Thursday 4 May 2023

Federal Reserve Just Said Banks Are ‘Sound And Resilient.’ Another One Might Collapse.

 PacWest stock plummeted as investors remain worried about the financial sector, a decline which occurred despite Federal Reserve officials assuring market actors hours earlier that the banking system is “sound and resilient.”

First Republic Bank imploded on Monday, weeks after Silicon Valley Bank and Signature Bank similarly collapsed, as account holders with balances above the Federal Deposit Insurance Corporation threshold at the three medium-sized banks rushed to withdraw their funds. PacWest was among several other regional banks to see stock prices sharply decline earlier this week amid news of the First Republic Bank failure and subsequent sale to JPMorgan Chase.

Shares for PacWest, which is based in Beverly Hills, California, and also serves clients in Arizona, Utah, and Texas, declined more than 45% between market close on Wednesday and early morning trading on Thursday. The firm has seen stock prices decrease more than 67% over the past five days and nearly 87% since the banking crisis started two months ago.

Several reports indicated that PacWest would consider strategic options such as a sale or capital raise; the company confirmed in a statement on Wednesday that multiple “potential partners and investors” have approached executives.

“The company will continue to evaluate all options to maximize shareholder value,” the statement from PacWest noted. “The bank has not experienced out-of-the-ordinary deposit flows following the sale of First Republic Bank and other news.”

The decline in PacWest shares came hours after Federal Reserve Chair Jerome Powell insisted at a press conference that the banking system is “sound and resilient” even after the tumult in early March and the collapse on Monday. “We are committed to learning the right lessons from this episode and will work to prevent events like these from happening again,” he said.

Federal Reserve officials announced a quarter-point target federal funds rate hike on Wednesday afternoon, a tactic which is meant to combat inflationary pressures but often results in constrained economic activity as the cost to borrow funds increases for consumers and businesses. Interest rate hikes contributed to the substantial loss incurred by Silicon Valley Bank as executives liquidated a long-term bond portfolio to cover withdrawals. Assets in the banking system are now $2 trillion lower than their book value as a result of the recent Federal Reserve efforts, according to a study from analysts at the National Bureau of Economic Research.

PacWest saw deposits fall 17% between the end of December and the end of March, from $34 billion to $28 billion, according to a first quarter earnings report from the company. Other regional banks, such as Western Alliance, saw similar declines.

 

Monetary policymakers concluded that the instability 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. “If banking and financial conditions and their effects on macroeconomic conditions were to deteriorate more than assumed in the baseline, then the risks around the baseline would be skewed to the downside for both economic activity and inflation, particularly because historical recessions related to financial market problems tend to be more severe and persistent than average recessions,” minutes from a recent Federal Reserve meeting said.

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