US Regional Banks Face Investor Concerns Amid Ongoing Uncertainty

Shares of smaller regional bank PacWest Bank witnessed a significant drop of nearly 50 percent on Thursday, reflecting persistent uncertainty within the banking industry. Despite reassurances from financial regulators and industry leaders like Jamie Dimon, concerns linger about the aftermath of the recent crisis, leading to market turbulence.

PacWest Bank, based in Los Angeles, confirmed reports about considering “strategic options,” including a potential sale of the company. The bank emphasized that it was not experiencing unusual deposit withdrawals and planned to sell off some assets to enhance liquidity on its balance sheet.

With $44 billion in assets, PacWest is one-fifth the size of the three regional banks that failed in the past two months—Silicon Valley Bank, Signature Bank, and First Republic Bank. Following Silicon Valley Bank’s failure in March, PacWest faced substantial deposit outflows but reported an increase in deposits since March 31, especially in its venture banking division catering to technology and startup companies.

Investor concerns heightened as they feared PacWest’s fate might parallel that of another California bank, First Republic, which recently failed after a prolonged search for a buyer. Struggling regional banks experiencing deposit outflows and requiring capital infusion pose challenges, particularly due to significant holdings of low-interest bonds and commercial real estate assets.

In another sign of potential challenges for the banking industry, TD Bank Group and First Horizon Corp canceled their planned merger, citing regulatory hurdles. Toronto-Dominion Bank’s $13.4 billion all-cash deal to acquire First Horizon was called off due to regulatory complexities.

Western Alliance’s shares faced significant volatility, plummeting 39 percent before trading was halted. The Phoenix-based bank denied reports of considering strategic options, emphasizing that it was not exploring a sale.

Other regional banks, including Zions Bancorp, Comerica, and KeyCorp, also experienced selling pressure on Thursday.

US officials at the federal and state levels are reportedly evaluating the possibility of “market manipulation” behind recent fluctuations in banking share prices.

The Federal Reserve’s aggressive stance against inflation has contributed to the banking industry’s turmoil. The recent rate hike, marking the tenth consecutive increase, aims to combat inflation but has led depositors to shift funds into higher-paying instruments.

Federal Reserve Chair Jerome Powell acknowledged the recent banking stress but expressed confidence that it would prompt other banks to tighten lending, supporting the Fed’s inflation-fighting efforts.

While some see these events as part of a tumultuous period for banks, with ongoing regulatory and economic uncertainties, others anticipate continued pressure on bank stocks. JPMorgan highlighted concerns about regulatory requirements impacting capital, liquidity, and debt, potentially affecting earnings per share.

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