The market is looking for the next ‘domino’ to fall, keeping banks under pressure

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May 3, 2023
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Traders work on the floor of the New York Stock Exchange.

Brendan McDermid | Reuters

After an intense few days in which the fate of ailing lender

3 hours ago

4 hours ago

“I was like, ‘Hey, it’s a good day to catch up, it seems like an orderly kind of day,'” McGratty said in a phone interview. “I get back to my desk, and I had 40 emails and 10 voicemails, and my screen was completely red.”

The sharp selloff in regional banks sparked by the March failure of Silicon Valley Bank resumed Tuesday, catching Wall Street analysts and investors off guard. The orderly resolution of First Republic by the nation’s biggest lender was supposed to quell concerns about the state of the American banking system, not reignite them.

The steep declines — PacWest shares tumbled 28% to a record low Tuesday, while Western Alliance lost 15% — amid a lack of new news had banking experts casting about for why this was happening.

Fears about uninsured deposits, worries about commercial real estate and coming regulation were all named possible triggers.

Others pointed to pressure from short sellers. That’s what Peter Orszag, CEO of financial advisory at Lazard who represented First Republic in its rescue efforts, told CNBC’s Sara Eisen on Tuesday.

“People are searching for answers, and no one has a good one,” said McGratty, the head of U.S. bank research at KBW who has covered the industry for nearly 20 years.

March madness

PacWest and Western Alliance had recently disclosed first-quarter results and updated figures through mid-April that initially calmed investor concerns about deposit outflows. But the current moment is more about human emotions than the way banks are evaluated in normal times, he said.

“The market is looking for the next potential domino” to fall after the seizures of SVB, Signature and First Republic, McGratty said.

“We’re in this situation that feels a lot like March, where we’re trading stocks on fear and sentiment and not fundamentals,” he added.

Which doesn’t make the danger to mid-sized banks any less real. Pressure on bank stocks could cause customers to again yank deposits from their institutions, according to analysts including McGratty and Evercore ISI’s John Pancari.

“While we are confident in liquidity and capital levels at the banks post 1Q, we cannot ignore the risk that market pressures on bank stock valuations could feed a self-fulfilling prophecy,” Pancari said Tuesday in a research note.

On Wednesday, shares of PacWest and Western Alliance rebounded somewhat. The KBW Regional Banking Index climbed, too.

More fragile

The events of March showed that banks can fail faster than anyone expected.

Digital banking tools and fears stoked by social media turbocharged the deposit flight at banks including SVB, where customers attempted to withdraw more than $140 billion in deposits over two days.

That’s why McGratty, who says he still has scars from the 2008 financial crisis, says the current turmoil is more frightening than that period 15 years ago in at least one important way.