WASHINGTON (Reuters) – Pressure is growing on U.S. regulators to take further steps to shore up the country’s banking sector as a renewed rout in regional lenders’ shares forced PacWest Bancorp to explore options to bolster its balance sheet.
Wall Street executives and bank analysts called for regulators to quickly provide more protection for bank deposits and consider other backstops, arguing only an intervention could stop the crisis from spiraling, although it was unclear if the authorities would step in.
“Investors are clearly continuing to focus on remaining players that are deemed the weakest,” wrote UBS banking analyst Erika Najarian on Thursday.
“In order to stop the cascade before the market literally drives more bank failures, we wonder if it’s time for the Treasury and the Fed to step up and potentially create some sort of backstop,” wrote Najarian.
Shares of Los Angeles-based PacWest were down 42% on Thursday after it confirmed it was exploring strategic options. Western Alliance’s stock was down 27%, despite saying it had no unusual deposit outflows and had adequate liquidity.
The S&P 600 bank index was down 3.2% on Thursday.
Activist investor Nelson Peltz told the Financial Times that deposit insurance should be extended, echoing billionaire investor Bill Ackman who on Wednesday tweeted that regulators’ failure to expand the insurance regime “hammered more nails in the coffin.”
Peter Orszag, CEO of financial advisory at Lazard Ltd, on Wednesday called on officials to at least signal their intention to guarantee uninsured deposits for a six-month period.
The U.S. Treasury Department on Thursday said it was continuing to “closely monitor” market developments, but “the banking system has substantial liquidity and deposit flows are stable.” The Federal Deposit Insurance Corp. did not respond to a request for comment.
Critics say increasing deposit insurance could encourage risk-taking, and note regulators have fewer tools to rescue banks following the 2008 financial crisis.
The latest crisis began in March when runs on Silicon Valley Bank and Signature Bank led to their abrupt closures, leading depositors to move their cash to bigger banks. To stem the contagion, regulators took emergency steps to reimburse all customers at the two banks, while the Fed offered lenders additional liquidity.
The markets appeared to calm late last month. But over the weekend, California-based First Republic became the third bank to fail. Regulators hoped its sale to JPMorgan would draw a line under the crisis but the deal revived investor fears.
On Monday, the FDIC floated reforms including potentially raising the current insurance cap of $250,000 per-person per-bank, but such a permanent change would require congressional approval.
“Congress does not appear ready to exercise this option at this juncture. So if a change to FDIC coverage limits is not happening, then the risk is that we may be stuck with a structural headwind,” said Carl Riccadonna, chief economist at BNP Paribas.
Major banks and private equity firms have balked at offering lenders capital infusions without a government backstop because of concerns about booking losses.
Raymond James analyst Ed Mills said regulators may also consider other options, including sending a signal that bank equity holders may be protected, or additional Fed funding, but added they were unlikely to move “unless things significantly deteriorate.”
(Writing by Michelle Price; reporting by Saeed Azhar, Matt Tracey, Andrea Shalal, Hannah Lang, Peter Schroeder and Svea Herbst-Bayliss; Editing by Andrea Ricci)
