Stocks of regional banks fell sharply Tuesday as the fallout from the third major bank failure this year continued to weigh on the sector. PacWest shares fell nearly 28% on Tuesday and were on track for its fourth-straight negative session. The stock was halted multiple times due to volatility. There were other regional lenders under pressure besides the California-based bank. Shares of Western Alliance dropped 15%. The SPDR S&P Regional Banking ETF (KRE) sank 6.3%. The steep declines deepened losses in the sector from Monday. JPMorgan Chase acquired First Republic, a troubled regional bank, over the weekend after being seized by regulators. After Silicon Valley Bank and Signature Bank in March, First Republic is the third large regional bank to fail this year.
It was not immediately clear why Tuesday’s declines occurred. Jamie Dimon, the CEO of JPMorgan Chase, announced on Monday that the initial phase of the regional bank crisis is over, and Wall Street analysts expressed cautious optimism about the issue of deposit flight. First Republic reported a decline in deposits of about 40% during the first quarter, raising questions about how the bank could survive on its own. Some regional banks, such as PacWest, reported a rebound in deposits in late March, although most other banks reported smaller declines. Questions have also been raised about the long-term profitability outlook for mid-sized regional banks following recent bank failures and the expected regulatory changes. “We believe that banks with assets >$500B and <$60B are the clearest winners in the new world order, while there is likely to be a no-man’s land between $80-120B, as banks in this range may need to shrink to avoid new regulations or more actively engage in M&A to increase scale and absorb regulatory costs,” KBW analyst David Konrad said in a note to clients Sunday.