Regional bank stocks fell again on Thursday just days after federal officials assured the public that JP Morgan Chase’s purchase of recently failed First Republic Bank would secure the banking sector.
PacWest Bancorp plummeted around 50%, Western Alliance Bancorporation dropped almost 40%, Zions Bancorporationand Comerica Incorporated declined over 10%. First Republic Bank’s collapse was the second-largest bank failure in U.S. history and the third major regional lender to fall this year, but President Joe Biden and Federal Reserve Chairman Jerome Powell said the banking system is sound.
Biden said the FDIC and JPMorgan Chase’s agreement will “make sure the banking system is safe and sound,” in remarksdelivered at a National Small Business Week event on Monday.
Powell said the U.S. banking system “is sound and resilient” in a press conference following the Federal Open Market Committee (FOMC) meeting and resulting decision to hike rates by 25 basis points on Wednesday to the highest level since 2008 financial crisis.
“In our last financial crisis in 2008, we had a few big banks go under early on and then hundreds of regional bank failures in their wake,” said Peter St. Onge, research fellow in economics at the Heritage Foundation. “So given that we have just had the second, third, and fourth largest bank failures in U.S. history, going by history we are due for a lot more.”
Increasing interest rates can be a problem for regional banks because it makes it more costly to hold deposits and lowers the value of particular bonds and loans, according to CNBC. These issues contributed to the deposit outflow from Silicon Valley Bank (SVB) in March, which rapidly spread to Signature Bank, causing the collapse of both lenders.
The Federal Reserve acknowledged its banking supervisors failed to take sufficient action to solve SVB’s severe issues before its collapse, according to a report by the central bank released on Friday.
America’s 25 biggest banks gained $120 billion in deposits after the failures and rescues of SVB and Signature in March, while smaller banks lost $108 billion in deposits, according to The Wall Street Journal.
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