US regional banking stocks led by PacWest Bancorp rebounded on Friday after a tough week of losses, triggered by concerns over the industry's health following the collapse of several lenders. PacWest shares rose by as much as 26% in premarket trading, while peers Western Alliance Bancorp and First Horizon Corp. gained 15% and 7%, respectively, reflecting a broader rally across US stock futures ahead of jobs data. Investor panic started in March, triggered by fears over a few lenders with large unrealised losses on bond investments or large proportions of uninsured depositors. Despite regulator moves, investors have cited new concerns such as banks' high exposure to real estate lending and deposits leaving for higher-yielding alternatives.
Earlier this week, the government seized and sold First Republic Bank, while a report that PacWest was exploring strategic options revived market nervousness, leading to tumbling peers. The rout spread to bigger lenders, with the KBW Bank Index down by 11% this week. PacWest shares lost 51% on Thursday, their worst one-day loss on record, after the lender confirmed it was in talks with several potential investors. Western Alliance shares dropped by 38%, paring an earlier fall after denying a report that it was exploring strategic options. First Horizon plummeted after its proposed $13.4bn merger with Toronto-Dominion Bank fell apart.
Although some investors, including hedge fund billionaire Bill Ackman, have warned that there could be more pain to come, others have suggested that the plunge has gone too far. Federal Reserve Chair Jerome Powell said the resolution of First Republic after regulators seized the lender was an "important step towards drawing a line" under bank turmoil. "The tension between poor market sentiment and strong liquidity at regional banks is difficult to reconcile as investors take a draconian view of banks' capital and operating models," Bloomberg Intelligence analyst Herman Chan said.
Bloomberg News reported on Thursday that the Federal Deposit Insurance Corp. (FDIC) is set to exempt smaller lenders from kicking in extra money to replenish the deposit insurance fund. Banks with less than $10bn in assets would not have to pay. The FDIC is due to release, as early as next week, a proposal for refilling the fund, which was partly depleted by the failures of Silicon Valley Bank and Signature Bank, according to people familiar with the matter. Equity trades betting against regional lenders have netted about $7bn in paper profits so far this year, according to research by S3 Partners. But possible policy remediation may bring an end to those crowded shorts, some experts said.
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