One half of the country is experiencing the banking turmoil of 2023 quite differently than the other half.
Three of the four banks that collapsed so far this year were in one state: California. Two of them were headquartered roughly 45 miles apart in San Francisco and Santa Clara.
The other regional banks under the most scrutiny from investors in 2023 are also clustered near the West Coast. Stocks of PacWest (PACW), Western Alliance (WAL), Zions (ZION) and HomeStreet (HMST) – mid-sized lenders based in Beverly Hills, Calif., Phoenix, Salt Lake City and Seattle – are down between 40% and 79% year to date.
There is no single reason why the West is under so much pressure. Some of the banks that failed or came under scrutiny share certain characteristics, including unrealized losses on certain assets or large amounts of uninsured depositors or exposure to certain types of clients. But some don’t.
Certainly panic and contagion and human psychology are also factors, as are the actions of some investors that see opportunity to benefit from weaker institutions.
Some of these Western banks say their fundamental soundness is being overlooked amid the chaos.
"Exogenous events over the past two months have created a clear disconnect between our stock price and the underlying strength of our bank," Western Alliance Chief Financial Officer Dale Gibbons told Yahoo Finance. Its stock is down 40% for the year.
HomeStreet CEO Mark Mason told Yahoo Finance his company’s market valuation “is reserved for companies that are in danger of failing and we’re just not.” HomeStreet’s stock closed Friday at $5.72, down 79% year to date.
'I don't think there was just one factor'
The question of why so many banking problems are on one side of the US came up in a House hearing earlier this month. Republican representative Young Kim, who is from California, asked California’s top banking regulator Cloey Hewlett to explain the confluence of failures.
There have been three so far in one state. Silvergate Bank in La Jolla wound itself down voluntarily, while Santa Clara’s Silicon Valley Bank and San Francisco’s First Republic were seized by regulators in what became the nation’s third-largest and second-largest bank failures ever.
"Why do you think California financial institutions are bearing the brunt of the current distress?" Kim asked Hewlett, commissioner of the California Department of Financial Protection & Innovation.
"I don’t think there was just one factor there," Hewlett said, speaking specifically about Silicon Valley Bank. "There were numerous factors that created the perfect storm,' and 'once that fear starts, it spreads."
What some of the Western banks, but not all, have in common is exposure to the riches created in Silicon Valley during an era of low interest rates. Some lent to venture capital firms, tech entrepreneurs or wealthy people in the California communities where the tech business thrived.
Some, as a result, amassed piles of deposits that were too large to be insured by the Federal Deposit Insurance Corporation. In turn, they also amassed bonds and loans that declined in value when interest rates rose, creating paper losses.
The scene outside a Silicon Valley Bank branch on the day the lender was seized by regulators. (AP Photo/Jeff Chiu, File) ·ASSOCIATED PRESS
The uninsured deposits became especially critical for Silicon Valley Bank, a lender to startups and tech entrepreneurs that spooked its customers when it disclosed taking an actual loss on underwater bonds. Many clients that had deposits over the FDIC limit of $250,000 per account pulled their money at once; more than $40 billion left the bank in one day.
"If you think about why the West, the predominant aspect is that there was a higher set of banks in that area that have a large proportion of funding coming from uninsured depositors," Tomasz Piskorski, Columbia Business School professor of finance and real estate, told Yahoo Finance.
First Republic got caught in that crossfire. It also had a high percentage of uninsured deposits and mostly catered to high net worth clients by offering jumbo mortgages at low rates. It also at one time had branches on Silicon Valley’s famed Sand Hill Road.
Former First Republic Bank CEO Michael Roffler told lawmakers that "everything changed overnight." (AP Photo/Andrew Harnik) ·ASSOCIATED PRESS
It lost $40 billion in deposits on the Monday after Silicon Valley Bank failed and more than $100 billion in the weeks that followed. Regulators seized it on May 1 and sold the bulk of its operations to JPMorgan Chase (JPM).
The last severe banking crisis also began with stresses on the West Coast, in 2008.
In July of that year, Pasadena, Calif-based regional bank IndyMac went down after a run on its deposits and a troubled Calabasas, Calif-based mortgage lender called Countrywide sold itself to Bank of America. In September of that year, Seattle’s Washington Mutual became the largest-ever bank failure in US history (and still is).
But there were as many weaknesses on the East Coast as there were in the West, especially on Wall Street. Bear Stearns had to be rescued by JPMorgan Chase, Lehman Brothers declared bankruptcy and Merrill Lynch had to be saved by Bank of America.
In subsequent years, as housing problems rolled through the rest of the country, more banks went down in Georgia and Florida than in California.
This year, the eastern half of the US wasn’t completely immune to the turmoil. New York City-based Signature Bank became one of the first banks to fall in March.
More banks outside the West could still experience stress, too. Piskorski and four other professors identified 186 smaller US lenders that have large amounts of uninsured depositors and are thus vulnerable to runs if panic mounts again.
"They're all over the US," he added.
Investors, though, are still more willing to bet that some of the Western institutions will get weaker. The regional banks that are currently the target of the most short bets as a percentage of all shares are PacWest, Bank of Hawaii, Western Alliance and Zions, according to data from S3 Partners.
A view of Western Alliance headquarters in downtown Phoenix. (Photo by PATRICK T. FALLON/AFP via Getty Images) ·PATRICK T. FALLON via Getty Images
PacWest, Western Alliance and Zions all lost deposits during the first quarter, which may help explain the extra scrutiny they received. PacWest and Western Alliance also at one time had venture-lending arms, just as Silicon Valley Bank did.
"Genuine investors understand that we have a strong balance sheet, quality assets, and a diversified deposit base," said Gibbons, the Western Alliance CFO. "Those fundamentals were true in February and they are true today."
HomeStreet's CEO said his strategy is to shrink the bank's balance sheet, prevent deposit outflows and temporarily suspend lending of fixed-rate loans until interest rates settle. Its profits dropped 40% during the first quarter.
Like other banking executives, Mason is also calling for the Securities and Exchange Commission to suspend the practice of short selling. He said he believes investors are coordinating on social media to push the bank's stock price lower.
"I think that a group attack or herd positioning is real. I know it is. It's not just a rumor," he said. "When stocks get beaten down this far, way beyond the fundamentals, that's not price discovery any longer. That's abusive short selling."
