By Ken Sweet and Michelle Chapman —
The Associated Press
Doubts about the financial health of regional banks in the United States, which this Thursday focused on PacWest Bank, rocked stock markets despite assurances offered by federal regulators about the strength of the banking system.
The shares of this small regional entity plummeted almost 50% on Thursday, after confirming that it was considering "strategic options" that could include its sale.
The Los Angeles, California-based bank said in a statement that it was not experiencing any unusual deposit withdrawals and that it plans to sell assets to free up cash on its balance sheet.
[Millions of jobs lost and a catastrophic stock market crash: this could happen if there is no
debt ceiling
agreement ]
With $44 billion in assets, PacWest is about a fifth the size of the three regional banks that failed in the past two months: Silicon Valley Bank, Signature Bank and First Republic Bank.
The bank experienced significant deposit outflows following the failure of Silicon Valley Bank in mid-March, but says its deposits have increased since March 31, including at its venture banking division, which services technology companies.
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Still, investors fear its fate is similar to that of another California bank, First Republic, which spent weeks looking for a buyer before failing on Monday.
Regional banks that have struggled have experienced strong deposit outflows and need to raise capital.
Almost all of them have large amounts of low-interest bonds and commercial real estate assets on their books, and would make a loss if they sold them on the market.
The healthier banks have been reluctant to step in to buy up troubled ones.
All Silicon Valley, Signature and First Republic assets were foreclosed after regulators intervened in these institutions and their deposits were transferred to the Federal Deposit Insurance Corporation.
In another sign of potential trouble for the banking industry, TD Bank Group and First Horizon Corp. have announced the cancellation of their proposed merger, citing regulatory hurdles.
Toronto-Dominion Bank had announced in February the purchase of regional bank First Horizon for $13.4 billion in cash.
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Western Alliance shares fell 39% until trading was discontinued.
The Phoenix-based bank issued a statement saying it had not experienced any unusual deposit withdrawals and that its plans to readjust its balance sheet were underway.
On Thursday morning, the Financial Times reported that the bank was also considering strategic options.
The bank denied it outright.
Other regional banks also fell public: Zions Bancorp fell 10%, Comerica 12%;
and KeyCorp more than 6%.
The Federal Reserve's fight against inflation has played a key role in this banking turbulence: on Wednesday it raised its interest rate by a quarter of a point, to the highest level in 16 years, marking its tenth consecutive rise.
Those rises have prompted depositors to move their money into higher-paying certificates of deposits and money market funds.
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Federal Reserve Chairman Jerome Powell said he will watch several factors, including turmoil in the banking sector, when deciding his next rate move.
Powell underscored his belief that the failure of three big banks in the last six weeks is likely to cause others to tighten credit, and that would help fight inflation.
He also said that First Republic's intervention was an important step to ease the recent banking stress.
But some Wall Street analysts foresee more turbulence in the sector.
"Banks have endured a tumultuous environment over the past two months and uncertainty remains in the smaller regional bank segment," JPMorgan told clients.
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The firm expects bank shares to continue under pressure from regulatory and economic uncertainty, among other factors.
"Regulatory concerns would primarily translate into the need for banks to increase their capital, liquidity and debt, all of which would strengthen them in the long run, but hurt earnings per share," he said.
