PacWest and Western Alliance Next in the Bank Panic Spotlight
First Republic’s closure was troubling, and when the nervous take their money and walk, insolvency can eventually happen.
More banks find themselves facing deep scrutiny and potential storms. PacWest and Western Alliance are in the spotlight as regulators, bankers, markets, and investors. Others are feeling pressure as well.
The market waters were already troubled. The Federal Deposit Insurance Corporation shuttered First Republic Bank on Monday, selling it to JPMorgan Chase. The federal funds rate was pumped up by another 25 basis points on Wednesday, driving up financing costs. Troubled parts of CRE are getting stymied by interest rate cap prices and requirements even more than before. The short end of the Treasurys are up with the 3-month at yield at 5.24%.
And then on Wednesday, Bloomberg said PacWest, the 53rd largest bank, was “teetering” and weighing a range of strategic options, including a sale. That was atop the bank’s April 25 earnings report with news of a quarterly $1.21 billion loss. Shares values dropped by 87%.
“Immediately available liquidity (on-balance sheet liquidity and unused borrowing capacity) of $12.4 billion, which exceeded uninsured deposits of $8.1 billion, with a coverage ratio of 153% at March 31, 2023,” the bank said at the time. But even late numbers in late March could well be wildly out of date now.
CRE and commercial construction and land loans represented 40% of all loans held, or $10.2 billion.
It would only take a panic and depositors withdrawing enough of their money to put the bank into an insolvency position. “If a ‘confidence crisis’ can happen to First Republic, it can happen to any bank in this country,” Jake Dollarhide, CEO of Longbow Asset Management, told Reuters.
Western Alliance Bank at the end of 2022 was the 40th largest bank with $67.7 billion in assets. It, too, saw share prices down sharply, by about 40% since Wednesday. On March 31, 2023, total assets were at $71.0 billion, according to the company’s Q1 earnings report. While not operating in the red, net income of $142.2 million and earnings per share of $1.28 were down respectively 40.8% and 42.3% from the previous year.
The KBW Regional Banking Index, one measure of the sector, is at its lowest level since the fall of 2020 and is down 40% since January 1, 2023. Other regional bank shares were down as well.
“Analysis of 150 years of bank failures supports our view that the fall-out from recent stress in the banking system is likely to be contained,” Oxford Economics said in a report today. “The banking stress seen so far falls far short of that typically required to generate a sizeable GDP hit. While an intensification of recent strains remains a key risk, the experience of recent decades is consistent with prudential policy reducing the likelihood of a very severe crisis.”
But it added, “much more severe banking stress would not be historically unusual.”