The fate of regional banks has been a prime focus for investors recently, as they await a decision from the Federal Reserve about the direction of interest rates. On Tuesday, PacWest and Western Alliance plummeted, but both saw a rise in their stocks on Wednesday, with PacWest up more than 6% and Western Alliance up more than 4% in early afternoon trading. Other regional banks that dropped on Tuesday, including Zions, Comerica, and Key, were also higher ahead of the Fed's decision.
The recent volatility follows an announcement on Monday that JPMorgan Chase had purchased the bulk of First Republic, a deal designed to restore stability to the banking system after two months of turmoil. Short sellers have increased their bets against regional bank stocks by more than $440 million over the last 30 days, according to data from S3 Partners. Since Friday, short interest in PacWest rose to more than 18% of shares, making it the second most shorted regional bank stock for the same period.
However, the larger concern for the industry is a slow drain of deposits that has been ongoing for a year. Since mid-April 2022, banks have lost $960 billion in deposits, the largest decline since the Fed began collecting the data in 1973. Both PacWest and Western Alliance lost a sizable amount of deposits during the first quarter, but both reported gaining some deposits back in April, and Fed data shows that outflows stabilized across the industry during the first three weeks in April.
Several big bank executives have tried to argue that concerns about the regional banking system should lessen with the seizure and sale of First Republic, but financial strategist Dick Bove believes that short sellers will continue to look for new targets. "The antelopes are being prowled by the lions here and the lions are going to find other ones to attack and bring down," Bove told Yahoo Finance.
Despite concerns, some big bank executives believe that the majority of the banks they look at are still extremely strong. Wells Fargo CEO Charlie Scharf said at a recent conference that "unfortunately, there will be a lot of volatility and turmoil" among regional banks, but the industry as a whole remains resilient.
In conclusion, the fate of regional banks remains uncertain, and short sellers are keeping a close eye on the most vulnerable lenders. While the industry faces challenges such as a slow drain of deposits, some big bank executives remain optimistic about the industry's resilience. Investors will need to closely monitor the situation to determine the best course of action.
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