Uncertainty clouds future of US banks

NEW YORK — Uncertainty continues to pummel the banking industry, despite assurances from financial regulators and bankers that the worst of the recent crisis is over.

Bank shares have sold off on Wall Street this week following the government seizure and subsequent sale of First Republic Bank to JPMorgan. It was the second-largest bank failure in US history and the third failure of a midsize lender in two months.

The bigger worry is that the bank failures might lead to doubts about relatively healthy banks, creating a financial contagion that could impact the wider economy. Averting that scenario was the reason the United States put tighter restrictions on major banks following the financial crisis 15 years ago.

Bankers and regulators have tried to reassure investors that the worst of the crisis is past, to little avail. JPMorgan Chase CEO Jamie Dimon said on Monday that he believed "this part" of the banking crisis was over. Federal Reserve Chair Jerome Powell vouched for the health of the financial system on Wednesday.

A renewed sell-off on Thursday focused on PacWest Bancorp and Western Alliance Bancorp, two smaller regional banks whose shares have been under pressure since Silicon Valley Bank failed in mid-March and set off the current crisis. PacWest fell 51 percent after acknowledging it was considering putting itself up for sale.

PacWest was targeted because of a high concentration of large, uninsured deposits from venture capital and tech clients, the same type of customers who triggered bank runs at Silicon Valley and First Republic. UBS analysts estimated that about 23 percent of PacWest's deposits come from the venture capital and tech space.

But even Midwest regionals such as Comerica and KeyCorp are down more than 20 percent this week. That could reflect growing concerns about large amounts of real estate loans, particularly in the office property market, which continues to suffer the effects of the COVID-19 pandemic.

PacWest and Western Alliance each issued a statement overnight saying they were not experiencing any out-of-the-ordinary deposit withdrawals following the sale of First Republic. Both saw significant withdrawals following the failure of Silicon Valley Bank, but the banks said deposits have increased since March 31.

Investors fear that PacWest's fate could mirror that of First Republic, which spent weeks looking for a buyer before failing. First Republic also catered to a wealthy clientele, many of whom rapidly pulled deposits when Silicon Valley failed. The rapid rise in interest rates over the past year had also reduced the value of large loans the bank issued when rates were much lower.

Unsustainable mix

"The underlying issue, particularly at these banks, is their asset and deposit mix isn't sustainable. Deposits keep running out the door or banks are having to pay hefty prices for them," Chris Caulfield, a banking industry consultant with West Monroe who has worked with many of the regional banks in trouble, said.

USA Today quoted a Social Science Research Network study on the fragility of the US banking system that found that 186 more banks are at risk of failure, even if only half of their uninsured depositors decide to withdraw their funds.

"With the failure of three regional banks since March, and another one teetering on the brink, will America soon see a cascade of bank failures?" USA Today stated.

In another sign of potential trouble, a major deal in the banking sector was called off on Thursday. TD Bank Group and First Horizon Corp said they called off a planned merger, citing regulatory hurdles. Toronto-Dominion Bank said in February that it was buying regional bank First Horizon in a $13.4 billion all-cash deal.

The Federal Reserve's fight against inflation has played a key role in the banking turmoil. The Fed on Wednesday raised its key interest rate by a quarter-point to the highest level in 16 years as part of that campaign, its 10th consecutive rate hike.

The higher rates have prompted depositors to move money into higher-paying certificates of deposit and money market funds. They also played a role in the slowdown in the tech industry, which had major implications for West Coast banks such as Silicon Valley.

Agencies - Xinhua