The market is looking for the next domino to fall

Traders work on the floor of the New York Stock Exchange.

Brendan McDermid | Reuters

After a few intense days in which the fate of the struggling lender First Republic was finally determined, veteran banking analyst Christopher McGratty was looking forward to some calm.

So early Tuesday, more than 24 hours after US regulators seized the First Republic and chose JPMorgan Chase to take over most of his assets, McGratty went to a client in Manhattan. Minutes into regular trading, however, shares of the regional banks he covers for KBW began to plunge.

“I was like, ‘Hey, this is a good day to catch up, this seems like an orderly day,'” McGratty said in a phone interview. “I go back to my desk, and I’ve had 40 emails and 10 voicemails, and my screen was completely red.”

The sharp selloff by regional banks triggered by the Silicon Valley Bank bankruptcy in March resumed on Tuesday, catching analysts and Wall Street investors off guard. The resolution ordered from the First Republic by the nation’s largest lender was meant to allay concerns about the state of America’s banking system, not rekindle them.

The sharp declines — PacWest shares fell 28% to a record low on Tuesday, while western alliance lost 15% – amid a lack of fresh news, banking experts asked why this was happening.

Fears over uninsured deposits, concerns over commercial real estate and upcoming regulations were all cited as possible triggers.

Others pointed to pressure from short sellers. That’s what Peter Orszag, CEO of Financial Advisory at lazard who represented the First Republic in its rescue efforts, CNBC’s Sara Eisen told CNBC on Tuesday.

“People are looking for answers, and no one has a good one,” said McGratty, head of U.S. banking research at KBW, which has covered the industry for nearly 20 years.

march madness

PacWest and Western Alliance had recently released first quarter results and updated numbers through mid-April, which initially eased investor concerns about deposit outflows. But the current moment is more about human emotions than how banks are normally valued, he said.

“The market is looking for the next potential domino” to fall after foreclosures from SVB, Signature and First Republic, McGratty said.

“We’re in this situation that’s a lot like March, where we’re trading stocks on fear and sentiment and not fundamentals,” he added.

This does not make the danger any less real for medium-sized banks. The pressure on bank stocks could cause customers to withdraw deposits from their institutions again, according to analysts such as McGratty and John Pancari of Evercore ISI.

“While we are confident in banks’ liquidity and capital levels after the first quarter, we cannot ignore the risk that market pressures on bank stock valuations could fuel a self-fulfilling prophecy,” Pancari said. Tuesday in a research note.

On Wednesday, shares of PacWest and Western Alliance rebounded somewhat. The KBW regional bank index also climbed.

More fragile

Events in March showed that banks can fail faster than expected.

Digital banking tools and fears fueled by social media have spurred the flight of deposits from banks, including SVB, where customers attempted to withdraw more than $140 billion in deposits in two days.

That’s why McGratty, who says he still has scars from the 2008 financial crisis, says the current turmoil is scarier than that of 15 years ago in at least one important way.

The bad debts that were at the root of previous crises can take months to bring down a bank, he said.

But a customer-led deposit race “can kill you in 36 hours, like what happened at SVB”, he said. “It shows you how fragile everything is.”

Peter Orszag: JPMorgan's cost to FDIC was lower than it could have been

Leave a Comment