Investors on Wall Street are already speculating which bank will fall next, even before regulators have finished writing the First Republic Bank’s obituary.
Tuesday saw a significant decline in bank stock prices, driven primarily by smaller institutions with high exposure to uninsured deposits and commercial institutions like Western Alliance Bank, PacWest Bancorp, Comerica, and Zions Bank. Western Alliance shares tumbled 19% in noon trading, while PacWest shares fell 26%.
Trading in both equities was briefly suspended owing to the excessive volatility.
After regulators shut down First Republic Bank on Monday and most of its operations were sold to JPMorgan Chase in a fire sale, bank stock losses continued on Tuesday. Following the failures of Silicon Valley Bank and Signature Bank, it was the second-largest bank failure in American history and the third in six weeks.
JPMorgan CEO Jamie Dimon remarked on Monday that he thought “this part of this (banking) crisis) is over” when talking about the deal to buy First Republic, but the conclusion of First Republic’s ordeal didn’t cure all the issues at other banks.
Investors and regulators are continually concerned that banks like PacWest have sizable sums of uninsured deposits—those over $250,000—which have grown to be a bigger problem since wealthy and affluent customers have demonstrated a willingness to withdraw their money at the first hint of danger.
The banks are also exposed to low-interest loans approved when interest rates were much lower but are now worth less on the open market.
In its earnings report from last week, Western Alliance said that to improve the health of its balance sheet, it had to start disposing of some of its commercial and industrial loans, taking a loss on most of them.
Because it had to write down some of the loans it intended to sell to straighten out its balance sheet, PacWest reported a loss in the first quarter.
The requirement for employees to remain in the workplace five days a week due to the pandemic impacted employee behavior, and there are still unresolved concerns regarding commercial real estate financing.
While commercial real estate, industrial loans, and construction make up more than half of Western Alliance’s balance sheet, they account for about a third of PacWest’s balance sheet.
These contributed to the credit rating agency Moody’s downgrading of Western Alliance last month.
Since they can charge more for loans, banks typically benefit from higher interest rates, but depositors are increasingly looking around for accounts with higher yields.
This implies that banks are paying depositors more, which affects their profitability.