First Republic Bank’s FRCB 8.52%increase; green up pointing triangle seizure and sale to JPMorgan Chase was supposed to be a cathartic moment for American banks, the denouement of the financial system’s latest crisis of confidence.
The relief lasted for barely a day. On Tuesday, shares of regional banks were plunging, with a handful of them dropping by double-digit percentages. At one point on Thursday, the KBW Nasdaq Regional Banking Index was down by 15% from the prior week, though it rallied back on Friday to finish the week down 8%.
Why does this matter? Investors, after all, aren’t depositors. A decline in a bank’s share price has no immediate effect on its ability to satisfy its obligations as they come due. And PacWest and Western Alliance, two regional banks that ended a volatile week down 43% and 27%, respectively, reported no unusual deposit activity following First Republic’s fire sale.
Economist Benjamin Graham once said that markets can be a weighing machine in the long term, reflecting reality. But in the short term they can be a voting machine, expressing what investors think will happen. And right now, some are voting against regional banks.
What happened to First Republic shows that banks are uniquely vulnerable to an investor vote of no confidence. California’s banking regulator pointed to First Republic’s free-falling stock as part of the justification for its decision to close it. The bank, the regulator said, had failed to restore “market confidence” in its business model.
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Nope 😰 pic.twitter.com/Kz7zUGIMO5
— Wall Street Silver (@WallStreetSilv) May 5, 2023