(Bloomberg) -- The collapses that claimed four US lenders this year have stuck investors with more than $54 billion of losses, after First Republic Bank’s demise added to the pile of nearly worthless securities and sent some peers into a new tailspin.
The tally includes $46.9 billion of market capitalization erased since Feb. 28, just before the bank turmoil began in earnest, and about $7.5 billion gone from bonds and preferred shares, according to calculations by Bloomberg. Combined, the shares of all four as of Tuesday had only about $725 million of value remaining — and when bank failures are completely resolved, there’s typically nothing left at all.
Preferred shareholders and bondholders weren’t included in the plans to salvage First Republic, Silvergate Capital Corp., Silicon Valley Bank or Signature Bank, either. First Republic alone had $800 million of unsecured bonds outstanding that are now quoted at little more than one penny on the dollar. S&P Global Ratings said late Tuesday that default is a virtual certainty.
It’s a stark reminder of how quickly financial companies can collapse, and that they leave little to compensate stockholders or junior debt owners, who stand at the back of the line for recoveries. The prospect of similar losses at more lenders hung over trading on Tuesday, when KBW’s index of regional bank stocks dropped 5.5%.
“This is how the market is supposed to work,” said Ross Levine, a finance professor at the University of California, Berkeley’s Haas School of Business. “They took on risks, made money while the risks were paying off, and then lost money when the risks failed.” Levine said he expects to see losses among other banks tied to the interest-rate risk that helped take down the four lenders.
The New York Stock Exchange formally suspended trading in First Republic Bank securities on Tuesday, after an announcement that JPMorgan Chase & Co. would acquire the lender. Cohen & Steers Inc., a buyer of regional bank securities, has sold preferred shares in recent weeks, limiting exposure to the sector while the firm evaluates how to proceed.
The wipe-outs are separate from what happened to the value of holdings in the portfolios of failed banks — a $114 billion grab-bag of securities turned over to the US government by SVB and Signature that still need to find buyers.
Speculation about the rest of the sector has rippled through other banks. PacWest Bancorp plunged 28% to close at a record low on Tuesday, while Western Alliance Bancorp tumbled 15%, even though both have posted some relatively upbeat quarterly results. The pair has shed more than $5 billion of market value this year, and quotes for some of PacWest’s debt hover at about two-thirds of their original value.
Mike Mayo, the Wells Fargo & Co. bank analyst who is often unsparing in his critiques, sees some strength among the larger regionals.
“Our call is no more banks in the S&P 500 are going to fail anytime soon,” Mayo said in an interview. “That doesn’t eliminate concerns related to commercial real estate, asset-liability management, funding, a potential recession, and a slew of many smaller banks which, while not systemic, could get headlines if they got caught off-sides.”
Gregor Matvos, a finance professor at Northwestern University’s Kellogg School of Management, co-authored a March 13 paper saying that if only half of uninsured depositors yank their funds, around 190 banks with assets of $300 billion could be impaired — “meaning that the mark-to-market value of their remaining assets after these withdrawals will be insufficient to repay all insured deposits.”
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With that analysis in mind, Matvos said this market value loss “is totally not a crazy number.”
Regulators must keep in mind that once shareholders have little to lose because stock prices have fallen so steeply, they may “gamble for resurrection,” Levine said. “Experience shows that this magnifies losses very quickly,” he said.
Levine’s concern is that US financial regulators won’t want to recognize more losses, and will hope things get better.
“Hope is an extremely ineffective policy,” he said.
--With assistance from Hannah Levitt.
(Updates with failed-bank portfolios in the seventh paragraph)
©2023 Bloomberg L.P.
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