Why the banking turmoil of 2023 has mostly been a West Coast affair so far

Half of the country is experiencing a banking crisis in 2023 that is completely different from the other half.

Three of the four banks that have failed so far this year have been in one state: California. The two of them are based about 45 miles apart in San Francisco and Santa Clara.

Other regional banks subject to the most scrutiny from investors in 2023 are also concentrated near the West Coast. Shares of PacWest (PACW), Western Union (WAL), Zion (ZION) and HomeStreet (HMST) — mid-sized lenders based in Beverly Hills, Calif., Phoenix, Salt Lake City and Seattle — are down 40% to 79% year-to-date.

“You don’t see this in other parts of the country,” said Tim Coffey, analyst at Janney Montgomery Scott, told Yahoo Finance earlier this month.

There is no single reason why the West is under so much pressure. Some failed or custodial banks share certain characteristics, including unrealized losses on certain assets or large numbers of uninsured depositors or exposure to a certain types of customers. But some don’t.

Certainly panic, contagion and human sentiment were also factors, as were the actions of some investors who saw an opportunity to profit from weaker institutions.

Some of these Western banks say their fundamental sanity is being ignored amid the chaos.

“Exogenous events over the past two months have created a clear disconnect between our stock price and the underlying strength of our bank,” Western Alliance Chief Financial Officer Dale Gibbons told Yahoo. Finance. Its shares are down 40% this year.

HomeStreet CEO Mark Mason told Yahoo Finance that his company’s market valuation “is reserved for companies that are at risk of failure and we are not.” Shares of HomeStreet closed Friday at $5.72, down 79% year-to-date.

‘I don’t think there’s only one element’

The question of why so many banking problems are on one side of the United States was raised during a House hearing earlier this month. Republican Representative Young Kim, from California, asked California’s top banking regulator, Cloey Hewlett, to explain the confluence of failures.

So far there have been three in one state. Silvergate Bank in La Jolla voluntarily beat myself upwhile the Silicon Valley Bank of Santa Clara and the First Republic of San Francisco were seized by regulators in what became the nation’s headquarters third largest And second largest Bank failure ever.

“Why do you think financial institutions in California are bearing the brunt of the current predicament?” Kim asked Hewlett, commissioner of the California Department of Financial Protection & Innovation.

“I don’t think there’s just one element there,” said Hewlett, specifically of Silicon Valley Bank. “There are so many factors that make up the perfect storm” and “once fear kicks in, it spreads.”

What some Western banks have in common, but not all, is their exposure to the wealth created in Silicon Valley during times of low interest rates. Some lend to venture capital firms, tech entrepreneurs or the wealthy in California communities where the tech business thrives.

As a result, some have accumulated piles of deposits too large to be insured by the Federal Deposit Insurance Corporation. In turn, they also accumulate bonds and loans that decline in value as interest rates rise, creating losses on paper.

FILE - People stand outside a branch of Silicon Valley Bank in Santa Clara, California, on March 10, 2023. The recent collapse of a trio of midsize banks, including Valley Bank. Silicon Valley, again raises the question of whether compensation for executives is skewed in favor of the short-term over the company's long-term health.  (AP/Jeff Chiu Photo, File)

A view of the outside of a Silicon Valley Bank branch on the day the lender was seized by regulators. (AP/Jeff Chiu Photo, File)

Uninsured deposits have become especially important for Silicon Valley Bank, a lender to tech startups and entrepreneurs that spooked its customers with the disclosure. real loss on the underwater bond. Many clients with deposits exceeding the FDIC limit of $250,000 per account withdrew their funds instantly; more than 40 billion dollars left the bank in one day.

“If you think about why in the West, the striking aspect is that there are more banks in that area that have the majority of the resources,” said Tomasz Piskorski, a professor of finance and real estate at Columbia Business School. funds come from uninsured depositors. told Yahoo Finance.

The First Republic was caught up in that skirmish. It also has a high percentage of uninsured deposits and primarily caters to high net worth customers by offering huge mortgages at low interest rates. It also once had a branch on Silicon Valley’s famous Sand Hill Road.

