Bank stocks continue to fall after the demise of the First Republic

NEW YORK – Regulators have barely written the epitaph of First Repbulic Bank, but Wall Street investors have already begun to speculate on which bank might be next to fail.

Bank stocks fell sharply on Tuesday, dragged down by smaller banks with high exposure to uninsured deposits and commercial banks such as Western Alliance Bank, PacWest Bancorp, Comerica and Zions Bank. Shares of Western Alliance fell 17% in afternoon trading and PacWest 25%, with trading in the two stocks briefly halted due to high volatility.

The second day of declines in bank stocks comes after regulators shuttered First Republic Bank on Monday and sold the vast majority of its operations to JPMorgan Chase in a fire sale. It was the second-largest bank failure in US history and the third bank failure in six weeks, following the collapse of Silicon Valley Bank and Signature Bank.

While discussing the deal to buy First Republic, JPMorgan CEO Jamie Dimon said on Monday he believes “that part of this (banking) crisis is over.” But the resolution of the First Republic ordeal did not solve all the problems of the other banks.

The constant concern of investors and regulators is that banks such as PacWest have large amounts of uninsured deposits – those over $250,000 – which have become larger liabilities because wealthy and wealthy customers have shown themselves willing to withdraw their money at the first sign of difficulty. . Banks are also exposed to low-interest loans that are now worth less on the open market due to the fact that they were taken out when interest rates were significantly lower.

When Western Alliance reported results last week, the bank said it needed to start selling some of its commercial and industrial loans to restore the health of its balance sheet, with the bank taking a loss on most of those loans. PacWest posted a loss in the first quarter as it had to write down some of the loans it planned to sell to clean up its own balance sheet.

There are also lingering fears over commercial real estate loans, which have been a sore point since the pandemic changed employee behavior around needing to be in the office five days a week. Businesses need less office space, and big employers like Facebook parent company Meta, Google, Microsoft, Amazon and banks have been laying off employees, which is also expected to impact space demand. Office.

About a third of PacWest’s balance sheet is related to construction and commercial real estate loans, while more than half of Western Alliance’s balance sheet is made up of commercial real estate, industrial loans and construction. That’s part of the reason ratings agency Moody’s downgraded Western Alliance’s credit rating last month.

While banks have generally benefited from higher interest rates because they can charge more for loans, depositors are now increasingly looking for higher yielding accounts. This means that banks pay more to depositors, which has an impact on profitability.