(Bloomberg) — PacWest Bancorp led a rally across U.S. regional bank stocks after a torrid week of losses, joining a broader rally across U.S. stock futures ahead of jobs data due later in the day.
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PacWest’s shares rose as much as 26% in U.S. premarket trading on Friday, while peers Western Alliance Bancorp and First Horizon Corp. rose 15% and 7%.
The investor panic around regional banks started in March with fears of a few lenders who had large unrealized losses on bond investments or large shares of uninsured depositors. Despite moves by regulators to address those issues, investors cited new concerns, including banks’ high exposure to real estate lending and general unease about deposits going to higher-yielding alternatives.
The government̵[ads1]7;s seizure and sale of First Republic Bank earlier this week and a report that PacWest was exploring strategic options revived market jitters, sending peers tumbling. The rout spread to larger lenders, with the KBW Bank Index registering an 11% drop this week.
PacWest shares plunged 51% Thursday in their worst one-day loss ever, after the Beverly Hills-based lender confirmed it is in talks with several potential investors. Western Alliance fell 38%, paring an earlier drop after denying a report that it is exploring strategic options. First Horizon plunged after its proposed $13.4 billion merger with Toronto-Dominion Bank fell apart.
While some investors, including hedge fund billionaire Bill Ackman, have warned that there could be more pain ahead, others have pointed out that the plunge has gone too far. Federal Reserve Chairman Jerome Powell said the resolution by First Republic after regulators seized the lender was an “important step toward drawing a line” during the banking crisis.
“The tension between poor market sentiment and strong liquidity in regional banks is difficult to reconcile as investors take a draconian view of banks’ capital and operating models,” Bloomberg Intelligence analyst Herman Chan said.
In what may come as a relief to smaller lenders, Bloomberg News reported Thursday that the Federal Deposit Insurance Corp. is ready to exempt them from kicking in extra money to top up the deposit insurance fund. Those with less than $10 billion in assets do not have to pay, the report said.
The FDIC plans to release as soon as next week a long-awaited proposal to refill the fund, which was partially depleted by the failures of Silicon Valley Bank and Signature Bank, people familiar with the matter said.
Stock trading bets against regional lenders have generated about $7 billion in paper profits so far this year, according to research from S3 Partners. But possible policy improvement could put an end to the crowded shorts, some experts said.
Read more: Short sellers targeting US banks risk a painful squeeze
“While it’s hard to see a catalyst to turn around the regional banks right now, there is a very popular and very crowded short that could come under pressure at some point,” said Chris Murphy, co-head of derivatives strategy at Susquehanna International Group .
In an effort to calm jittery investors, PacWest said this week that core deposits have risen since March and that it “has not experienced unusual deposit flows following the sale of First Republic Bank and other news.” Insured deposits rose to 75%, the firm said.
Western Alliance said it has not seen unusual deposit flows since First Republic’s collapse. Insured deposits make up over 74% of the total, the company said.
–With assistance from Joanna Ossinger, Ishika Mookerjee and Michael J. Moore.
(Updates with FDIC proposal in the seventh paragraph.)
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