US regional banks suffered severe equity drawdowns on Thursday amid fresh calls for more powerful intervention from Washington to stem the crisis.
Shares of PacWest plunged 50.6% after the California-based bank became the latest to seek a financial lifeline, announcing it was in talks with “several potential partners and investors.”
Canada’s TD Bank said so was scrapping its planned $13 billion acquisition of Memphis-based First Horizon, blaming uncertainty around the deal’s regulatory approval. Shares of First Horizon fell 33.2% on the day.
The KBW Regional Bank Index fell 3.5% and is down more than 30% this year.
The latest alarm bells come days after the Federal Deposit Insurance Corporation seized California lender First Republic and sold its deposits and assets to JPMorgan Chase.
The rise in interest rates took several US lenders by surprise, starting with the collapse of Silicon Valley Bank and Signature Bank in March. Banks that harbor losses on long-term bonds are being punished by equity investors, who fear for their future profitability as the cost of deposits rises fueled by the Federal Reserve’s aggressive rate hikes.
Those with a high percentage of deposits in accounts above the FDIC’s $250,000 guarantee limit are considered especially vulnerable, as these depositors have an incentive to withdraw their unsecured money.
Activist investor Nelson Peltz told the Financial Times that the deposit insurance limit should be raised, with wealthy account holders paying a small insurance premium to the federal insurance fund to safeguard balances over $250,000.
“It should stop the outflow of deposits from small regional and community banks,” Peltz said. “I don’t think we want all the funds to just go to the major banks.”
The activist, co-founder of Trian Fund Management, warned that the turmoil could continue without a strong far-reaching intervention from Washington.
“I don’t have a crystal ball and I don’t know what these banks’ balance sheets look like,” Peltz said. “If that stopped with JPMorgan’s acquisition of First Republic, I’d be happy, but that might not.”
The FDIC said earlier this week that deposit insurance should be increased to cover business accounts, noting that an increase to $2.5 million would cover most small and medium-sized businesses. Such a move would require congressional approval.
There are more than 4,100 commercial banks in the United States, according to the FDIC.
As the turmoil continued, there was a new check on SVB’s collapse. Goldman Sachs said it is cooperating with and providing information to “various governmental bodies” in connection with investigations and investigations into the California-based lender.
This included “Goldman’s activity with SVB circa March 2023 when SVB engaged the firm to assist with a proposed capital increase and SVB sold the firm a portfolio of securities.”
Goldman he has been criticized for his dual role vis-à-vis SVB, both as the purchaser of $21 billion in securities sold by the lender and as an adviser on a botched capital raise for the bank days before the bankruptcy.
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