US bank PacWest moves to calm markets after 60 per cent rout

SydneY – PacWest Bancorp said deposits have increased since March and confirmed it is in talks with several potential investors, seeking to calm markets after a 60 per cent stock rout that made it the new focal point of concern over the health of United States regional lenders.

“The bank has not experienced out-of-the-ordinary deposit flows following the sale of First Republic Bank and other news,” PacWest said in a statement on Wednesday. “Our cash and available liquidity remain solid and exceeded our uninsured deposits.”

Shares in the bank plummeted in after-hours US trading on Wednesday after Bloomberg News reported that the lender is considering strategic options including a sale. The sharp moves, which also dragged an exchange-traded fund tracking regional banks to its lowest level since 2020, come as investors fret that the turmoil that has dogged the sector since early March is yet to be contained.

“Recently, the company has been approached by several potential partners and investors – discussions are ongoing,” PacWest said. “The company will continue to evaluate all options to maximise shareholder value.”

The sell-off came just hours after Federal Reserve chair Jerome Powell said the authorities are closer to containing the turmoil that has claimed four banks this year. The government seizure and sale of First Republic Bank to J.P. Morgan Chase was “an important step towards drawing a line under that period of severe stress” for regional lenders, Mr Powell said.

Market watchers were sceptical that PacWest’s comments would ease concern about the sector, and the banking jitters could tighten credit availability across America and hurt growth.

The bank’s statement “offers little in the way of confidence to the market”, said Mr Tim Waterer, chief market analyst at KCM Trade. “Despite the best efforts by Jerome Powell to calm the market, there is nothing to suggest that the banking crisis is at an end.”

PacWest has been considering a break-up or a capital raise, according to people familiar with the matter. While it is open to a sale, the company has not started a formal auction process, the people said.

An outright sale has been hindered because there are not many potential buyers interested in the entire bank, which comprises a community lender called Pacific Western Bank and some commercial and consumer lending businesses, the people said.

A potential buyer will also have to potentially book a big loss marking down some of its loans, they added.

Smaller US lenders are facing a pinch as rising interest rates lower the value of their longer-term investments while increasing the cost of funding. This is spurring depositors to move cash into higher-yielding money market funds.

Investors also worry that modern technology allows clients to pull money rapidly out of struggling institutions, funnelling deposits instead to the biggest banks, which have so-far been insulated from the turbulence.

Critics of the banking system have called for the Federal Deposit Insurance Corp (FDIC) to increase the insurance cap, which typically covers up to US$250,000 (S$332,000) on most accounts. While regulators are mulling over a broadening of deposit insurance, no changes have yet been announced.

PacWest is not the only US regional bank under fire. Western Alliance Bancorp sank as much as 38 per cent in post-market trading, while Comerica and Zions Bancorp fell more than 10 per cent each.

Western Alliance also said on Wednesday that it has seen no unusual deposit outflows and reaffirmed its guidance that deposits will rise quarter over quarter.

Financial heavyweights including hedge fund billionaire Bill Ackman and former Federal Reserve Bank of Dallas president Robert Kaplan are among those warning of more banking stress to come. Speaking before PacWest’s statement, Mr Ackman said he thinks the whole US regional banking system is at risk.

“Confidence in a financial institution is built over decades and destroyed in days,” Mr Ackman, chief executive officer of Pershing Square Capital Management, said on Twitter. “As each domino falls, the next weakest bank begins to wobble.”

On Wednesday, the Fed again raised rates by 25 basis points. While Mr Powell hinted that this could be the last increase, he also left the door open for officials to keep raising borrowing costs if inflation remains sticky. He also pushed back strongly against market expectations that the Fed will be cutting rates by year end.

A year of interest rate hikes has driven unrealised losses for banks to an estimated US$1.84 trillion, with trouble in commercial real estate increasing the pain. These stresses are adding to the market focus on smaller banks, which typically have fewer resources to defend themselves.

First Republic Bank became the fourth US lender to collapse this year, following Silvergate Capital, Silicon Valley Bank and Signature Bank.

Regulators had hoped its sale to J.P. Morgan on Monday would draw a line under the crisis. Instead, the deal renewed fears in the market.

“When you lose confidence in the banks, that equals a whole lot of trouble,” said Mr Dennis Dick, a trader at Triple D Trading. “I have not felt this scared since the financial crisis.” BLOOMBERG