What’s changed for regional banks this week?

It’s spring time, and you know what means: Bears are coming out of hibernation.

This week it’s the California regional bank bears surfacing. The regional bank ETF run by SPDR (ticker KRE) is getting smoked again, down about 6 per cent. It’s off 15 per cent so far this week.

But the declines come after everyone said the “acute” phase of the banking crisis is over; from Fed Chair Jay Powell to Wells Fargo analyst Mike Mayo and his former frenemy Jamie Dimon.

If a new challenge to regional banks has surfaced just this week, it’s a tough one to find. Funding costs have been going up, which has been obvious for months. We covered that here, and here, and here.

Now, this week did bring the failure of First Republic and its purchase out of FDIC receivership by JPMorgan. But that failure was widely expected, and this handy chart from CreditSights shows why:

First Republic lost nearly 60 per cent of its deposits in the first quarter. Even after that, it spent an entire month running on funding fumes.

Western Alliance, for its part, lost a little more than 10 per cent of its deposits in the first quarter. And 73 per cent of its deposits were insured as of April 14.

PacWest isn’t an outlier in deposit losses either, and said it had lost 17 per cent of deposits in 1Q. For scale, we have made an extremely rough addition of that deposit loss on to the CreditSights chart from above:

“The thing I can’t wrap my brain around is that we have zero evidence — and if anything we have contrary evidence — that there is still concerted deposit flight in the system”, CreditSights’ Jesse Rosenthal told Alphaville this week.

It’s possible that data published later will show that banks had to step up their reliance on the Federal Reserve’s Bank Term Funding Program in the week ended May 3. Over the week ended April 26, its usage rose about 9 per cent to $81.3bn. (At the same time, there were only about $73.8bn of loans through the primary credit facility at the Fed’s discount window, compared to $153bn during the post-SVB panic on March 16.)

And there are plenty of signs that regional banks are not going to have a good time in the coming months and years.

First, PacWest and Western Alliance have both needed to pay more, on aggregate, to hang on to deposits. The share of zero-interest bank deposits has been steadily shrinking, as we have reported, because US interest rates have been rising and money-market funds provide an attractive alternative.

Regional banks’ exposure to offices will be important as well, but that could shake out over a longer timeline. Western Alliance and PacWest are both West Coast banks, after all, and San Francisco office valuations are getting shellacked by the quick-moving collapse of the venture capital bubble.

Office loans made up about 3 per cent of PacWest’s total loans at the end of the first quarter, and about 21 per cent of its commercial real estate portfolio, according to its 1Q presentation. Western Alliance’s commercial real estate loans make up about 25 per cent of its loan book, but it didn’t break out the share of offices in its presentation.

None of this means that deposits are exiting, as CreditSights’ Rosenthal points out. For now, banks can still access FHLB financing — which doesn’t seem to be experiencing any obvious spike in issuance like it did after SVB’s failure — and the Fed’s discount window. Banks that hold safe fixed-income securities can pledge them with the Fed’s new BTFP for their par value, effectively zeroing out any losses on safe Treasuries or agency-backed securities.

Shareholders do face a different set of risks, of course. And they seem to discover those risks only in fits and starts.

One could argue that, before this week, shareholders expected regulators to make banks buy their failing peers before their shares got zeroed out. Even so, the time pressure for mergers or rescues seems lighter, as it is tough to find any other notable banks that lost anything like 60 per cent of deposits in Q1. PacWest announced Wednesday that “core customer deposits have increased since March 31 . . . with insured deposits totaling 75% vs. 71% at quarter end.” Western Alliance is paying a dividend this month.

But hey, Mercury’s in retrograde. Maybe that’s why.