Regulators have barely written the epitaph for First Republic Bank, but investors on Wall Street have already moved onto speculating which bank might be the next to fail. Bank stocks fell sharply Tuesday, led downward by smaller and commercial banks.
When Western Alliance reported its results last week, the bank noted that it had to start selling off some of its commercial and industrial loans in order to restore the health of its balance sheet, with the bank taking a loss on most of those loans. PacWest reported a loss in the first quarter because it had to write down some of the loans it planned to sell to clean up its own balance sheet.
There are also lingering fears about commercial real estate loans, which have been a sore spot since the pandemic changed employee behavior around the the need to be in the office five days a week. Companies are needing less office space, and larger employers like Facebook parent company Meta, Google, Microsoft, Amazon and banks have been laying off employees, which should impact the demand for office space as well.
Roughly a third of PacWest’s balance sheet is tied up in construction and commercial real estate loans, while more than half of Western Alliance’s balance sheet is commercial real estate, industrial loans and construction. These were partially the reason why credit rating agency Moody’s downgraded Western Alliance’s credit rating last month.
While banks typically benefitted from higher interest rates because they can charge more for loans, depositors are now increasingly shopping around for higher yielding accounts as well. That means banks are paying more to depositors, which is impacting profitability.
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