Why the First Republic drama isn't over yet
Add Axios as your preferred source to
see more of our stories on Google.
If you were looking for a huge sigh of relief from the markets after the sale of large chunks of First Republic Bank to JPMorgan yesterday, you were disappointed.
State of play: Financial markets gave mixed reviews to the government-aided purchase of parts of the failed San Francisco-based bank, which specialized in high-touch service for the wealthy.
- Regional bank shares continued to sell off with the S&P 500 regional banking index down 3.4%. The KBW banking index, another closely watched bank index, was off by 1.8%.
- Larger regional banks such as Citizens Financial and PNC — both of which were in the hunt to buy First Republic — fell more than 6%, suggesting some investor disappointment that they weren't allowed to devour bits of First Republic's carcass.
Meanwhile, JPMorgan and other banking giants like Wells Fargo and Citigroup rose, an indication investors continue to draw a distinction between the biggest banks — perceived to have implied backing from the government — and everyone else.
Details: The market seems to view the resolution of First Republic not as a sign that the banking panic is over, but as a reason to keep sniffing out other — though perhaps smaller — weak spots in the system.
- New Jersey's Valley National Bank came under scrutiny, as its shares tumbled 20%, its worst daily drop ever. The bank, which has a large share of investments in the commercial real estate sector, was downgraded by an analyst who cited rising deposit costs as a threat to profitability.
- Los Angeles' PacWest Bancorp — which disclosed deposit outflows during the initial phase of the bank panic in March, but since said deposits had resumed growing — tumbled by nearly 11%.
- Seattle-based commercial and real estate lender HomeStreet Inc., dove 18%.
To be sure, these banks are tiny compared to First Republic and Silicon Valley Bank.
What they're saying: "Emergency lending to the domestic banking system remains elevated," analysts with BofA Securities wrote late last week. "Regional bank stress may not be getting worse, but it may not be getting better either."
- In theory, that number should fall in the coming week, as some part of those Fed loans were helping First Republic limp along. But we'll have to wait and see.
The bottom line: Judging by the reaction of the markets and the large level of help the Fed was still offering to the banking system, at least until recently, it seems a bit early to sound the all-clear.
