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Banks Sink After First Republic Bank (NYSE: FRC) Failure; Fed Rate-Set To Be Announced

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First Republic Bank (NYSE: FRC) inches up in pre session on Wednesday after the failure of troubled lender First Republic Bank this week prompted investors to scrutinize the sector’s financial health, regional US banking stocks were headed for another day of heavy losses.

PacWest Bancorp sank 14% in premarket trading in the United States after falling 28% to a record low the previous day, while Western Alliance Bancorp declined 7.8% after falling 15% the day before. The problem might be “more serious than we currently understand,” according to former Federal Reserve Bank of Dallas President Robert Kaplan, who spoke to Bloomberg Television.

“Investors are clearly focusing on the negatives again, with many bank stocks trading on deteriorating sentiment rather than deteriorating fundamentals,” Keefe, Bruyette & Woods analyst Christopher McGratty said in a note. McGratty went on to say that the Federal Reserve’s interest-rate decision and press conference on Wednesday are now much more significant since banking confidence has been undermined.

Stock markets gained ground ahead of the Federal Reserve’s projected interest-rate rise later in the day. Kaplan urged policymakers to stop their rate rise campaign since the financial crisis may not be ended. First Republic, which was bought by JPMorgan Chase & Co. in a government-led deal on Monday, is the fourth US lender to fail this year.

Furthermore, bearish bets on regional banks have increased significantly in the last week, potentially adding to the pressure on the stock. According to S3 Partners data, short interest as a proportion of shares outstanding in the SPDR S&P Regional Banking ETF increased to 96% from 74% a week earlier.

Bank Pain Is Just Beginning, According to Ex-Fed President Kaplan

The KBW Regional Banking Index fell 8% last week, reaching its lowest level since 2020. While First Republic’s problems were caused by bad investments and a run on the bank’s deposits, PacWest and Western Alliance reported last month that their deposit bases had stabilized, which was an encouraging sign for investors.

Other mid-sized peers, such as Zions Bancorp and Truist Financial Corp, experienced less severe stock losses on Wednesday.

“None of the banks within BofA’s bank coverage universe experienced anywhere close to the stress of the three failed banks,” Bank of America Corp. analysts including Ebrahim Poonawala said in a note on Wednesday. “However, a persistent sell-off in stocks has the potential to inform deposit customer behavior and worsen the profitability challenges faced by certain banks.”

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