It ain’t over ’til it’s over

Another day, another sell-off in US regional banks. Yesterday PacWest Bancorp and Western Alliance Bancorp led a selloff of the regional bank index, falling 28% and 15% respectively. So JPMorgan Chase & Co.’s purchase of First Republic announced over the weekend did not reassure investors this crisis is coming to an end. To us, the root cause of the current trouble are higher interest rates. They expose within the smaller US lenders a toxic combination of uninsured deposits, a deposit flight to money market funds investing into T-bills, looming trouble in the US commercial real estate market and erosion of the value of the long term assets hold in the books of the banks due to the higher rates. We view the future development path entirely dependent on the actions of the regulator and the Fed over the coming months.