Former First Republic Bank CEO and President Michael Roffler speaks during a House Financial Services Committee hearing on oversight of regional banking failures on Capitol Hill in Washington, Wednesday Wednesday, May 17, 2023. (AP Photo / Andrew Harnik)

Former First Republic Bank CEO Michael Roffler told lawmakers that “everything changed overnight.” (AP photo/Andrew Harnik)

It lost $40 billion in deposits Monday after the bankruptcy of Silicon Valley Bank and more than $100 billion in the weeks that followed. Regulators seized it on May 1 and sold most of its operations to JPMorgan Chase (JPM).

Its top executive said that rumors and misconceptions about the bank spread on social media contributed to its downfall. “Everything changed overnight,” First Republic’s chief executive officer, Michael Roffler, told House lawmakers earlier this month.

How is this different from 2008

The most recent severe banking crisis also began with tensions on the West Coast in 2008.

In July of that year, IndyMac, the regional bank based in Pasadena, Calif., went bankrupt after it ran out of deposits, and Calabasas, the Calif-based mortgage lender called Countrywide, was in trouble. Difficulty sold himself to Bank of America. In September of that year, Seattle’s Washington Mutual became the largest-ever bank bankruptcy in US history (and still is).

But there are as many weaknesses on the East Coast as there are in the West, especially on Wall Street. Bear Stearns had to be bailed out by JPMorgan Chase, Lehman Brothers declared bankruptcy, and Merrill Lynch had to be saved by Bank of America.

In the years that followed, as housing problems spread throughout the rest of the country, more banks went bankrupt in Georgia and Florida than in California.

This year, the eastern half of the United States is not entirely immune to turmoil. New York City-based Signature Bank became one of the first to fail in March.

Many banks outside the West may also experience stress. Piskorski and four other professors identified 186 smaller U.S. lenders that have large numbers of uninsured depositors and are therefore vulnerable to withdrawals should panic increase again.

“They’re all over America,” he added.

However, investors are still more willing to bet that some Western institutions will weaken. According to data from S3 Partners, the regional banks that are currently the shortest bet targets as a percentage of all holdings are PacWest, Bank of Hawaii, Western Alliance and Zions.

TOPSHOT - Western Alliance Bank signage is displayed on Western Alliance Bancorp Headquarters in downtown Phoenix, Arizona, on April 27, 2023. - Stocks of top US banks , including JPMorgan Chase, were bearish in late-morning New York trading on Tuesday.  Meanwhile, those at regional banks suffered a severe decline.  Shares of PacWest Bancorp fell about 35%, while Comerica lost 13.6%.  (Photo by Patrick T. Fallon/AFP) (Photo by PATRICK T. FALLON/AFP via Getty Images)

View of the Western Union headquarters in downtown Phoenix. (Photo by PATRICK T. FALLON/AFP via Getty Images)

PacWest, Western Alliance and Zions all lost deposits in the first quarter, which could help explain the more thorough scrutiny they received. PacWest and Western Alliance have also had venture capital arms, just as Silicon Valley Bank did.

All are working to change investor sentiment. Shares of PacWest have surged over the past week after announcing the sale of the property to two different buyers. Western Alliance has provided weekly updates on its performance and Ithe latest is that deposits have increased by $2 billion since the end of the first quarter.

Gibbons, Western Alliance Chief Financial Officer, said: “Genuine investors understand that we have a strong balance sheet, quality assets and a diversified deposit base. “Those fundamentals were right in February, and they still hold true today.”

The HomeStreet CEO says his strategy is to shrink a bank’s balance sheet, stem the outflow of deposits and temporarily halt lending on fixed-rate loans until interest is paid. stable capacity. Its profits fell 40% in the first quarter.

Like other bank executives, Mason is also calling on the Securities and Exchange Commission to suspend short selling. He said he believes investors are coordinating on social media to push the bank’s share price lower.

“I think a group attack or swarm positioning is real. I know it is. It’s not just a rumor,” he said. “When stocks fall this deep, going beyond fundamentals, it’s no longer price discovery. It’s abusive short selling.”

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