PacWest Teeters Despite Federal Reserve Claims

Investors remained on edge Thursday despite Federal Reserve officials previous assurances that the banking system issound and resilient, as stock prices for PacWest plummeted by more than 45% in a single day. The Southern California-based financial company is among several medium-sized banks that have seen their stock prices sharply decline in the wake of the First Republic Bank collapse and subsequent sale to JPMorgan Chase.

The rapid decline in PacWest shares came hours after Federal Reserve Chair Jerome Powell insisted at a press conference that the banking system issound and resilient even after the tumult in early March and the collapse on Monday. Despite Powells assurances, many market actors remain worried about the overall financial health of the banking sector and are seeking to liquidate their funds from medium-sized banks.

The Federal Reserves recent decision to raise the target federal funds rate by a quarter-point, which is meant to combat inflationary pressures, has added to the instability in the banking system. Assets in the banking system are now $2 trillion lower than their book value as a result of the Federal Reserves actions, according to a study from analysts at the National Bureau of Economic Research.

Several reports have indicated that PacWest is considering strategic options such as a sale or capital raise. The company confirmed in a statement on Wednesday that multiplepotential partners and investors have approached executives.

The company will continue to evaluate all options to maximize shareholder value, the statement from PacWest noted.The bank has not experienced out-of-the-ordinary deposit flows following the sale of First Republic Bank and other news.

However, PacWest did see deposits fall 17% between the end of December and the end of March, from $34 billion to $28 billion, according to a first-quarter earnings report from the company. Other regional banks, such as Western Alliance, saw similar declines.

Monetary policymakers concluded that the instability in the financial system warrants a recession forecast for the end of the year, followed by a predicted recovery over the course of the subsequent two years. However, many market actors remain concerned as the banking sector continues to experience turmoil.

We are committed to learning the right lessons from this episode and will work to prevent events like these from happening again, Powell said.

It remains to be seen if PacWest and other regional banks will be able to weather the storm, as investors remain worried about the financial sector. Until more is known about the stability of the banking sector, many market actors will likely remain hesitant to buy stock in regional banks.

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