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Turmoil in the banking sector continued to rattle investors Thursday, with shares in regional banks PacWest Bancorp and Western Alliance Bancorp tumbling on fears of deposit runs, and TD Bank Group and First Horizon Corp. pulling out of a merger that would have created the nation’s sixth largest bank.
PacWest Bancorp said Wednesday it “has not experienced out-of-the-ordinary deposit flows following the sale of First Republic Bank and other news” but is continuing with a planned sale of $2.7 billion in assets and has been approached by “several potential partners and investors” and is exploring “strategic options.”
Shares in PacWest lost about half their value in trading Thursday morning before recovering some losses. Shares in the Beverly Hills, California-based bank holding company for Pacific Western Bank, which has traded for as much as $34.21 in the last year, closed at $6.42 on Wednesday and opened at $3.59 Thursday.
Western Alliance Bancorp, the holding company for Western Alliance Bank, issued a similar statement Wednesday saying it had not experienced “unusual” deposit flows and “reaffirming its financial strength” with a planned sale of $6 billion in assets “on track.”
Shares in Phoenix, Arizona-based Western Alliance Bancorp, which closed at $29.57 Wednesday, were down 30 percent in midday trading Thursday, a 76 percent drop from a 52-week high of $86.87.
The U.S. Treasury Department issued a statement Thursday saying it continues “to closely monitor market developments” and that the banking system “has substantial liquidity and deposit flows are stable.”
Investors are also digesting Thursday’s announcement by TD Bank Group and First Horizon Corp. that they’re calling off a planned merger over uncertainty as to when regulatory approvals might be obtained.
The $13.4 billion merger agreement announced Feb. 28, 2022, would have created the sixth-largest U.S. bank, Reuters reported, saying the collapse of the “deal further spooked already shaky sentiment towards U.S. regional banks.”
In announcing the termination of the merger agreement, the banks said Toronto-based TD Bank will pay Memphis-based First Horizon $225 million.
Bank failures and a potential showdown over the U.S. debt ceiling showdown are wildcards for Federal Reserve policymakers weighing their next moves as the threat of recession looms.
In announcing what some expect will be the final interest rate increase in the Fed’s year-long inflation-fighting campaign Wednesday, Federal Reserve Chairman Jerome Powell said the recent failures of Silicon Valley Bank, Signature Bank and First Republic Bank complicates an assessment of cumulative impacts of Fed tightening to date.
If regional banks pull back on lending, that could generate additional headwinds for the economy that the Fed hadn’t factored into previous projections.
Regional banks are a major source of residential construction loans and jumbo mortgages that exceed Fannie Mae and Freddie Mac’s $726,200 conforming loan limit, economists at Fannie Mae noted in a March forecast projecting the U.S. will enter a “modest” recession in the second half of 2023.
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