US regional banks continued to slide on Thursday as the industry’s worst crisis since 2008 rumbled on, with California-based lender PacWest exploring a possible sale.
Shares in PacWest fell more than 50 per cent after the lender said it had been approached by potential partners and investors over a potential sale. The KBW Regional Banking index lost 3.5 per cent in the session.
Silicon Valley Bank, Signature and First Republic have all collapsed since March, raising investor concerns about the health of some other regional banks. The KBW regional index has lost 35 per cent over the past three months.
“We’re seeing the big banks win, we’re going to see massive consolidation, and we’re going to see very pointed regulation of small and mid-cap banks,” said Brian Belski, chief investment strategist at BMO Capital Markets. “My theme remains resolute: scale. Regional banks were unable to compete with the big banks.”
First Horizon’s share price, meanwhile, tumbled 33 per cent after the Memphis-based bank and Canada’s TD Bank said regulatory hurdles meant they had mutually agreed to terminate a planned merger.
The S&P 500 index of US stocks slid 0.7 per cent and the tech-heavy Nasdaq Composite lost 0.5 per cent.
Treasuries continued their rally from Wednesday, with the yield on the rate-sensitive two-year note falling 0.07 percentage points to 3.77 per cent.
On Wednesday, the Federal Reserve raised the federal funds rate to a new target range of 5 per cent to 5.25 per cent, the highest level since mid-2007. The central bank’s latest statement removed previous guidance stating additional monetary tightening “may be appropriate” and emphasised its policy approach would depend substantially on economic data.
Speaking after the policy decision, Fed chair Jay Powell said the central bank still expected inflation would take time to reach its target range. “We on the committee have a view that inflation is going to come down not so quickly . . . if that forecast is broadly right, it would not be appropriate to cut rates,” he said.
Analysts said the changes to the Fed’s statement could mark the end of the current tightening cycle. But while markets have priced in several rate cuts before the end of the year, opinions were mixed on the likelihood of imminent easing while inflation remained elevated.
“A slowdown, or even a mild recession, may not be sufficient to convince the Fed to reverse policy course soon,” said Tai Hui, a market strategist at JPMorgan Asset Management.
Ray Sharma-Ong, investment director for multi-asset investment solutions at Abrdn, said banking sector issues — such as this week’s failure of First Republic — were unlikely to pose a systemic threat, but tightening credit conditions could weigh heavily on US growth and force the Fed to take supportive action.
“With the Fed’s forward guidance . . . indicating a strong shift towards data dependence, we expect the Fed to cut rates when a recession occurs,” said Sharma-Ong.
Across the Atlantic, Europe’s region-wide Stoxx 600 fell 0.5 per cent after the European Central Bank raised rates by a quarter of a percentage point to 3.25 per cent, in a move that marks a slowdown from consecutive half-point rises this year. The euro was 0.4 per cent lower against the dollar.
The headline rate of eurozone inflation rose for the first time in six months to 7 per cent in the year to April, though core inflation dipped for the first time since June 2022.
