Federal Reserve Chair Jerome Powell said Wednesday that the seizure of First Republic was "an important step toward drawing a line under" turmoil in the banking system. Within two hours the stock of another troubled regional lender was down more than 50%.
The trigger was a series of media reports that Beverly Hills, Calif.-based PacWest (PACW) was weighing a range of strategic options, including a sale or capital raise. Its stock continued to fall Thursday and ended the day down 50%.
Other regional banks under scrutiny from investors also plunged, including Western Alliance (WAL) after the Financial Times reported the Phoenix-based lender was considering a sale of all or parts of its business. Western Alliance called the report "categorically false." It ended Thursday down 38%.
The new round of volatility for regional banks punctuates a disconnect in the financial world as the industry’s unrest drags into an eighth week.
While top figures on Wall Street and Washington display optimism that the worst is over, investors continue to punish other regional lenders that share any characteristics of the three mid-sized banks already seized by regulators.
'The regional banking system is at risk'
On Monday JPMorgan Chase (JPM) CEO Jamie Dimon captured the industry’s hopes when he said "this part of the crisis is over" after announcing JPMorgan’s purchase of First Republic. Jane Fraser, CEO of Citigroup (C), on Monday called First Republic "the last remaining main uncertainty of the small handful of banks that did not do a good job with asset liability management."
Powell reinforced this view on Wednesday, citing the failures of First Republic, Silicon Valley Bank and Signature Bank as the "three large banks really from the very beginning that were at heart of the stress we saw in early March," he said.
"Those have all now been resolved" and the US banking system, he added, is now “sound and resilient.”
Billionaire hedge fund manager Bill Ackman offered a much more pessimistic take on the situation Wednesday night on Twitter. The Pershing Square Capital Management CEO called on the US government to put in place a systemwide deposit guarantee to prevent more bank failures, saying that "the regional banking system is at risk."
Banking, he added, is a "confidence game" and “at this rate, no regional bank can survive bad news or bad data as a stock price plunge inevitably follows, insured and uninsured deposits are withdrawn and 'pursuing strategic alternatives' means an FDIC shutdown over the coming weekend.”
The discussion of regional banks is also a hot topic on Reddit's WallStreetBets, a popular forum for everyday investors. Many commenters share Ackman's pessimism, arguing that Powell is willing to let certain institutions fail.
One meme about Powell circulating on the forum sums up this view. Dubbed “JPOW’s message to regional banks at the FOMC Meeting,” it shows an image of Ivan Drago, the fictional Russian boxer in the 1985 movie Rocky IV, and Drago's famous quote: “If he dies, he dies.”
Attempts to restore calm
The two names most in focus this week, PacWest and Western Alliance, were among the financial institutions that came under intense scrutiny following the March 10 and March 12 failures of Silicon Valley Bank and Signature Bank.
Both lenders, like First Republic, lost a sizable amount of deposits during the first quarter as customers sought the perceived safety of larger banks or higher yields being offered by money market funds. PacWest, a lender based in Beverly Hills, Calif., lost 17% of its deposits and Phoenix-based Western Alliance lost 11%. First Republic lost 41%.
Short sellers have increased their bets against regional bank stocks by more than $440 million over the last 30 days, according to data from S3 Partners. Since Friday, short interest in PacWest rose to more than 18% of shares, making it the second most shorted regional bank stock for the same period.
"It's definitely a sentiment trade right now," Alexander Yokum, an analyst with CFRA Research, told Yahoo Finance Thursday. "And people are looking for any excuse."
On Wednesday night and early Thursday morning, PacWest and Western Alliance both scrambled to reassure investors with new statements about their deposits. Both, in fact, used nearly the exact same language to describe how their customers reacted to this week’s First Republic announcement.
PacWest said “the bank has not experienced out-of-the-ordinary deposit flows following the sale of First Republic Bank and other news” while Western Alliance said it “has not experienced unusual deposit flows” following the First Republic sale.
PacWest also confirmed in its press release issued at 12:30 AM ET that it had explored asset sales and been approached recently “by several potential partners and investors.” Those discussions, it said, “are ongoing.”
Both PacWest and Western Alliance are considerably smaller than First Republic, which was the nation's 14th largest bank before its failure. PacWest, founded in 1999, was the nation’s 53rd-largest bank as of Dec. 31. Western Alliance, founded in 1994, was 40th-largest as of that same period.
The 38th-largest US bank, Memphis-based First Horizon (FHN), also plummeted 33% Thursday after Toronto-Dominion Bank called off its deal to acquire the company.
'We've now separated ourselves'
Western Alliance's stock took a deeper dive Thursday morning after the FT reported that the bank was considering strategic options, including a sale. It recovered some of those losses after the company issued a statement calling the story "categorically false in all respects."
"Western Alliance is not exploring a sale, nor has it hired an advisor to explore strategic options," the company said in its statement. "It is shameful and irresponsible that the Financial Times has allowed itself to be used as an instrument of short sellers and as a conduit for spreading false narratives about a financially sound and profitable bank."
It was just two weeks ago that Western Alliance’s CEO, Ken Vecchione, told analysts that "we've returned to a lot more calm" after acknowledging his institution had lost $6 billion in deposits amid the chaos that roiled the banking world in the first quarter.
He predicted deposits would grow $2 billion a quarter, guidance the bank reinforced in its statement Wednesday night, and told analysts his bank had proved it was now in a different category than First Republic.
"There was a point where whatever happened to them affected us. But I think we've now separated ourselves."