The rapid change in interest rates under the leadership of Federal Reserve Board Chairman Jerome Powell has put pressure on US regional banks. Credit: Jim Lo Scalzo/Shutterstock
The turmoil in the US banking sector intensified on Thursday after PacWest became the latest regional lender to apply for bailouts.
Several US regional bank stocks tumbled on the strength contagion fears just days after California lender First Republic was bought by JP Morgan in a bailout deal.
This comes after data from the Bank of England showed that households withdrew a record amount of deposits from creditors in March, indicating that the crisis in the US has begun to affect British banks.
Samuel Tombs, chief economist at Pantheon Macroeconomics in the UK, said: “These [data] are much more clear signs of contagion from US bank failures than we expected.”
PacWest shares fell 60% after the company confirmed it was looking into a potential sale and was approached by several potential bidders about the deal.
A crisis of confidence in the sector and concerns about its stability hit other regional lenders, with Western Alliance shares falling more than 62% and First Horizon shares down 40%.
Western Alliance cut losses to around 30% after vehemently denies that it is considering selling all or part of its business, as reported by the Financial Times.
The bank called the report “categorically false in every respect,” adding: “Western Alliance is not considering selling and did not hire a consultant to explore strategic options.”
Both PacWest and Western Alliance have struggled because of their similarities to failed Silicon Valley Bank and First Republic, such as high levels of uninsured deposits.
First Horizon in Arizona plummeted after TD Bank, a Canadian lender, has abandoned its $13.4bn (£10.7bn) target.
TD blamed uncertainty over whether the merger would be approved by regulators after U.S. politicians raised concerns that TD would become too big a player in the U.S. market.
The deal was announced in February 2022, before central banks embarked on a historic hike in interest rates that was delayed by regulators for months.
The rapid change in interest rates has put pressure on US regional banks, causing deposit outflows.
Meanwhile, the FTSE 100 fell 1.1% to close at a one-month low on Thursday as renewed fears from US banks weighed on sentiment. The banking index fell 1.7%, while high-risk US stocks experienced one of the biggest drops. The blue chip index is down almost 2% since the start of the week.
Nelson Peltz, a prominent activist investor, has warned that more U.S. regional banks will fail if regulators do not expand deposit insurance rules. In the US, bank deposits up to $250,000 are covered by federal insurance.
He told the FT that customers with deposits above the insurance threshold must pay a small premium to the Federal Deposit Insurance Corporation, and the funds from these fees are then used to insure deposits above $250,000.
He said: “This should stop the outflow of deposits from small regional and community banks. I don't think we want all funds to go to the big banks.”
Bank of England data released on Thursday showed households withdrew a total of £4.8bn from their bank accounts in March. the biggest monthly withdrawal since 1997, when records were first set.
This is £1.65bn or 53% more than in October 2008, when bank customers withdrew deposits during time of the financial crisis.
UK household deposit withdrawals in March accounted for only about 0.3% of all household deposits, but economists said they showed a clear response to the turmoil in the banking sector.
Ashley Webb of Capital Economics said: “These are the first the data that we have covering the period immediately after concerns emerged about the state of the global banking system following Silicon Valley Bank and the Credit Suisse takeover. It seems that these unrest caused the withdrawal of funds from the banking system.”
“People didn't want, didn't want to see a repeat of what happened with Northern Rock.”
Total UK bank deposits, including business accounts and other types of bank accounts, fell by £18.1bn in March. With the exception of the last three months of 2022, when the market did not recover from the effects of the mini-budget, this was the largest total withdrawal since the Bank began collecting data in 2009.
Savers and investors pulled money out of the banking sector. system and moved it to bonds and national savings and investment accounts, which are 100 percent government guaranteed. In contrast, only the first £85,000 of the bank deposit is insured.
The families transferred £3.5bn – most of the money they withdrew from their deposits – to NS&I accounts.
Private sector stocks of gilts rose by £25.3bn in March. That's four times the £6.2bn average of the previous 12 months, according to Pantheon.
Part of the move has been fueled by higher interest rates as savers move their money away from instant access accounts and into time deposits in pursuit of higher rates.
However, economists have warned that a new disruption in the US could cause further withdrawal in the UK.
Mr Webb of Capital Economics said: “Definitely I think people will be aware of the new developments. The news of the bankruptcy of the First Republic may revive the situation a bit.”
Separately, US officials are investigating the role of Goldman Sachs in the Silicon Valley bank's attempt to raise funds in March before its collapse.
SVB sold Goldman investment $24 billion portfolio at a significant loss and sought help from the Wall Street giant to raise new capital to cover the shortfall.
However, Goldman failed to raise the funds, prompting bank runs that led to chaos in the US regional banking system.
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