PacWest's Financial Troubles Follow the Failure of Three of the Nation's 30-Largest Banks

by Wall Street Rebel - Michael London | 05/11/2023 9:15 PM

PacWest Bancorp's stock dropped more than 23% in premarket trading on Thursday after the regional lender reported a significant withdrawal of deposits the previous week, reviving worries about the company's financial health in the wake of a series of high-profile bank failures.

The announcement that Pacific Western Bank had lost approximately 10% of its deposits in the preceding week was made on Thursday. This caused an additional decrease in the already low share price of the company. As a result, the medium-sized bank is now experiencing a crisis of confidence.

A regulatory filing has made public the information that a lender located in Los Angeles is experiencing new difficulties because it has put billions of dollars into a flight. The value of the bank's shares witnessed a huge decrease, falling by 23 percent throughout the course of the day. This decrease was more severe compared to other banks that have been generating investors' anxiety owing to the recent failures of Silicon Valley Bank, Signature Bank, and First Republic Bank.

On Thursday morning, owing to a significant drop in its value, trading of PacWest shares was temporarily halted for a short period of time. Despite this, trade picked back up later in the day.

As a lender to the technology sector, PacWest enjoyed tremendous expansion, and the company's assets are now worth $44 billion. The majority of PacWest's branches are located in California. Unfortunately, this likeness to some of the institutions that have collapsed in the recent past has proven to be disastrous. In the regulatory statement that PacWest submitted on Thursday, the company noted that the seizure and sale of First Republic in early May heightened customers' and the market's fears about the prospect of other bank failures, including the collapse of PacWest.

On May 3, the bank issued a statement confirming that it was investigating several possibilities, including the chance of selling itself or raising extra capital. The bank reported at that time that it had not come across any odd deposit activity. This revelation suggested that the bank's operations were lacking in strength, which resulted in a large reduction in the company's share value.

Subscribe 100% Free to Wall Street Rebel.com and receive access to investment tools worth $17,500!

This assertion appears to have become invalid. As per the filing made by the bank on Thursday, the shifting value of its shares has amplified consumers' apprehensions regarding the security of their deposits. Consequently, this has expedited the rate at which customers have been withdrawing funds from their PacWest accounts.

PacWest's deposit balance has decreased from slightly over $28 billion as of March-end to approximately $25 billion. The institution disregarded a request for its commentary from the bank.

The recent scrutiny directed towards PacWest serves as a poignant reminder that, despite the two-month duration of the banking crisis that ensued following the insolvency of Silicon Valley Bank, smaller financial institutions continue to face significant pressure. The main reason for this trend is the growing apprehension among consumers regarding the depreciated stock prices of said lenders.

There is no straightforward solution to this predicament. Similar to its peers of commensurate magnitude, PacWest has increasingly relied on government borrowing to address its financial deficiencies. Due to the escalation of inflation and interest rates, the expenses associated with such lending have increased, exacerbating the already constrained margins at financial institutions.

In contradistinction to the preceding weeks, wherein the shares of numerous minor banks underwent wild fluctuations en masse, PacWest sustained most losses. On Thursday, the shares of other financially distressed lending institutions, including Comerica and Zions Bank, were observed to be trading with reduced losses. Despite the 0.2 percent decline in the S&P 500, the broader market exhibited minimal impact.

The swift increase in interest rates by the Federal Reserve during the preceding year led to a decrease in the worth of extended-term Treasury and mortgage bonds, thereby adversely affecting the financial statements of specific regional banks.

The occurrence of Silicon Valley Bank's collapse in March had a significant impact on the worldwide financial system, subsequently leading to the decline of Signature Bank in New York City a few days later. At the beginning of the current week, the government assumed authority over First Republic as a preliminary measure for its acquisition by JPMorgan Chase.

While elevated interest rates may have played a role, the insolvency of the banks was also attributable to the retention of a significant proportion of uninsured depositors, who tend to react with alarm when their funds lack government protection.

PacWest has recently addressed apprehensions regarding accounts that lack government protection, asserting that 75% of its assets are comprised of insured deposits. The statement above was issued as an attempt to assuage concerns, as it was observed that the percentage of insured deposits had significantly increased from 48% after the previous year.

The stability or growth observed in the stock prices of various regional banks during the initial trading session on Thursday indicates that the impact of the financial crisis is currently limited to PacWest. The stock value of Western Alliance Bancorp, located in Phoenix, exhibited a rise of approximately 5%. In contrast, the stock value of Zions Bancorp, headquartered in Salt Lake City, experienced a marginal decline of less than 1%.