US regional banks face big sell-off despite First Republic rescue deal
Regional banks across the US were under pressure today as investors became increasingly nervous about the state of the banking sector despite JP Morgan’s acquisition of First Republic Bank.
The KBW regional bank index, which includes a range of regional lenders, shed 6.6 per cent.
Pacwest Bancorp shares were down nearly 30 per cent, while Western Alliance was down nearly 20 per cent.
Larger banks were also down, although by not as much. At the time of reporting, JP Morgan shares were down 1.9 per cent, Citi 3.4 per cent, Bank of America 4.5 per cent, Wells Fargo 5.1 per cent.
The sell-off indicates the First Republic rescue deal hasn’t immediately calmed investors’ nerves and the banking crisis might be entering a new phase.
Finalto’s Neil Wilson commented: “It probably only ends when investors stop asking ‘who’s next?’ We ain’t there yet.”
Following the acquisition of First Republic, JP Morgan boss Jamie Dimon said the immediate banking crisis in the US was “over”, arguing that only a small number of banks were vulnerable to the specific range of problems that impacted SVB and Signature Bank.
But analysts also pointed out that warning lights are still flashing in the sector despite the interventions of regulators.
“It is striking that even though the Fed’s emergency lending hasn’t expanded any further since the initial crisis in March, use of the Fed’s discount window remains extremely elevated,” Paul Ashworth, Capital Economics’ chief North America economist, said.
George Lagarias, chief economist at Mazars, also said regional banks were still “heavily using the Fed’s discount window.”
Aside from the emergency lending, UBS analysts pointed to other problems saying that the First Republic deal “does not change the rates, recession, and regulatory headwinds that regional banks are facing”.
Regional banks are expected to face much tighter regulations as a result of the banking crisis. Last week, the Fed laid the blame for SVB’s collapse at Trump-era deregulation, which exempted smaller banks from tighter capital rules.
“The 2018 US legislation, which eased restrictions and oversight for banks with less than $250bn in assets, may be repealed and mid-size banks will face more scrutiny,” Wilson commented.