Amid the serious turmoil and instability in the United States banking sector, the Federal Reserve decided to make an increase of another 0.25% on the benchmark interest rate on Wednesday.
With another increase during the time of such instability, the fate of the regional banks was the most looked-into event following the increase in the benchmark interest rate by the Federal Reserve.
Looking more closely at the data from the market on Wednesday, it is very evident that financial institutions like PacWest and Western Alliance fell again, following their plummet on the day before as well. Along with the two banks, other popular banking institutions like Zions, Comerica, and Key also reported a fall in their shares too.
The sudden change in the shares of the banks started off after the deal between JP Morgan & Chase and the Federal Deposit Insurance Corporation (FDIC) was announced on Monday.
Through this deal, JP Morgan & Chase purchased a bulk of the First Republic Bank which was also on the verge of a potential collapse, just like the Silicon Valley bank and Signature Bank in March.
The deal aimed at avoiding another possible collapse of a bank that could potentially trigger instability and restore the stability of the banking sector in the country.
According to the information provided by the leading financial data marketplace S3 Partners, there had been a massive increase of around $440 million in terms of the bets placed by short sellers against the regional banks.
The short interest of PacWest saw a shocking rise of 18% of their shares which gave it the status of the second most shortened regional bank stock of the same period.
Just like the First Republic Bank which was under scrutiny following the collapse of Silicon Valley Bank and the Signature Bank, PacWest, and Western Alliance were also under tight supervision for the past few months following the two collapses of the two major banks in the country.
While there are many concerns for the banking industry in the country right now, experts suggest that the major concern for the sector today is the slow drain that is being experienced in the field of deposits, which has been traced for almost a year now.
According to the data compiled by the Federal Reserve over a time span of one year, since April 2022 to be exact, there had been a loss of around $960 billion in terms of deposits.
It is also shocking to note that the decline is said to be the largest one ever recorded since the Fed started collecting the data in 1973. This statement alone is needed to get a picture of the depth of turmoil that the banking sector in the country currently faces.
It is not wrong to say that the collapse of the Silicon Valley Bank and the Signature Bank In March had effects on another bank more than that were visible to the eye. The collapse of the bank triggered doubt regarding the safety of large banks among depositors.
Just like the First Republic Bank, PacWest, and Western Alliance also lost a massive amount for the depositors during the first quarter as the investors are still skeptical about the safety of large banks.
Statistics show that while the First Republic Bank lost over 41% of their deposits, PacWest lost around 17% and Western Alliance lost around 11% of their deposits during the first quarter.
While there had been a notable decrease in the deposits of the bank in the first quarter, the banks announced that they had made a slight improvement in April as the banks were able to gain a few deposits back.
The data from the Federal Reserve also agree with the statements of the bank that the outflows had been stabilized across the industry during the first three weeks of April, citing the said deposits by the bank.
The deal between the FDIC and JP Morgan & Chase was introduced as a measure to put an end to the current crisis in the banking sector.
The executives of many large banks on Monday stated that the concerns regarding the instability or potential problems that could affect the regional banks should lessen, pointing to the deal made between FDIC and JP Morgan & Chase.
The CEO of JP Morgan and Chase also insisted that things were under control; as of now through his statement “This part of the crisis is over.”
While there had been assurances about the security of the banks and the stability of the sector from the executives of some of the biggest banking institutions of the country, Dick Bove, a financial strategist with Odeon Capital Group, stated that short sellers who made a substantial profit by wagering against the First Republic Bank and the Silicon Valley Bank will not retreat and will seek out new targets.
Also Read:- JPMorgan To Pay $10.6 Billion To The FDIC For First Republic
Dick Bove made his point clear using an interesting choice of metaphor. He compared the situation by using the example of lions and antelopes. He said that the antelopes are being prowled by the lions here, where the short sellers are compared to the lions.
He also added that the lions are also going to look for other targets to attack and bring down. Through his statement, Dick Bove stated that even though there had been a temporary relaxation in the situation, chances are high that other banks could also fall in the near future.
Following the same type of statement by Dick Bove, the CEO of Wells Fargo also made a striking statement during a Milken Institute conference in California. According to him, there would be a lot of volatility and turmoil among the regional banks in the future.
He also added that the majority of banks that are under major focus were still going strong.
While the government and other concerned agencies are doing their best to avoid another major collapse of a bank and to restore stability in the banking sector, there are experts who also suggest that there could be a possible collapse of banks and sustained turmoil in the sector.
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