Regional banks in turmoil after First Republic collapse.

Ben ZeisloftMay 3, 2023

Investors Rattled by First Republic Bank Collapse

Investors are feeling uneasy about the financial sector after the collapse of First Republic Bank this week. They are jettisoning their shares with other large regional banks, indicating that the industry has not yet stabilized.

First Republic Bank imploded on Monday after Silicon Valley Bank and Signature Bank collapsed two months ago. All three firms had a majority of clients with account balances well above the $250,000 threshold insured by the Federal Deposit Insurance Corporation (FDIC). This prompted the government-backed company to secure insured and uninsured deposits at the two latter institutions to decrease the risk of bank runs at other firms.

Despite assurances from JPMorgan Chase CEO Jamie Dimon that outflows at regional banks have largely stabilized, investors remain hesitant. “There may be another smaller one, but this pretty much resolves them all. This part of the crisis is over,” he said in a call on Monday. “Down the road, there are rates going way up, real estate, recession, that’s a whole different issue. But for now, everyone should just take a deep breath.”

Deposits Plummet

PacWest saw deposits plummet 17% over the same time horizon, from $34 billion to $28 billion, while deposits at Western Alliance fell more than 11%, from $54 billion to $48 billion. Shares for PacWest declined nearly 25% as of early Tuesday afternoon, while shares for Western Alliance fell more than 19%, shares for Zions and Comerica each decreased 12%, and shares for KeyCorp fell 10%.

Volatility in the Financial System

Assets in the banking system are $2 trillion lower than their book value as a result of Federal Reserve efforts to implement a rollback in monetary stimulus. This had been previously maintained to stimulate the economy during the lockdown-induced recession. Tumult in the commercial real estate sector, which has been challenged in recent months as companies downsize their physical office space, also poses a lingering threat to balance sheets.

Officials at the Federal Reserve recently concluded that the volatility in the financial system warrants a recession forecast for the end of the year, followed by a predicted recovery over the course of the subsequent two years. Policymakers also estimated that the historically low unemployment rate would rise toward the beginning of next year.