Federal Reserve Chair Jerome Powell may have insisted on Wednesday that the American banking system remains “strong and resilient," but reverberations from the bank crisis that shook markets earlier in the year resurfaced this week as another US bank appeared to be teetering on the brink of failure.
The share price of PacWest Bank (PACW), based in California, plunged more than 50% in after-hours trading in the wake of a media story that the moneylender was in trouble and weighing various options, including a sale.
As the bank’s loans and bond holdings suffered a beating amid surging interest rates, customers started pulling their deposits back in March. The media report on May 3 cited anonymous sources as saying PacWest had been on the lookout for buyers, but was also mulling the possibility of breaking up the company.
“In accordance with normal practices the company and its board of directors continuously review strategic options… Recently, the company has been approached by several potential partners and investors — discussions are ongoing. The company will continue to evaluate all options to maximize shareholder value,” PacWest said in a statement.
In a nod to the collapses of Silicon Valley Bank and Signature Bank earlier in the year, the company also stated:
“The bank has not experienced out-of-the-ordinary deposit flows following the sale of First Republic Bank and other news. In addition, the company recently paid down $1 billion of borrowings with our excess liquidity. Our cash and available liquidity remains solid and exceeded our uninsured deposits, representing 188%.”
The developments with PacWest come just days after the takeover of San Francisco-based First Republic Bank. After seizing it, the Federal Deposit Insurance Corporation sold its deposits and assets to JPMorgan Chase.
Furthermore, the Federal Reserve, which has been on a roll, churning out a series of interest rate hikes designed to cool inflation, nearly sparking a massive banking collapse in March, announced another such measure. On May 3 it added a quarter point, bringing US rates to 5.25%.
The Federal Reserve has been facing backlash from critics over its interest rate hikes. The ensuing dwindling of the value of Treasury bonds forced several major commercial banks into bankruptcy. First Republic Bank, Silicon Valley Bank (SVB) and Signature Bank all collapsed due to jittery clients withdrawing money in bank runs linked to the Fed’s rate hikes.
The domino-effect of the collapse of the US regional banks triggered fears of a repetition of the 2007-2008 crisis that resulted in a recession. During a press conference on Wednesday, Jerome Powell warned of the possibility that the US may experience a recession.
"You know, the case of avoiding a recession is in my view more likely than that of having a recession... It's possible that we will have what I hope would be a mild recession."