Following the recent seizure of First Republic, a sharp selloff in regional banks resulted in Wall Street investors and analysts being caught off guard. The plunge comes amid a lack of new news, leaving banking experts looking for answers as to why this is happening. The orderly resolution of First Republic was supposed to quell concerns about the state of the American banking system, not reignite them.
Fears about uninsured deposits, worries about commercial real estate, and coming regulation were all named as possible triggers for the sudden decline. Others pointed to pressure from short sellers, which was suggested by Peter Orszag, CEO of financial advisory at Lazard who represented First Republic in its rescue efforts.
Human Emotions Over Bank Evaluation
Although PacWest and Western Alliance had recently disclosed first-quarter results and updated figures through mid-April that initially calmed investor concerns about deposit outflows, the current moment is more about human emotions than the way banks are evaluated in normal times. The market is looking for the next potential “domino” to fall after the seizures of Silicon Valley Bank, Signature, and First Republic.
The Danger to Mid-Sized Banks
Pressure on bank stocks could cause customers to again yank deposits from their institutions, according to analysts. While they are confident in liquidity and capital levels at the banks post 1Q, they cannot ignore the risk that market pressures on bank stock valuations could feed a self-fulfilling prophecy. The events of March showed that banks can fail faster than anyone expected, making the current turmoil more frightening than that of the 2008 financial crisis.
In conclusion, the unpredictable nature of the market has caused stocks to plunge, causing concerns for mid-sized banks. The fear is that the pressure on bank stocks could cause customers to yank deposits from their institutions, leading to a potential domino effect. The market is searching for answers as to why this sudden decline has occurred, and the events of March have shown how quickly banks can fail.
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