Bank stocks continue to fall after the fall of the First Republic

NEW YORK – Regulators have barely written the epitaph for First Republic Bank, but Wall Street investors have already begun to speculate on which bank might fail next.

Bank stocks fell sharply on Tuesday, led by smaller banks with heavy exposure to uninsured deposits and commercial banks including Western Alliance Bank, PacWest Bancorp, Comerica and Zions Bank. Shares of Western Alliance fell 17% in afternoon trade and PacWest fell 25%, with both stocks briefly halted trading due to high volatility.

The second day of the decline in bank stocks comes after regulators closed First Republic Bank on Monday and sold the majority of its business to JPMorgan Chase in a fire sale. It was the second largest bank failure in US history and the third bank failure in six weeks, following the collapses of Silicon Valley Bank and Signature Bank.

While discussing the deal to buy First Republic, JPMorgan CEO Jamie Dimon said Monday that he believes “this part of this (banking) crisis is over.” But First Republic’s resolution of the ordeal didn’t solve all the problems at other banks.

The ongoing concern among investors and regulators is that banks like PacWest have large amounts of uninsured deposits — those in excess of $250,000 — that have become a greater liability as rich and affluent customers have shown a willingness to put their money first subtract signs of trouble . Banks are also exposed to soft loans that are now worth less on the open market because they were written at much lower interest rates.

When the Western Alliance reported its results last week, the bank noted that it had to begin selling some of its commercial and industrial loans to restore its balance sheet to health, with the bank suffering losses on most of those loans. PacWest reported a loss in the first quarter because it had to write off some of the loans it was planning to sell to clean up its own balance sheet.

There are also lingering fears over commercial real estate lending, which has been a sore point since the pandemic changed employee behavior to requiring them to be in the office five days a week. Businesses need less office space and larger employers like Facebook’s parent company Meta, Google, Microsoft, Amazon and banks have laid off employees, which should also affect demand for office space.

About a third of PacWest’s balance sheet is tied up in construction and commercial real estate loans, while more than half of Western Alliance’s balance sheet is in commercial real estate, industrial loans and construction loans. That was partly why rating agency Moody’s downgraded Western Alliance’s credit rating last month.

While banks typically benefited from higher interest rates because they could charge more for loans, depositors are now increasingly looking to higher-yielding accounts as well. That means banks are paying depositors more, affecting profitability.