First Republic collapse sparks regional bank shares sell-off

With the third major casualty since March, depositors flee regional lenders, driving fears about other smaller banks.

A man walks past a branch of First Republic Bank in San Francisco, California.
First Republic Bank is the third major casualty of the biggest crisis to hit the US banking sector since 2008 [Hyun Joo Jin/Reuters]

Shares of several regional lenders have fallen on Monday after the collapse of First Republic Bank, the third major casualty of the biggest crisis to hit the banking sector in the United States since 2008.

The banking turmoil erupted from the closure of Silicon Valley Bank and Signature Bank in March, causing depositors to flee regional lenders and driving fears that the crisis could engulf other midsized banks.

The KBW Regional Banking Index shed 2.7 percent on Monday, hitting a session low, while shares of Citizens Financial Group, PNC Financial Services Group, Truist Financial Corp and US Bancorp fell between 3 percent and 7 percent. Valley National Bankcorp, which owns Valley National Bank, lost more than 20 percent.

A deal was announced earlier on Monday that allows for an orderly failure of First Republic. Under the terms, JPMorgan Chase & Co will pay $10.6bn to the US Federal Deposit Insurance Corp (FDIC), which took First Republic into receivership, for most of the failed bank’s assets.

Shares of JPMorgan Chase rose 2.14 percent, making the largest US bank the top gainer on the Dow Jones. In the options market, traders were still being cautious on most regional banks, with the 30-day implied volatility on the S&P Regional Banking ETF — a measure of expected near-term price swings — dropping about 2 points on Monday from the previous week.

“This deal does not change the rates, recession, and regulatory headwinds that regional banks are facing,” said UBS analyst Erika Najarian, but added it is an elegant solution that should lay to rest outstanding investor concerns over liquidity.

Mid-cap banks, which have client deposits parked in interest rate-sensitive investment portfolios such as mortgage bonds, are also facing an enormous challenge due to aggressive monetary policy tightening by the US Federal Reserve. Their portfolios are now worth far less than the value in their books.

While investors digested the rescue engineered over the weekend by regulators for First Republic’s assets with a pinch of salt, Wall Street analysts were largely sanguine about the deal.

“This marks [the] second largest failure on record. Still, unlike Silicon Valley Bank and Signature Bank, the FDIC had a buy waiting in the wings,” said analysts at Barclays.

Source: Reuters