PacWest shares plunged by 60 percent in after-hours trading Wednesday, raising concerns that the Los Angeles-headquartered bank might be the latest victim of the turmoil sweeping through the banking sector ever since the collapse of Silicon Valley Bank (SVB) in March.
In the space of 48 hours in early March, SVB—a 40-year-old California lender that had established itself as a favorite of tech sector—failed in the biggest bank meltdown since the 2008 global financial crisis. The U.S. government was forced to step in as panic spread among investors over a widespread crisis of the banking sector, promising all the California lender's depositors that they would have their money back despite the bank's meltdown.
Some 48 hours after SVB, Signature Bank also failed, forcing another federal intervention to guarantee the funds of the bank's depositors. The bank failures, despite the government's actions, generated fears of contagion across the banking sector that have not yet been completely dissipated.
Another mid-tier California-based bank, First Republic, was seized by regulators just weeks after the collapse of SVB. It was sold to America's biggest lender, JP Morgan, earlier this month.
The similarities between PacWest and SVB are heightening fears over the fate of the California bank. Like SVB, PacWest boasts close ties to the tech community, and has experienced a rapid growth in assets in a very brief period of time. From 2019 to the end of 2022, PacWest's assets grew by 58 percent, while SVB's assets surged by 64 percent during the same period.
In the same period, PacWest grew its deposit by 77 percent—another warning sign for investors if these deposits aren't stable enough. PacWest's deposits started dropping in the first quarter of 2023.
PacWest shares have plummeted 90 percent since March 7, the day before SVB's collapse—a much more severe decline than the 34 percent one reported by the S&P Regional Banks Select Industry Index in the same period. The sudden, drastic drop on Wednesday followed Bloomberg's report that PacWest is now looking for a buyer.
But the troubles at PacWest are also a sign that the turmoil caused by SVB might be moving to smaller banks that underestimated the impact of the Federal Reserves' moves to dampen the growth of inflation. PacWest counts $40 billion in assets, significantly less than SVB's estimated $209 billion and First Republic's $230 billion in assets before they failed.
"The market is dealing with a crisis of confidence when it comes to regional banks," David Nicholas, founder of Nicholas Wealth Management and portfolio manager of the Nicholas Fixed Income Alternative ETF (FIAX), told Newsweek.
"The irony is PacWest's balance sheet is much stronger compared to Silicon Valley or First Republic's, yet the market is punishing PacWest for its sudden loss in uninsured deposits. To start the year, PacWest had $17.8 billion of uninsured deposits, which represented 52 percent of total deposits. By the end of the first quarter that number had dropped to $8.1 billion or 28 percent of all deposits. This is a significant decline in deposits and the market is concerned that this trend will only continue.
"PacWest currently has sufficient liquidity to meet withdrawal demands, but unfortunately now that sellers have pushed the stock price down so quickly, this causes fear for current depositors which can lead to significant increases in withdrawals. In a 24/7 news cycle and viral social media, bank runs can happen exceptionally fast. Silicon Valley lost 75 percent of their deposits in just two days—a feat that was virtually unfathomable 30 years ago."
Growing anxiety over the fate of PacWest and other smaller banks in the future would likely increase pressure on the Fed, which in the aftermath of the SVB's collapse was widely expected to pause its interest rate hikes.
Another smaller bank, Western Alliance, saw its shares drop by as much as 38 percent in after-hours trading on Wednesday.
But despite predictions and expectations, the Fed has so far persisted in its strategy.
"What makes these bank failures so unusual is that the failures are not due to 'bad loans' or 'defaults,' but rather a mismatch of interest rate duration on bonds and mortgages held on bank balance sheets," Nicholas said.
"As the Federal Reserve raised rates 10 times in the past year, with over 500 basis points in total increases, this put substantial pressure on the value of long-term bonds and mortgages that were purchased when rates were historically low. The next shoe to drop for regional banks could be commercial real estate loans that will come due in the coming months and years. What will the value be of class A office properties that are only 70 percent leased? Will banks be forced to fire sale commercial real estate positions while realizing large losses? The outlook for bank profitability going forward does not look promising and the selling may only continue for both regional and large banks."
Update 5/9/23, 3:15 a.m. ET: This article has been updated to include a comment from expert David Nicholas.
Uncommon Knowledge
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Giulia Carbonaro is a Newsweek Reporter based in London, U.K. Her focus is on U.S. and European politics, global affairs ... Read more
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