Smaller Banks Are Scrambling as Share Prices Plunge

That’s disconcerting for the banks themselves, indicating that their claims of sound financial health have yet to achieve the desired impact.

There is a limit to how long any public company can limp along with a cratering stock price before creating fear among depositors and drawing ire from shareholders.

Even before this week’s commotion, depositors were increasingly worried about the safety of their money, following the collapse of Silicon Valley Bank. According to a Gallup poll conducted through late April, 48 percent of U.S. adults said they were concerned about the money they held in deposits at financial institutions.

The Federal Deposit Insurance Corporation, which guarantees bank accounts up to $250,000, this week released a report saying it would consider changes to its rules. The agency suggested that it might try to provide higher levels of insurance to business payment accounts, which would allow businesses to feel comfortable continuing to pay workers without creating the “moral hazard” problems that could happen if all deposits were broadly guaranteed.

It would require legislation from Congress to amend the current deposit insurance system.

Amid the relentless stock declines, some blamed a different boogeyman: Investors who bet on a fall in the price of a stock. Short sellers have made nearly $7 billion this year betting against regional banks, according to estimates by S3 Partners, a data provider, and can direct those profits toward new targets.

PacWest appeared most squarely in their cross hairs, for the moment at least. Almost 20 percent of the bank’s shares are currently on loan to short sellers, who sell them and hope to buy them back later when the stock has fallen, according to data from S3. Nearly 8 percent of Western Alliance’s shares are similarly lent out.

Before First Republic was seized, over 36 percent of its shares were out on loan.

On Thursday, Western Alliance blamed those short sellers for the turmoil, suggesting they were behind “false narratives about a financially sound and profitable bank,” as it issued a statement denying a report that it was considering a sale.

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