Following a turbulent period that concluded with the resolution of struggling lender First Republic, experienced banking analyst Christopher Mc Gratty was anticipating a period of peace.
On Tuesday morning,2nd May, shortly after the regular trading session commenced, the regional bank stocks that Mc Gratty monitors for KBW began to sharply decline.
The unexpected resurgence of selling pressure on regional banks, triggered by the March collapse of Silicon Valley Bank, surprised Wall Street analysts and investors on Tuesday.
The smooth resolution of First Republic by the biggest U.S. lender was supposed to put an end to worries regarding the condition of the American banking system, rather than rekindling them.
The significant drops in stock prices, with PacWest experiencing a 28% decline to reach a record low and Western Alliance losing 15%, left banking experts searching for explanations amid a dearth of fresh information.
Concerns surrounding uninsured deposits, the commercial real estate sector, and anticipation of upcoming regulations were all cited as potential factors contributing to the situation.
PacWest and Western Alliance recently released their first-quarter results and updated figures until mid-April, which initially lifted investor concerns regarding deposit outflows. However, the current situation is driven more by human emotions rather than the typical evaluation of banks during normal times, as stated by McGratty.
“The market is looking for the next potential domino” to fall after the seizures of SVB, Signature and First Republic, McGratty said.
“We’re in this situation that feels a lot like March, where we’re trading stocks on fear and sentiment and not fundamentals,” he added.
Nonetheless, the risk to mid-sized banks remains significant. Analysts, including McGratty and John Pancari from Evercore ISI, suggest that the downward pressure on bank stocks could potentially lead customers to withdraw deposits from these institutions once again.
Wednesday saw a partial recovery in the shares of PacWest and Western Alliance, with both experiencing an increase in value. Similarly, the KBW Regional Banking Index also witnessed a climb during this time.
The events that unfolded in March revealed that banks can collapse at a much faster pace than anticipated. The combination of digital banking tools and the influence of social media intensified the flight of deposits from banks, including SVB, where customers attempted to withdraw over $140 billion within two days.
