US banks under fresh pressure as Nelson Peltz calls for Washington to stem crisis

US regional banks suffered severe stock declines on Thursday amid fresh calls for a more powerful intervention from Washington to stem the crisis.

Shares in Pacific Western Bank (PacWest) plummeted 50.6 per cent after the California-based bank became the latest to seek a financial lifeline, announcing it was in talks with “several potential partners and investors”.

Canada’s TD Bank said it was scrapping its planned $13 billion (€1.8 billion) acquisition of Memphis-based First Horizon, blaming uncertainty about regulatory approval of the deal. First Horizon shares fell 33.2 per cent on the day.

The KBW Regional Bank index fell 3.5 per cent and is down more than 30 per cent this year.

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The latest alarm bells come days after the Federal Deposit Insurance Corporation seized California lender First Republic and sold its deposits and assets to JPMorgan Chase.

Rising interest rates have caught out several US lenders, beginning with the collapse of Silicon Valley Bank and Signature Bank in March. Banks nursing paper losses on long-dated securities are being punished by equity investors, who fear for their future profitability given the rising cost of deposits fuelled by the Federal Reserve’s aggressive rate rises.

Those with a high proportion of deposits in accounts above the FDIC’s $250,000 guarantee limit are seen as especially vulnerable, as these depositors are incentivised to withdraw their unprotected money.

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Activist investor Nelson Peltz said the deposit insurance limit should be increased, with wealthy account holders paying a small insurance premium to the federal insurance fund to safeguard balances of more than $250,000.

“It should stop the deposit outflow from the small regional and community banks,” Mr Peltz said. “I don’t think we want all of the funds just going to major banks.”

The activist, co-founder of Trian Fund Management, warned the turmoil could continue without strong broad-based intervention from Washington.

“I don’t have a crystal ball and I don’t know what the balance sheets of these banks look like,” said Mr Peltz. “If this stops with First Republic being acquired by JPMorgan, I would be happy, but it may not.”

The FDIC said earlier this week that deposit insurance should be increased to cover business accounts, noting that raising it to $2.5 million would cover most small- and medium-sized companies. Such a move would require congressional approval.

There are more than 4,100 commercial banks in the US, according to the FDIC.

As the turmoil continued, there was new scrutiny over the collapse of SVB. Goldman Sachs said it was co-operating with and providing information to “various governmental bodies” in connection with investigations and inquiries into the California-based lender.

This included Goldman’s “business with SVB in or around March 2023, when SVB engaged the firm to assist with a proposed capital raise and SVB sold the firm a portfolio of securities”.

Goldman has been criticised for its dual role with regards to SVB, both as a buyer of $21 billion in securities sold by the lender and as an adviser on a failed equity raise for the bank days before it failed. – Copyright The Financial Times Limited 2023