“The banks left-tail outcome is growing in real-time,” Nomura’s Charlie McElligott said Thursday, amid another tumultuous session for America’s beleaguered regional lenders.

Existential declines for a handful of already battered names suggested additional government action of some sort may be necessary to stabilize the situation.

Although Jerome Powell was keen to project confidence and calm following what most believe was the final hike of the cycle for the Fed, it was glaringly obvious by Thursday that First Republic wasn’t the last domino.

McElligott cited the Gallup poll which showed nearly half of Americans are at least somewhat concerned about the safety of their money in US banks, a higher percentage than that recorded around Lehman’s collapse.

“It’s pretty easy to see how this thing could spiral into a more asymmetrically ‘extreme’ outcome, particularly with the awful optics of the Bloomberg story on PacWest hitting less than two hours after Powell hiked and downplayed bank stress,” Charlie wrote.

JonesTrading’s Mike O’Rourke also lamented the bad timing of the PacWest scoop. “That aged poorly,” he quipped, of Powell’s “sound and resilient” characterization.

One key point from McElligott’s Thursday missive was that what you’re seeing in terms of market pricing for Fed cut odds in the back half of the year isn’t necessarily best viewed as two or three 25bps moves, but rather as a reflection of the possibility that an “accident” could force a hard pivot — a complete about-face.

The curve inflected steeper in March when the crisis began. Recall that in the wake of SVB’s failure, the 2s10s re-steepened some 60bps (from post-Volcker inversion extremes) in a matter of days, in what amounted to the largest three-session steepener since 1982. If you plot the 5s30s with the regional bank ETF, you can see both the dramatic inflection around the initial drama (first red box in the figure), and then a renewed impetus over the last few days (second red box).

“If the Fed were indeed forced to cut due to building pressures with regional banks and the impact that it can have on the broader US economy through ‘hard-stop’ lending, it most likely would not occur in the form of ‘baby step’ 25bps cuts spread into the end of the year,” Charlie said. “Instead, the Fed path probability distribution has become even ‘fat taily-er’ now… as more hikes to bleed demand-side inflation only perpetuate the regional bank deposit flight / profitability spiral strains.”

RRP will be offered at 5.05% following Wednesday’s hike, and while the facility may be “really helping keep rates where they’re supposed to be” and thereby serving the Fed “quite well,” as Powell put it Wednesday, it’s also bleeding deposits from banks, some of whom are then forced to fund their assets through the Fed to the detriment of profitability.

“Sure, there is a case where the still resilient US economy — and with it, still too sticky inflation — remains firm over the balance of the year [keeping] Fed funds ‘higher for longer’ and ‘paused’ at current levels into year-end,” McElligott went on, before underscoring why he thinks the probability distribution might’ve shifted. “But [if] the existential regional banks ‘profitability crisis’ daisy chain continues and the inherent deposit flight / tighter lending / credit crunch dynamic grows more systemic, there is now a fatter tail of the Fed having to do a more draconian ‘hard pivot,’ which would see the probabilities of a 150bps-200bps ’emergency Fed cut’ outcome pick up even more delta.”