stock of regional banks drop sharply amid svb-related fears

The stock of multiple regional banks in the West Coast of the United States is dropping sharply on pre-market action this morning following the government’s decision to seize the assets of the Silicon Valley Bank and actions from the Treasury Department to protect depositors.

Shares of First Republic Bank (FRC), Western Alliance Bancorp (WAL), and PacWest Bancorp (PACW) are among the hardest hit as they are experiencing 65%, 52%, and 36% drops thus far respectively.

This sharp drop is occurring despite the efforts of regulators within the United States to assure the public that their deposits are safe.

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The First Republic Bank Has Huge Unrealized Losses on its Books

In a joint statement published by the Treasury Department, the Federal Reserve, and the Federal Deposit Insurance Corporation (FDIC) yesterday, the most prominent government figures overseeing the financial sector commented that they were taking “decisive actions” to protect the public’s confidence in the country’s financial system.

In the case of the First Republic Bank, its latest annual report indicates that the institution’s business loans accounted for 11% of its portfolio while nearly 60% of those loans were made to private equity and venture capital funds.

By the end of December 2022, FRB was sitting on unrealized losses of $4.84 billion on its held-to-maturity debt securities, most of which came from tax-exempt municipal securities, and mortgage-backed securities.

Meanwhile, the bank has lost another $471 million on securities that are available for sale. In the event that the bank is forced to sell these assets to deal with a spike in withdrawals, those losses will be immediately transferred to the institution’s income statement.

On average, the institution has produced gains above $1 billion in the past three years. If they were to book these losses, that could result in net losses of over $3 billion for the bank in an instant.

Investors may be worried that the events that unfolded and that ultimately led to the collapse of SVB could occur to other regional banks that have allocated so much money to US Treasury bonds and other debt securities whose value has declined sharply amid the Federal Reserve’s multiple interest rate hikes.

The Treasury Department and the Fed Are Standing by to Assist Other Ailing Banks

In a statement published yesterday, the Fed said that it was making available additional funding to eligible institutions to help them “meet the needs of all their depositors”, meaning that the central bank will provide the cash needed to make sure they can respond to a bank run if it happens without having to liquidate their financial assets at a loss.

However, the situation is unfolding at a point when tech firms have been pummeled by a deterioration in financial conditions and venture capital firms are probably sitting on large unrealized losses as well resulting from their investments in the tech sector – one of the most prominent industries in the West Coast.

If delinquency rates in the loans extended by institutions such as the First Republic Bank to VC funds and tech companies increase sharply, that could lead to further losses to the institution and could push the FDIC to intervene once again. Judging by this morning’s fire sale, investors appear to be preparing for the worst.

“This was a much needed move to avert contagion on the banking sector and consumer confidence. That said the Street knows there is never just one cockroach and investors will be laser focused on other regional banks that need to possibly shore up capital”, commented Dan Ives from Wedbush Securities in regards to the latest actions taken by the Fed and the Treasury Department.

According to a report from the FDIC, banks are sitting on $620 billion in unrealized losses at the moment. This is a ticking time bomb that could go off if consumers lose their confidence in the financial system – which is what the government is trying to prevent at all costs.

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