JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon made a bold call on Monday: his firm’s rescue of First Republic Bank ended the initial phase of the turmoil engulfing banks.
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Twenty-four hours later, that prediction was already looking shaky as Wall Street traders drove down shares of regional banks in a rout that resembled the dark days of March. Several sank more than 10%.
These bank bears can find plenty of ammo in the latest academic research, which casts fresh light on industry stresses in the grip of the biggest monetary-tightening campaign in decades.
It finds that a year of interest-rate hikes has driven unrealized losses for banks to an estimated $1.84 trillion, with trouble in commercial real estate only adding to the pain. Lenders are also facing the risk of deposit flight as frustrated savers leave for higher-yielding alternatives.
So after largely taking it on the chin last week, traders are falling prey to renewed concerns about asset-liability mismatches and uninsured deposits across the banking sector.
“All of a sudden we are raising rates, faster than last time and to a higher level,” said Philipp Schnabl, a professor at New York University who co-wrote a paper on the bank turmoil. “Now is a question of people waking up – are they seeing something on Twitter, reading about it, and maybe changing their behavior?” he said, referring to depositors pulling out their cash.
One major bank index dropped 4.5% Tuesday to the lowest since late 2020 while trading in PacWest Bancorp and Western Alliance Bancorp was halted at one point. Both extended losses in pre-market trading Wednesday following declines of 28% and 15%, respectively, a day earlier. Meanwhile, two- and 10-year yields also dropped further as investors rushed for havens and jobs data pointed to a softening labor market.
Stresses in the banking sector are a headache for Federal Reserve officials meeting this week, as they weigh financial stability concerns against still stubborn inflation, as shown in data released Friday. While regulators are mulling a broadening of deposit insurance, no changes have yet been announced — one reason for the market plunge on Tuesday.
Read the full article here by Justina Lee, Advisor Perspectives.
