Summary: The collapse of First Republic Bank highlights long-standing weaknesses in the banking sector. The market now wonders which bank may need assistance next. Additionally, when the FDIC took over First Republic on Monday, it did not announce an expansion of deposit insurance coverage, disappointing some regional bank investors.
Despite US regulators taking over First Republic Bank on Monday and quickly finding a buyer in JPMorgan Chase, the banking crisis has not eased, but rather intensified.
On Tuesday, just a day after First Republic Bank was taken over and JPMorgan Chase's successful bid was announced, US regional bank stocks plunged, becoming a significant contributor to the market's downward trend.
The KBW Nasdaq Regional Banking Index fell up to 7% on Tuesday, while the regional bank stock ETF, SPDR S&P Regional Banking ETF (KRE), even dropped over 8%.
Among regional banks, PacWest Bancorp (PACW) fell by 42% at one point, and Alliance Western Bank (WAL) saw a decline of up to 27%. Both Comerica Inc. (CMA) and Zions Bancorp (ZION) fell over 10%.
Why did regional bank stocks plummet even though First Republic Bank seemed to be saved? Some media outlets believe that as the fourth US bank to collapse this year, First Republic Bank's fate highlights long-standing weaknesses in the banking sector. These banks' collapses had some unique factors, but their predicaments can be attributed to rising interest rates, increased financing costs, and shrinking asset values.
As depositors sought higher returns by moving funds into money market funds and other instruments, banks experiencing deposit outflows absorbed more liquidity provided by the Federal Reserve and the Federal Home Loan Bank System. While these funds help banks maintain liquidity, their high financing costs inevitably hurt profitability.
Similar opinions suggest that regional banks also face the issue of the Federal Reserve continuing to raise interest rates. Higher rates increase the cost of holding deposits for banks and reduce the book value of the long-term bonds and loans they hold.
Analyst Herman Chan believes there is currently no clear solution, and addressing the market's lack of confidence in regional banks may require a more comprehensive response from regulators or government agencies.
Some commentators pointed out that after successfully bidding for First Republic Bank on Monday, JPMorgan Chase's CEO Jamie Dimon said the current banking crisis is nearing its end, but he also admitted that another small bank may collapse.
Edward Moya, Senior Market Analyst at Oanda, commented that Wall Street wants to know which bank may need assistance next, so it's easy to pick potential victims from other regional banks.
Moya believes that JPMorgan Chase's acquisition of First Republic Bank only brought one day of calm to the US banking industry. Regional bank stocks still seem fragile until there is clear evidence that emergency loan programs may be canceled.
Some commentators believe that the performance of regional bank stocks on Tuesday was partly due to the disappointment of many investors who had hoped the Federal Deposit Insurance Corporation (FDIC) would announce changes to bank deposit insurance when taking over First Republic Bank. Silicon Valley Bank and Signature Bank had extremely high uninsured deposit levels, so they quickly collapsed after experiencing a run. However, the FDIC ignored industry calls and did not decide to expand deposit insurance coverage.
The FDIC released a plan on deposit insurance reform on Monday, offering three options: maintaining the current insurance framework and possibly raising the existing $250,000 deposit insurance limit; expanding coverage to all depositors; or providing targeted protection with different deposit insurance limits, offering more protection for corporate payment accounts.
The FDIC did not favor a comprehensive expansion of deposit insurance, instead believing that the third option best met the objectives of financial stability for deposit insurance and protecting depositor costs.
It seems that even if the FDIC implements reforms, the actual measures put into place are more likely to disappoint regional bank investors in terms of their expectations. The reluctance to expand deposit insurance coverage more broadly has left some regional bank investors feeling let down, contributing to the decline in regional bank stocks. As the market continues to speculate on which bank may be the next to need assistance, the uncertainty surrounding the banking sector and regional banks remains high.
