The US financial landscape faced another challenge as trading in the shares of PacWest, a Los Angeles-based lender, and Western Alliance, an Arizona-based bank, was temporarily suspended on Thursday. This development comes amidst a growing crisis for the country’s mid-sized banks, following the dramatic decrease in share prices.
The intervention by regulators occurred after selling another mid-sized bank, First Republic, to JP Morgan earlier in the week. With $100 billion withdrawn by depositors from First Republic, concerns over the safety of their money amplified.
In an attempt to stabilize the markets on Wednesday, PacWest announced that it was in discussions with several potential investors after experiencing a 60% drop in share prices. However, the sell-off persisted into Thursday, affecting other regional banks.
PacWest Shares Tumble, Bank Explores Strategic Options
PacWest’s share prices took a 50% hit on Thursday following a report from Bloomberg News that the bank was considering strategic options, including a potential sale or fundraising round. In response, the bank tried to reassure investors by stating that it had not seen unusual deposit flows and was engaging in ongoing discussions with potential partners and investors.
Western Alliance’s share prices dropped by a staggering 45% after the Financial Times reported that the bank was also exploring strategic options, including a potential sale. Western Alliance vehemently denied these claims, labeling the story “absolutely false” and asserting that it had not experienced unusual deposit flows in the aftermath of the First Republic sale. Nevertheless, by the end of Thursday, the bank’s shares were down 38%.
Third US Bank Failure Amid Crisis, Warnings from Industry Experts
First Republic became the third US bank failure to be engulfed by the crisis, the worst since 2008, following the collapse of Silicon Valley Bank and Signature in March.
Bill Ackman, CEO of the New York hedge fund Pershing Square, cautioned that the US regional banking system was in jeopardy. In a tweet before PacWest’s statement, Ackman emphasized the fragility of confidence in financial institutions, noting that it takes decades to build but can be destroyed in days.
Ackman called for urgent action to address the problem, questioning how many more bank failures must occur before the Federal Deposit Insurance Corporation (FDIC) and the government take action. In addition, he urged the establishment of a system-wide deposit guarantee regime.
PacWest announced that as of Tuesday, its total deposits amounted to $28 billion, with cash and available liquidity remaining solid and exceeding uninsured deposits. The PacWest branch in Glendale, a city outside Los Angeles, was open and mostly empty on Thursday afternoon, showing no signs of disruption. When asked for comment on the bank’s situation, employees provided a number for a company spokesperson.
Erwin Lee, a Los Angeles resident who opened a CD account with PacWest on Thursday, expressed confidence in the bank’s status and the FDIC insurance for his account. He trusted that the Biden administration would protect bank customers, citing the federal government’s intervention following the Silicon Valley Bank failure. Lee believed that the government would act to prevent further bank failures and the withdrawal of funds by customers.
Other Regional Banks Affected, Importance in US Economy
Shares in other, lesser-known regional banks also experienced the impact of the crisis. Comerica, a Dallas-based bank, saw its shares decline by 13%, while shares in Zions Bancorporation fell approximately 16% on Thursday. Unlike the banking landscape in the UK, smaller regional banks play a significant role in the US economy, accounting for nearly half of all consumer and business lending.
As the crisis unfolds and affects more regional banks, experts and industry insiders are calling for the US government to intervene and implement measures to strengthen the financial stability of these institutions. The growing concern over the safety of deposits and the increasing number of bank failures necessitate prompt action to safeguard the interests of both customers and the broader economy.
Lessons from the Past, Importance of Swift Action
The crisis is a stark reminder of the 2008 financial meltdown, highlighting the need for rapid and decisive action to prevent further economic damage.
With regional banks playing such a crucial role in the US, ensuring their financial stability and restoring confidence in the banking system is paramount.
Whether the government and regulatory bodies will heed the warnings and take the necessary steps to avert a more significant financial catastrophe remains to be seen.
Future Implications for the US Banking Sector
The ongoing crisis for mid-sized banks in the US raises critical questions about the future of the banking sector and the potential repercussions for consumers, businesses, and the economy.
As more regional banks face challenges, the need for a comprehensive, long-term solution becomes increasingly evident.
The outcome of this crisis will likely shape the direction of the US banking sector for years to come, making the need for swift, decisive action more urgent than ever before.
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