Small Banks Rush to Reassure Investors as Shares Plunge

A pair of banks whose shares have been hammered rushed to address investors’ concerns as the spiraling crisis for smaller lenders entered a new phase — one that pits the banks against investors who are betting against their viability.

The effort came as shares of PacWest Bancorp and Western Alliance Bancorp, along with several other regional banks, skidded on Thursday, drops that reflect skepticism that the lenders are on sound financial footing after the collapse of three of their larger peers since March.

After its share price suddenly dropped late Wednesday, following a Bloomberg News report that it was evaluating its strategic options, PacWest said it was continuing to look to sell assets to shore up its finances. It said that it had not seen an “out-of-the-ordinary” outflow of deposits in recent days. In a statement issued shortly after midnight, the Los Angeles bank said that it was planning to sell a $2.7 billion loan portfolio, that it was reviewing other options after being approached by potential “partners and investors,” and that deposits stood at $28 billion as of Tuesday, compared with roughly $29 billion that it held in late April.

Western Alliance, in Phoenix, also tried to reassure investors, saying late on Wednesday that it was not seeing deposit outflows. As of Tuesday, the bank said, deposits stood at $48.8 billion, compared with $47.6 billion at the end of March.

In a second statement, on Thursday, the bank also denied a report that it was considering a sale, describing that as “categorically false in all respects.”

PacWest’s shares ended the day down about 50 percent on Thursday, while Western Alliance tumbled almost 40 percent.

Other small banks’ shares were also lower, though the declines weren’t quite as severe. Zions Bancorp fell about 12 percent, while Fifth Third Bancorp dropped about 3 percent. An index of regional banks was about 4 percent lower. Investors in broader markets were less fazed, with the S&P 500 down 0.7 percent.

The share swings are the latest development in a crisis of confidence in small lenders that has been punctuated by the failures of Silicon Valley Bank and Signature Bank in March and the seizure and sale of First Republic Bank on Monday.

After First Republic was sold to JPMorgan Chase, the relative calm in markets that day led some to say that the acute phase of the regional banking crisis had passed. Jamie Dimon, the chief executive of JPMorgan, the nation’s largest bank, said on a call with analysts that “this part of the crisis is over.” After the Federal Reserve Bank announced another interest rate increase on Wednesday, Jerome H. Powell, its chair, said that the three failed banks formed the “heart” of the crisis.

That calm didn’t last long, however, in part because investors who bet on share prices falling, known as short sellers, have set their sights on what they see as the next weakest link in the system.

These investors have made huge returns on regional banks’ stocks as they’ve tumbled. Since the collapse of Silicon Valley Bank in March, the return on short-selling First Republic shares was more than 200 percent, according to the market data firm S3 partners. Some investors are recycling profits from those trades to set their sights on other regional banks, like PacWest, Western Alliance, Zions and others, and heavy activity by short sellers can exert downward pressure on a company’s share price.

On Thursday, Western Alliance blamed those short-sellers for the turmoil, suggesting they were behind “false narratives about a financially sound and profitable bank.”

Stock prices are an imperfect measure of a lender’s health, but an intensifying challenge for bankers and regulators is how to keep the turmoil in the stock market from spilling into lenders’ day-to-day businesses, potentially spooking depositors.

Resolving investors’ fears is tricky. With share prices beaten down and interest rates rising, any attempt to raise capital by selling stock would be costly and damaging to a bank’s existing investors. Selling a bank’s assets to raise funds, including loans and securities with low interest rates, would lock in losses that could otherwise be avoided.

Amid the renewed turmoil in regional banking stocks, First Horizon, a regional lender based in Memphis, and TD Bank, one of Canada’s largest lenders, on Thursday ended their agreement to merge, citing uncertainty about regulatory approval. The deal was originally announced in early 2022 and had been mired in regulatory delays before the collapse of Silicon Valley Bank. TD will pay a $200 million breakup fee to First Horizon, whose stock fell 35 percent.

PacWest has been a particular worry for investors since the concerns about small banks emerged this year. Like the failed Silicon Valley Bank, PacWest had a large number of unsecured depositors and does a lot of business with the technology industry. The Federal Deposit Insurance Corporation insures up to $250,000 in deposits, and that has left banks with a large share of uninsured deposits vulnerable to runs if clients fear they won’t have access to their money and rush to withdraw it.

Days before it failed, for example, First Republic reported outflows of more than $100 billion in deposits over just a few weeks.

But PacWest has tried to address the worst of those fears. On Wednesday, it said that insurance covered 75 percent of its deposits, up from 71 percent at the end of March. The bank said it had access to cash and other funds worth nearly twice the amount of its remaining uninsured deposits.

PacWest said in March that it had raised $1.4 billion from an investment firm and about $15 billion from various federal programs, including those set up after the demise of Silicon Valley Bank and Signature Bank. At the time, PacWest also said it had considered selling a stake in itself, but decided that the depressed value for regional bank stocks meant that such a move “would not be prudent.”

Since then, its shares have fallen more than 60 percent.

Bernhard Warner contributed reporting.