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New signs of banking turmoil after First Republic Bank's failure — the third in 2023

SACHA PFEIFFER, HOST:

There are new signs of turmoil in the banking system just days after First Republic Bank became the third lender to fail this year. Shares of several regional banks got hammered. That includes California-based PacWest and Western Alliance, which is headquartered in Arizona, and that's fueling fears there could be more bank failures. NPR's David Gura joins us now. Hi, David.

DAVID GURA, BYLINE: Hey, Sacha.

PFEIFFER: What's the concern about these regionals?

GURA: Well, there's this worry that, just like with those three banks that already failed, PacWest or Western Alliance or another lender could suffer a similar run. Customers would scramble for their money back, and a bank would be unable to deal with that demand. You know, like those three other banks, many of the lenders that are under pressure now have a sizable number of deposits that are too large to be insured by the Federal Deposit Insurance Corporation, the FDIC.

Wall Street is also worried about investments banks have made in government bonds that have lost value as the Federal Reserve has raised interest rates so aggressively. Many lenders are exposed to commercial mortgages, and that makes them increasingly vulnerable as offices across the U.S. remain vacant. And on top of that, there were people on Wall Street - investors known as short sellers - who are betting things are going to get worse. Sacha, they're literally betting regional bank shares are going to go lower.

PFEIFFER: Are these regional banks truly vulnerable?

GURA: Well, that is what is so weird about this. There's this strange disconnect between the actual health of these banks and what investors think. Chris McGratty is the head of U.S. bank research at KBW, which is part of the financial services firm Stifel.

CHRIS MCGRATTY: If you just looked at the balance sheets of these companies and did not look at the stock prices, you would not even be questioning the solvency of these companies.

GURA: McGratty told me one culprit is how fast information and misinformation is spreading. That accelerated the first bank run we saw this year at Silicon Valley Bank. And it's also much easier now to move money. Many of these lenders, including PacWest and Western Alliance, reported quarterly earnings recently. We got updates on their financials, and since then, they've given us even more information. The majority of them say their deposits have stabilized.

The worry was there'd be this exodus of money moving from smaller banks to the big banks, and that ended up not being as bad as expected. So you've got lenders like Western Alliance saying, hey. Take a look at our balance sheet. More of our deposits are insured than they were just a few weeks ago. We're financially sound. But none of that seems to matter to investors. PacWest, which has 70 branches, mostly in California, says it's actually seen an increase in core deposits, has more cash and financing than it has uninsured deposits. Yet PacWest's share price has cratered this week, Sacha. It was down 50% today.

PFEIFFER: So what could or should happen from here?

GURA: Well, no one really knows for sure. But if these stocks continue to sink, that's going to create a real risk. This could be a self-fulfilling prophecy. If shares continue to sink, that could motivate customers to withdraw their money, sparking the kind of bank run short sellers have been betting on. And eventually, there may be no recourse except a failure or a government rescue. Now, federal regulators are in a very tricky position here. They used emergency powers to guarantee deposits at Silicon Valley Bank and Signature Bank. They stepped in to negotiate a quick sale of First Republic Bank to JPMorgan Chase.

What's unclear is what will happen the next time a bank gets into serious trouble. What we've seen the government do so far has been very costly. It's cost tens of billions of dollars. But, Sacha, if this turmoil continues, the government will be under pressure to intervene again.

PFEIFFER: NPR's David Gura. Thank you.

GURA: Thank you. Transcript provided by NPR, Copyright NPR.

Based in New York, David Gura is a correspondent on NPR's business desk. His stories are broadcast on NPR's newsmagazines, All Things Considered, Morning Edition and Weekend Edition, and he regularly guest hosts 1A, a co-production of NPR and WAMU.