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New Phase of Banking Crisis Pits Fear Against Fundamentals

A cluster of regional banks scrambled to convince the public of their financial health on Thursday, even as stocks plummeted and investors bet on what might fall next.

The turmoil has brought to the fore questions about the future of lenders and signals a new phase in the crisis that began two months ago with the collapse of Silicon Valley and Signature banks and punctuated by the seizure and sale of First Republic on Monday. doing. Bank.

PacWest and Western Alliance were on the verge of a storm despite protests from both companies that their financials were solid. PacWest shares fell 50% on Thursday, while Western Alliance lost 38% of his. Other mid-sized banks, such as Zions and Comerica, also posted double-digit declines.

Unlike banks that went bust after depositors rushed to withdraw funds, lenders currently under pressure report relatively stable deposit bases and do not have mounting bad debts. It’s also much smaller than Silicon Valley Bank and First Republic, which each had about $200 billion in assets at the time of their failure. Los Angeles-based PacWest has approximately $40 billion in assets, while Phoenix-based Western Alliance has his $65 billion in assets. Both banks operate his less than 100 branches.

Analysts say the most pressing threat facing banks is a crisis of confidence. Headlines about soaring stock prices can spook depositors and upend a bank’s ability to operate normally.

“How do we get out of this situation?” said Christopher McGratti, head of US banking research at Keefe, Brouillette & Woods. “I think we’re still looking for that answer.”

Stocks in PacWest and Western Alliance were halted dozens of times on Thursday after significant price volatility broke the stock exchange’s guardrails put in place to prevent a crash from spiraling out of control. The turmoil has also sparked specters of concerted action by short sellers, who have been accused of betting on falling stock prices and sometimes fueling market volatility.

White House spokeswoman Carine Jean-Pierre said Thursday that the Biden administration is closely monitoring markets, “including short-selling pressure on sound banks.” Securities and Exchange Commission Chairman Gary Gensler said in a statement on market conditions that the commission “identifies and seeks to identify all forms of fraudulent activity that could threaten investors, capital formation, or markets more broadly. The focus is on prosecution,” he said.

Justin D’Ercole, founder of ISO-mts Capital Management, a bank-focused fund, said Thursday’s trade felt “very panicky” and “overdone”.

“There was extreme anxiety about these banks for not many reasons,” he said.

The deal is a reminder that the crisis may still continue, with expectations that things will calm down after JPMorgan Chase reaches a deal with government officials to buy the ailing First Republic. betrayed the

Regulators have agreed to assume billions of dollars in potential losses lurking in First Republic’s books, and JP Morgan Chief Executive Jamie Dimon warned shortly after the acquisition that “this is a crisis.” The part is over,” he declared.

Federal Reserve Chairman Jerome H. Powell said at a press conference on Wednesday that the situation had calmed down since the failure of the Silicon Valley bank, adding that it and two other failed banks were “at the center of stress.” ” was resolved. Hours later, PacWest’s stock price began its latest plunge.

Since then, it has become clear that investors are not confident the remaining local lenders will survive. Still taking a hit from the initial turmoil of the month, the outlook remains uncertain.

“Institutional investors have lost faith in banks,” said Julian Wellesley, banking analyst at Loomis Sayles. Will not come.”

This has embarrassed the banks themselves and shows that their claims of sound financial health have not yet achieved the desired effect.

There is a limit to how long a publicly traded company can limp with a stock price plunge before causing fear among depositors and incurring the wrath of shareholders.

Even before this week’s fuss, depositors were increasingly concerned about the safety of their money following the collapse of Silicon Valley Bank.according to gallup A survey conducted by late April found that 48% of U.S. adults are concerned about the money they have in their financial institutions.

The Federal Deposit Insurance Corporation, which insures up to $250,000 in bank accounts, released a report this week that it would consider rule changes. Agencies are responsible for ensuring that corporate payments are made so that they can continue to pay their employees with peace of mind without creating the “moral hazard” issues that could arise if all deposits were broadly insured. It suggested that it might try to offer a higher level of insurance to the account.

Congressional legislation would be required to amend the current deposit insurance system.

Some blame another boogeyman amidst the relentless stock market crash. It’s an investor betting on falling stock prices. Data provider S3 Partners estimates that short sellers could make about $7 billion this year betting on local banks, and channel those profits to new targets.

PacWest seemed the straightest in the crosshairs, at least for now. Nearly 20% of the bank’s shares are currently on loan to short sellers, who hope to sell them and buy them back later when the stock price drops, according to S3 data. Nearly 8% of his shares in Western Alliance are on loan as well.

Prior to First Republic’s seizure, over 36% of its shares were on loan.

On Thursday, Western Alliance released a statement denying reports that it was considering a sale, suggesting it was behind “a false statement about a financially sound and profitable bank”. short sellers were blamed for the disturbance.

Such attacks rarely work against short sales, with bank disclosures on Wednesday and Thursday also showing that no depositors have fled and that their capital base is sound. did not.

One solution to putting an end to such attacks is to ban the short selling that regulators did in 2008 when the financial crisis erupted. It wasn’t clear whether such a ban worked as intended, and when asked about it on Thursday, a Securities and Exchange Commission spokesperson said the agency would impose a limit on short selling of local bank stocks. He said he was not considering it.

“Whether Washington will do anything remains to be seen,” said Ian Katz, a policy analyst at the advisory group Capital Alpha Partners. He emphasized his worry: “What is stopping this at this point?”

The management of Zions, a Utah-based financial institution with about $90 billion in assets, invested nearly $2 million in the bank’s falling stock price over the past few days to boost confidence, according to regulatory filings. showing.

Lenders, now under pressure, also appear eager to open up their books to reassure investors. As the business collapsed, the First Republic remained largely silent.

PacWest issued a statement Thursday night saying it was “approached by multiple potential partners and investors.” Hours earlier, a report that the company was weighing options triggered a 50% drop in the share price in after-hours trading on Wednesday.

The bank said it had not seen “abnormal” deposit outflows since the collapse of the First Republic, and said deposits stood at $28 billion as of Tuesday, down slightly from late April.

Western Alliance also released its latest financial details on Wednesday, saying it “has not experienced any unusual deposit flows” in recent days.

Western Alliance shares still plunged, especially after the Financial Times reported that the bank had hired advisers to advise on a potential sale. The stock rebounded from its worst losses after the Western Alliance denied the report, but it still ended the day sharply lower.

“Stocks aren’t companies, and companies aren’t stocks,” said Timothy Coffey, banking analyst at Janney Montgomery Scott. “But the loss of trust in financial institutions can be difficult to repair.”

The report was contributed by Gianna Smirek, Allan Lapeport, Maureen Farrell, Stacey Cowley and Lauren Hirsch.

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