Fed: Banks are strong, but one could fail.

PacWest Stock Plummets Amid Financial Sector Worries

First Republic Bank Collapse Sparks Panic

Investors are in a state of panic as PacWest stock plummeted this week, following the collapse of First Republic Bank. The Beverly Hills-based bank saw its shares decline by more than 45% between Wednesday’s market close and early morning trading on Thursday. The decline comes despite Federal Reserve officials assuring the market that the banking system is “sound and resilient.”

First Republic Bank’s collapse has sparked a wave of panic among account holders with balances above the Federal Deposit Insurance Corporation threshold at medium-sized banks. Silicon Valley Bank and Signature Bank have also collapsed in recent weeks, with account holders rushing to withdraw their funds.

PacWest Considers Strategic Options

PacWest has confirmed that it is considering strategic options, including a sale or capital raise, following the decline in its stock prices. The company has received interest from multiple “potential partners and investors,” according to a statement released on Wednesday.

Despite the decline in stock prices, PacWest has not experienced any out-of-the-ordinary deposit flows following the sale of First Republic Bank and other news.

Interest Rate Hikes Contribute to Losses

The recent quarter-point target federal funds rate hike announced by Federal Reserve officials is meant to combat inflationary pressures but often results in constrained economic activity. Interest rate hikes contributed to the substantial loss incurred by Silicon Valley Bank as executives liquidated a long-term bond portfolio to cover withdrawals.

Assets in the banking system are now $2 trillion lower than their book value as a result of the recent Federal Reserve efforts, according to a study from analysts at the National Bureau of Economic Research.

Recession Forecasted for End of Year

Monetary policymakers have concluded that the instability in the financial system warrants a recession forecast for the end of the year, followed by a predicted recovery over the course of the subsequent two years. The risks around the baseline would be skewed to the downside for both economic activity and inflation, particularly because historical recessions related to financial market problems tend to be more severe and persistent than average recessions.

• PacWest stock declined more than 45% between Wednesday’s market close and early morning trading on Thursday
• First Republic Bank, Silicon Valley Bank, and Signature Bank have all collapsed in recent weeks
• PacWest is considering strategic options, including a sale or capital raise
• Interest rate hikes contributed to the substantial loss incurred by Silicon Valley Bank
• Monetary policymakers have forecasted a recession for the end of the year