PacWest Bancorp (PACW) led regional-bank stocks sharply lower Tuesday as investors continue to test the health of smaller U.S. lenders following the sale this week of First Republic (FRC) to JPMorgan (JPM) at the behest of federal regulators.
First Republic's sale marked the second U.S. bank failure in as many months following the collapse of SVB Financial in early March. The move saw JPMorgan outbid PNC Financial (PNC) and Citizens Financial (CFG) for the lender and wealth manager's $173 billion loan book and its $92 billion in deposits.
The deal did not, however, include either First Republic's debt nor its preferred or common stock, and the loan book valuation may be forcing mark-to-market adjustments at other regional banks.
The Federal Deposit Insurance Corp. also took a $13 billion hit on the sale, which it arranged alongside the California Department of Financial Protection and Innovation late Sunday.
That cost, which adds to the $22.5 billion in losses linked to the collapse of SVB Financial and the closure of Signature Bank in early March, leaves the FDIC's Deposit Insurance Fund with a $35 billion gap that will need to be filled with higher fees from domestic U.S. banks.
Focus on FDIC Deposit-Insurance Threshold
Investors may also be worried that the FDIC's current deposit threshold of $250,000 per account -- which was expanded to protect savers at Silicon Valley Bank -- would be insufficient in protecting another bank run.
The Mid-Size Bank Coalition of America, a lobby group, is seeking a blanket deposit guarantee that lasts for at least two years, while Sen. Elizabeth Warren (D-Massachusetts), a vocal critic of U.S. banking regulations, is asking Congress to lift the cap on FDIC insured deposits, potentially to as high as $10 million, in order to truly stem the regional banking sector crisis.
The KBW Regional Banking index was marked 4.8% lower in late morning trading Tuesday, its worst decline since March 13, after hitting a two-year low of 82.03 earlier in the session.
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PacWest shares were marked 26% lower at $6.73 while Western Alliance (WAL) shares tumbled 20% to $29.30 each. Big bank stocks were also under pressure, with JPMorgan falling 1.55%, Citigroup (C) down 2.9% and Wells Fargo (WFC) slumping 4.5%.
The sharp moves lower also come just ahead of what is widely anticipated to be an interest rate hike from the Federal Reserve. The central bank is expected to lift its benchmark federal-funds rate by 0.25 percentage point, to a range of between 5% and 5.25% amid the most aggressive policy tightening in at least four decades.
Banks Sitting on Bond Losses After Rate Hikes
Banks are sitting on an estimated $620 billion of unrealized losses from Treasury, agency and mortgage-backed-securities bonds following the surge in market interest rates, which has swamped fixed-income portfolios worldwide. (Bond prices drop when interest rates rise.)
That said, markets betting the Fed will hold its next rate hike in place for a number of months and bets on a late 2023 rate cut are continuing to accelerate. So the stresses on regional-bank balance sheets should be abating as prices of Treasury bonds rise and yields decline.
Benchmark 10-year Treasury note yields, for example, are some 40 basis points (0.4 percentage point) south of their late-December levels, with 2-year notes down by a similar amount, with the former last seen trading at 3.447% and the latter at 3.978%
Still, a surprise overnight rate increase from the Reserve Bank of Australia, still-sticky inflation in Europe and mixed data on price pressures in the U.S. have some market participants worried that the Fed may look to extend its hawkish policy stance, adding longer-term pressures to bank balance sheets.
"The Fed wants to whip inflation, and the surest way to do so is a recession, which would make workers and businesses less confident in their ability to negotiate higher wages and raise selling prices," said Bill Adams, chief economist for Comerica Bank in Dallas.
"The Fed’s pivot to rate cuts is harder to predict than them going on hold."
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