“There may be another small one, but this pretty much resolves them all,” Jamie Dimon said, after buying First Republic on Monday. “This part of the crisis is over.”
I wouldn’t want to call those “famous last words,” but Dimon was certainly tempting fate, not to mention tempting the market. Obviously, his intention was to instill confidence, but JPMorgan can’t buy every bank in America. Markets know that. And the knives are out for anything seen as exposed to CRE.
On Tuesday, PacWest and Western Alliance were in the crosshairs. At the lows, the former was down 42% and the latter 27%. That isn’t tenable.
As we saw with First Republic, these kinds of losses aren’t sustainable in perpetuity. These are banks, after all. Deep, dark stock selloffs that look existential can affect depositor psychology, increasing the odds of a self-fulfilling prophecy. That makes regulators nervous.
Markets may be “go[ing] after the weakest link,” according to Goldman’s Ryan Nash.
Tellingly, CDX.IG widened to the highest since early last month on Tuesday. That’s the credit fear gauge.
“We have to take a step back and do a different type of analysis,” Cohen & Steers’ Elaine Zaharis-Nikas told Bloomberg. The firm, which has pulled back recently from the preferred shares of US regionals, is among the top 10 investors in those securities, which the banks use to shore up capital.
There’s a conceptual parallel between those securities and European AT1s, and the Credit Suisse CoCo debacle means this is top of mind. Dimon didn’t assume First Republic’s preferred in Monday’s deal.
The KBW regional bank gauge dove on Tuesday. The median bank in the index has more than a quarter of its assets in CRE-related exposure. That figure for the large bank index is just 10%.
To state the obvious, this remains a delicate situation, and markets are looking for excuses. As Michael Barr emphasized last week, run risk is elevated in the era of digital banking and social media.
Suffice to say Dimon’s Monday exhortation for everyone to “just take a deep breath” appears to have fallen on deaf ears.
Stating the obvious, but while increased FDIC coverage can address bank run risk, it can’t help with CRE loans or with tighter Fed supervision. I think many regionals will need to raise capital and/or reduce cash return to shareholders. With the median regional’s stock down more than -30% L12M, it will be a painful time to raise capital.