US lender’s collapse sparks shares sell-off

Banking crisis leads to deposit outflows from smaller lenders

BENGALURU:

Shares of several regional lenders fell on Monday after the collapse of First Republic Bank, the third major casualty of the biggest crisis to hit the US banking sector since 2008.

The crisis unravelled after the closure of Silicon Valley Bank and Signature Bank in March that led to deposit outflows from smaller lenders and fuelled fears of similar liquidity crunches at peers.

The KBW Regional Banking Index was down 1.9% on Monday, while shares of Citizens Financial Group, PNC Financial Services Group, Truist Financial Corp and US Bancorp fell between 1.2% and 7%.

A deal was announced earlier on Monday that allows for an orderly failure of First Republic. Under the terms, JPMorgan Chase and Co will pay $10.6 billion to the US Federal Deposit Insurance Corp (FDIC), which took FRC into receivership, for most of the failed bank’s assets.

Shares of JPMorgan Chase were up 2%, making the largest US bank the top gainer on the Dow Jones.

“This deal does not change the rates, recession, and regulatory headwinds that regional banks are facing,” said UBS analyst Erika Najarian, but added it is an elegant solution that should lay to rest outstanding investor concerns over liquidity.

Mid-cap banks, which have client deposits parked in rate-sensitive investment portfolios such as mortgage bonds, are also facing a massive challenge due to aggressive monetary policy tightening by the US Federal Reserve. Their portfolios are now worth far less than what they valued them at in their books.

Published in The Express Tribune, May 2^nd, 2023.

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