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PacWest and Western Alliance rush to reassure investors as stocks fall

PacWest and Western Alliance rush to reassure investors as stocks fall

Two banks whose shares were blown rushed to assuage investor concerns as the spiraling crisis entered a new phase for smaller lenders — a phase in which the banks are pitted against investors betting on their viability.

The effort came as shares of PacWest Bancorp and Western Alliance Bancorp, along with several other regional banks, tumbled on Thursday, reflecting skepticism that lenders have been on solid financial footing following the collapse of three of their larger peers since March.

After the stock price suddenly fell late Wednesday, PacWest said it was evaluating its strategic options, saying it would continue looking to sell assets to shore up its finances, according to a Bloomberg News report. It has not seen an “extraordinary” outflow of deposits in recent days. In a statement released just after midnight, the Los Angeles bank said it was planning to sell a $2.7 billion loan portfolio, but was evaluating other options after being approached by potential “partners and investors.” , and that deposits totaled $28 billion as of Tuesday, compared to about $29 billion it held at the end of April.

Western Alliance in Phoenix also tried to reassure investors, saying late Wednesday there were no outflows of deposits. As of Tuesday, the bank said deposits totaled $48.8 billion, compared with $47.6 billion at the end of March.

In a second statement on Thursday, the bank also denied a report that it was considering a sale, calling it “categorically false in every respect”.

PacWest shares ended the day down about 50 percent on Thursday, while Western Alliance fell nearly 40 percent Percent.

Shares of other smaller banks were also lower, although the declines were not quite as sharp. Zions Bancorp fell about 12 percent, while Fifth Third Bancorp fell about 3 percent. An index of regional banks was about 4 percent lower. Investors in broader markets were less concerned, with the S&P 500 down 0.7 percent.

The stock swings are the latest in a crisis of confidence among small lenders, punctuated by the collapses of Silicon Valley Bank and Signature Bank in March and Monday’s seizure and sale of First Republic Bank.

The relative calm in markets that day, following the sale of First Republic to JPMorgan Chase, led some to say that the acute phase of the region’s banking crisis was over. Jamie Dimon, chief executive officer of JPMorgan, the country’s largest bank, said on a call with analysts that “that part of the crisis is over.” After the Federal Reserve announced another rate hike on Wednesday, its Chairman Jerome H. Powell said the three failed banks were at the “heart” of the crisis.

That calm didn’t last long, however, in part because investors who bet on falling stock prices, so-called short sellers, have turned their attention to what they see as the next weakest link in the system.

These investors have reaped huge returns on regional bank stocks as they plummeted. Since the Silicon Valley bank collapse in March, shorting First Republic stock has returned more than 200 percent, according to market data firm S3 Partners. Some investors recycle profits from these trades to target other regional banks like PacWest, Western Alliance, Zions, and others, and heavy short-selling activity can weigh on a company’s stock price.

On Thursday, the Western Alliance blamed these short sellers for the turmoil, claiming they were behind “false narratives about a financially healthy and profitable bank.”

Stock prices are an imperfect measure of a lender’s health, but a growing challenge for bankers and regulators is how to prevent the turmoil in stock markets from spilling over into lenders’ day-to-day operations and potentially frightening depositors.

Allaying investor fears is difficult. With stock prices falling and interest rates rising, any attempt to raise capital by selling shares would be costly and would hurt a bank’s existing investors. Selling a bank’s assets to raise funds, including loans and securities with low interest rates, would involve losses that could otherwise be avoided.

Amid renewed turmoil in regional bank stocks, First Horizon, a regional lender based in Memphis, and TD Bank, one of Canada’s largest lenders, ended their merger agreement on Thursday, citing uncertainty over regulatory approval. The deal was originally announced in early 2022 and was mired in regulatory delays prior to the collapse of Silicon Valley Bank. TD is paying a $200 million break-up fee to First Horizon, whose shares fell 35 percent.

PacWest has been a particular concern for investors since concerns about small banks surfaced earlier this year. Like the failed Silicon Valley Bank, PacWest had a large number of unsecured depositors and does a lot of business with the technology industry. The Federal Deposit Insurance Corporation insures up to $250,000 in deposits, and that has left banks with large proportions of uninsured deposits vulnerable to runs when customers fear they won’t be able to access their money and take it off hastily.

For example, days before the failure, First Republic reported deposit outflows of more than $100 billion in just a few weeks.

But PacWest has tried to address the worst of those fears. On Wednesday, it said insurance covered 75 percent of his deposits, up from 71 percent at the end of March. The bank said it had access to cash and other funds worth nearly double its remaining uninsured deposits.

PacWest said in March it had raised $1.4 billion from an investment firm and about $15 billion from various federal programs, including those set up after the fall of Silicon Valley Bank and Signature Bank. At the time, PacWest also said it had considered selling a stake in itself, but decided the low value for regional bank stocks meant such a move “would not be prudent.”

Since then, shares have fallen more than 60 percent.

Bernhard Warner contributed to the reporting.

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