U.S. banking woes continue, PacWest extends declines

Investing.com - A new wave of turmoil in regional banks has disrupted trading desks worldwide, leading traders to increase their bets on Federal Reserve interest-rate cuts due to growing concerns about the next financial crisis.

Recent trading halts within the financial sector have impacted Western Alliance Bancorporation (NYSE:WAL) and PacWest Bancorp (NASDAQ:PACW), both experiencing losses exceeding 60% for each stock. This turmoil has spread across various other banking institutions – large and small alike – such as First Horizon National Corporation (NYSE:FHN), which saw a decline of over 30% after its planned merger with Toronto Dominion Bank (NYSE:TD) fell through. Additionally, an investigation into Goldman Sachs Group Inc's (NYSE:GS) involvement in SVB Financial Group deal contributed to the negative market sentiment.

All shares within the Invesco KBW Bank ETF (NASDAQ:KBWB) – consisting of financial giants like JPMorgan Chase & Co (NYSE:JPM), and Bank of America Corp (NYSE:BAC) – retreated during this period. The $2.5 billion SPDR S&P Regional Banking (NYSE:KRE) exchange-traded fund experienced its lowest closing since October 2020. As a result, this unrest among banks restrained overall market growth, causing the S&P 500 to suffer its fourth consecutive decline.

The CBOE Volatility Index, Wall Street's "fear gauge," spiked significantly during this time, reaching above the critical level of 20 points - contrasting sharply with April's relative calm that kept it below just last week at around 16 points.

This ongoing instability highlights how fragile investor confidence remains despite Fed Chairman Jerome Powell's assurance on Wednesday that authorities are closer than ever to containing the crisis. Smaller lenders find themselves under increasing pressure following a year where rate hikes severely affected their bond holdings' value and drove unrealized losses up to an estimated $1.84 trillion.

Krishna Guha, Vice Chairman at Evercore ISI, warned that "the acute phase of bank turmoil may not be over, and policymakers need urgently to recognize that." He added, "The problem is that their financial stability policy options are limited."