Smaller banks scramble as stock prices plunge

A group of regional banks scrambled Thursday to convince the public of their financial strength, even as their stock prices plunged and investors bet on which might be next to fall.

The tumult has brought to the fore questions about the future of lenders, suggesting a new phase of the crisis that began two months ago with the bankruptcy of Silicon Valley Bank and Signature Bank, and punctuated on Monday by the seizure and sale of First Republic Bank.

PacWest and Western Alliance were in the eye of the storm, despite protests from companies that their finances were strong. PacWest shares lost 50% of their value on Thursday and Western Alliance fell 38%. Other mid-sized banks, including Zions and Comerica, also posted double-digit percentage declines.

Unlike banks that went bankrupt after depositors rushed to withdraw their money, lenders currently under pressure reported relatively stable deposit bases and are not sitting on mountains of soured loans. They are also much smaller than Silicon Valley Bank and First Republic, which each had around $200 billion in assets when they collapsed. Los Angeles-based PacWest has about $40 billion in assets, and Phoenix-headquartered Western Alliance has $65 billion in assets. Both banks operate less than 100 branches.

Analysts say the most immediate threat facing banks is a crisis of confidence. Headlines about soaring stock prices could spook depositors and jeopardize banks’ ability to operate normally.

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

Shares of PacWest and Western Alliance were halted for trading dozens of times on Thursday as their huge price swings breached stock market safeguards put in place to prevent a sell-off from spiraling out of control. The turmoil has also raised the specter of concerted action by short sellers, traders who bet on falling stock prices and are sometimes blamed for fueling market volatility.

The Biden administration was watching the markets closely, “including short-selling pressures on sound banks,” White House press secretary Karine Jean-Pierre told reporters on Thursday. Gary Gensler, chairman of the Securities and Exchange Commission, said in a market conditions statement that the agency “is focused on identifying and prosecuting any form of misconduct that may threaten investors, the formation of capital or markets more broadly”.

Justin D’Ercole, founder of ISO-mts Capital Management, a bank-focused fund, said Thursday’s trading was “unusually panicked” and “overdone”.

“There was extreme anxiety about these banks without much reasoning,” he said.

The negotiation was a reminder that the crisis could still continue, belying predictions that the situation would be calmer after JPMorgan Chase reached an agreement with government officials to acquire the struggling First Republic.

Regulators agreed to take on billions of dollars in potential losses lurking on First Republic’s books, and JPMorgan chief executive Jamie Dimon said immediately after the acquisition that “this part of the crisis is over. “.

Federal Reserve Chairman Jerome H. Powell told a news conference on Wednesday that conditions had calmed since the collapse of Silicon Valley Bank, noting that it and the other two banks in bankruptcy “at the heart of the stress” had been resolved. Hours later, PacWest shares began their final plunge.

It has since become clear that investors are unconvinced that the remaining regional lenders can remain viable. And while there’s no reason for any company to be immediately knocked down by falling stock prices, the outlook remains uncertain as investors are still battered by the first wave of turbulence in March.

“Institutional investors have lost faith in banks,” said Julian Wellesley, banking analyst at Loomis Sayles. “I hear a lot of people say the stock price doesn’t make sense, but no one wants to come in and buy.”

This is disconcerting for the banks themselves, indicating that their claims of sound financial health have not yet achieved the desired impact.

There is a limit to how long a public company can limp along with a plummeting stock price before creating fear among depositors and angering shareholders.

Even before this week’s turmoil, depositors were increasingly worried about the safety of their money, following the collapse of Silicon Valley Bank. According to a Gallup poll conducted through the end of April, 48% of American adults said they were concerned about the money they held on deposit at financial institutions.

The Federal Deposit Insurance Corporation, which guarantees bank accounts up to $250,000, released a report this week saying it would consider changing its rules. The agency suggested that it could try to provide higher levels of assurance to companies’ payment accounts, which would allow companies to feel comfortable continuing to pay workers without creating the problems of ” moral hazard” that could arise if all deposits were largely guaranteed.

It would take congressional legislation to change the current system of deposit insurance.

Amid the relentless declines in stocks, some have blamed another boogeyman: investors who bet on a stock price drop. Short sellers have made nearly $7 billion this year betting against regional banks, according to estimates from S3 Partners, a data provider, and can direct those profits to new targets.

PacWest has appeared most clearly in their sights, at least for now. Nearly 20% of the bank’s shares are currently on loan to short sellers, who sell them back and hope to buy them back later when the stock drops, according to data from S3. Nearly 8% of Western Alliance shares are also on loan.

Before the seizure of the First Republic, more than 36% of its shares were on loan.

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

Such attacks rarely work against short sellers, and the revelations from the banks on Wednesday and Thursday that their depositors weren’t leaking and their capital was strong didn’t seem to do either.

One solution being considered to end such attacks would be to ban short selling, something regulators did in 2008 as the financial crisis erupted. It’s unclear whether those bans have worked as intended, and when asked about it on Thursday, a spokesperson for the Securities and Exchange Commission said the agency isn’t considering any limits on short selling stocks. regional banks.

“I’m not sure Washington will do anything yet,” said Ian Katz, political analyst at Advisory Capital Alpha Partners. He underlined the worry: “What’s going to stop it at this point?”

In a show of confidence, executives at Zions, a Utah-based lender with about $90 billion in assets, have spent nearly $2 million over the past few days investing in falling stocks. bank, according to regulatory documents.

Lenders now under pressure also seem keen to open their books in an attempt to reassure investors. The First Republic generally remained silent as its affairs crumbled.

PacWest issued a statement Thursday night saying it had “been approached by several potential partners and investors.” Hours earlier, a report that it was exploring its options triggered a 50% drop in its share price on Wednesday after hours.

The bank said it had not seen “out of the ordinary” deposit outflows since the collapse of the First Republic, saying deposits stood at $28 billion on Tuesday, down slightly from report at the end of April.

Western Alliance also released updated financial details on Wednesday and noted that it “did not experience any unusual deposit flows” in recent days. He said deposits had increased by $1.2 billion since the end of March.

Western Alliance shares have always been skewed, particularly after the Financial Times reported that the bank had hired advisers to guide it through a potential sale – an indication that the lender needed help. The shares rebounded from their worst losses after Western Alliance denied the report, but still ended the day significantly lower.

“The stock is not the business, and the business is not the stock,” said Timothy Coffey, banking analyst at Janney Montgomery Scott. “But loss of trust in a financial institution can be difficult to repair.”

The report was provided by Jeanna Smialek, Alan Rappeport, Maureen Farrel, Stacy Cowley And Lauren Hirsch.

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