The banking crisis is not over

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A rollercoaster week for regional bank stocks signaled that the banking crisis is not over, said Dan Primack in Axios. The forced sale of First Republic Bank as it collapsed earlier this month didn’t reassure investors. Shares of PacWest Bancorp fell by 50 percent after it said it was exploring a possible sale. Reports that Phoenix-based Western Alliance is also seeking help forced halts to trading several times. Last week, PacWest and Western shares rebounded 82 percent and 49 percent, but shares in both banks, as well as in Texas’ Comerica and Utah’s Zions Bancorp, resumed their tumble this week. Federal Reserve chair Jerome Powell tried to reassure markets by declaring the U.S. banking system is “sound and resilient.” But it sounded “akin to a sports team owner giving the coach a vote of confidence” — never a good sign.

Wall Street isn’t buying Powell’s bromides, said Charles Gasparino in the New York Post. “Banking is a confidence game,” and depositors in regional banks have lost confidence. “They’re draining the banks of their capital and sending them into insolvency because they don’t know what they’re backing up, such as increasingly depressed commercial real estate.” A shotgun marriage tying First Republic to JPMorgan Chase “did nothing to stem worries about the system,” said Amit Seru in The New York Times. Commercial real estate loans make up a quarter of an average bank’s assets. While the delinquency rate on commercial mortgages was 2.61 percent in March, “it has been rising fast.” If it reaches 10 percent, which is “at the lower end of the range seen during the Great Recession,” it would result in about $80 billion to $160 billion in losses that regional banks cannot afford.

“The stock market has been pretty panicky about these banks, but their depositors, for the most part, have not been,” said Matt Levine in Bloomberg. This is a case where the stock market is looking at the worst-case scenarios and overreacting, something that stock markets routinely do. It might be that depositors, who added $600 million in cash to Western Alliance the day after First Republic’s rescue, might not be ready to flee at all. And that raises an ugly possibility that some short-sellers might be pushing a panic hoping to “cause them to fail.”

Short selling bank stocks has to stop, said Liz Hoffman in Semafor. Regulators have restricted short selling — essentially, betting on a company’s decline — in the past out of concern for market stability, as in the fall of 2008 and March 2020. “Short sellers play a crucial role” in rational, well-functioning markets by holding businesses accountable, “but this is no longer a well-functioning market.” Betting on bank failures can be a self-fulfilling prophecy, said Julia Horowitz in CNN. “Customers may see a drop in their bank’s share price, assume it’s in trouble, and yank their funds,” causing a bank collapse. That’s why this situation requires government intervention. Short-selling restrictions would help. So would a U.S. guarantee to protect all deposits, regardless of size. That would buy time until the financial markets calm down. 

This article was first published in the latest issue of The Week magazine. If you want to read more like it, you can try six risk-free issues of the magazine here.