US bank shares have dropped sharply as a crisis of confidence in the country’s banking sector continues.
Investors, reeling from the most serious string of banking failures to hit the US since 2008, are fleeing smaller lenders seen as at risk of falling next.
Shares in California-based PacWest plunged 50%, while Western Alliance also tumbled nearly 40%.
The US Treasury Department said it was monitoring developments “closely”.
“The banking system has substantial liquidity and deposit flows are stable,” an official said.
Shares in regional banks have been pummelled since March, when the failure of Silicon Valley Bank – then the country’s 16th largest lender – ignited concerns about how the industry will adjust to the steep rise in interest rates that started last year.
Investors sold off banking shares and customers rapidly started shifting funds to larger banks seen as safer, prompting the collapse of Signature Bank a few days later and First Republic this week.
These failures were the biggest in US history, except for the collapse of Washington Mutual during the 2008 financial crisis.
Investors are now anticipating trouble at other banks, as they come under pressure to follow interest rate rises with higher rates on customer deposits. At the same time higher rates are hurting the market value of some of their assets, which are returning lower rates of interest.
The sell-off in bank shares picked up pace this week, after First Republic was seized by regulators and sold to America’s biggest bank, JPMorgan Chase.
That was followed by an announcement on Wednesday from PacWest, which had seen shares tumble by roughly two thirds this week. It said it had been approached by potential buyers and investors and was weighing its options.
Arizona-based Western Alliance, also found its shares under pressure, but denied a report in the Financial Times on Thursday that it was considering a sale, calling it “categorically false in all respects”.
Amid the turmoil, Canada’s Toronto-Dominion Bank called off a $13.4bn (£10.7bn) acquisition of Tennessee-based First Horizon, sending its shares down by about 33%.
The Canadian bank had come under pressure from investors to halt the purchase due to concerns about the financial industry’s stability. First Horizon said it stopped the deal due to problems getting regulatory approval.
“Confidence in a financial institution is built over decades and destroyed in days,” billionaire investor Bill Ackman tweeted. “As each domino falls, the next weakest bank begins to wobble.”
Along with rate rises, US mid-sized banks including PacWest have been struggling due to investor fears over their loans to venture capitalists, who have heavily invested in technology firms.
The technology sector has been cutting jobs as firms struggle with a downturn in demand, high inflation and rising interest rates.
The spate of collapses has led to a focus on the issue by US lawmakers. On Thursday, the Senate Committee on Banking, Housing and Urban Affairs will have a hearing on “holding executives accountable after recent banking failures”.
Source: British Broadcasting Corporation