, he noted that long-term investors had been buying more bank shares in recent weeks, suggesting “no panic or wider contagion”. He added: “The implication is that [Tuesday’s] price action is driven more by speculation.
Shares of major banks were also falling, but not as sharply, with Goldman Sachs and Morgan Stanley were each down about 2%. JPMorgan fell about 1.4%.
Banking stocks tend to be highly cyclical and the Bureau of Labor Statistics reported on Tuesday that the number of job vacancies fell to the lowest level since May 2021 amid growing concerns that the United States States do not exceed their borrowing limit.
Several prominent investors and executives have warned on the potential for further fallout from the string of bank failures.
PGIM chief executive David Hunt told attendees at the Milken Institute conference in Beverly Hills on Monday that “we’re just getting started [to see] the implications for the US economy,” while Investcorp co-head Rishi Kapoor said there was “no doubt the second- and third-order effect on the banking sector. . . will create binding financial conditions”.
Regional banks are particularly exposed to commercial real estate, which has recently become a concern, due to its exposure to higher interest rates and fears that the prevalence of working from home could reduce demand for office space. .
In an interview with the Financial Times this weekend, Berkshire Hathaway’s Charlie Munger warned that regional banks were “full” of bad commercial real estate loans.
Investors bet heavily on further share declines in some of the midsize banks, with short-term interest in California-based PacWest particularly high. However, the level of short selling activity has changed little over the past month, according to data from Markit.
Mid-sized banks between $100 billion and $250 billion in assets are also a concern as U.S. regulators have said they plan to tighten supervision and regulatory requirements, which will likely increase costs and will affect the profits of small banks.
Concerns about the debt ceiling could also contribute to lower bank stocks, said Casey Haire, an equity analyst at Jefferies. “It spoils the [Treasury] yield curve,” he added. “An inverted yield curve is never good for banks.”
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