The market is looking for the next falling domino
Traders work on the floor of the New York Stock Exchange.
Brendan McDermid | Reuters
After a few intense days where the fate of the ailing lender First Republic Finally, veteran banking analyst Christopher McGratty was looking forward to some rest.
So early Tuesday, more than 24 hours after US regulators seized and selected First Republic JPMorgan Chase In order to acquire most of his fortune, McGratty made his way to a client in Manhattan. However, minutes into regular trading, the regional bank stocks he oversees for KBW began to tumble.
“I was like, ‘Hey, it’s a good day to catch up, seems like an orderly day,'” McGratty said in a phone interview. “I come back to my desk and I had 40 emails and 10 voicemails and my screen was completely red.”
The sharp sell-off in regional banks sparked by the collapse of Silicon Valley Bank in March resumed on Tuesday, catching Wall Street analysts and investors unprepared. The orderly dissolution of the First Republic by the nation’s largest lender should allay, not reignite, concerns about the state of America’s banking system.
The steep descents – PacWest Shares fell 28% to a record low on Tuesday Western Alliance lost 15% – in the absence of fresh news, banking pundits had pondered why this was happening.
Fears of uninsured deposits, worries about commercial real estate and upcoming regulations were mentioned as possible triggers.
Others pointed to pressure from short sellers. That says Peter Orszag, CEO of Financial Advisory Lazard represented the First Republic in its rescue efforts, CNBC’s Sara Eisen said Tuesday.
“People are looking for answers, and no one has a good one,” said McGratty, KBW’s head of US banking research, who has covered the industry for nearly 20 years.
PacWest and Western Alliance recently released first-quarter results and updated figures through mid-April that initially calmed investors’ concerns about deposit outflows. But right now it’s more about human emotions than how banks are valued in normal times, he said.
“The market is looking for the next potential domino” to fall following the seizure of SVB, Signature and First Republic, McGratty said.
“We’re in this situation that feels a lot like March where we’re trading stocks based on fear and sentiment and not fundamentals,” he added.
Which doesn’t make the danger for medium-sized banks any less real. According to analysts like McGratty’s John Pancari and Evercore ISI, the squeeze on bank stocks could lead customers to withdraw deposits from their institutions again.
“While we have confidence in banks’ liquidity and capital levels post-Q1, we cannot ignore the risk that market pressures on bank stock valuations could fuel a self-fulfilling prophecy,” Pancari said in a research note on Tuesday .
On Wednesday, shares in PacWest and Western Alliance recovered somewhat. The KBW regional bank index also rose.
The events of March showed that banks can fail faster than expected.
Digital banking tools and fears fueled by social media have accelerated the deposit flight at banks like 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 it was 15 years ago in at least one important way.
It can take months for non-performing loans, which have been the main cause of previous crises, to bring down a bank, he said.
But a customer-led run on deposits “can kill you in 36 hours, as happened at SVB,” he said. “It just shows you how fragile everything is.”