US Regional Banks in Distress: Markets Await Federal Reserve Decision on Rates Amid Uncertainty and Bankruptcy Crisis

From our correspondent in Washington, Guillaume Naudin

« This part of the crisis is over “. Jamie Dimon, the boss of JP Morgan was rather optimistic Monday, May 1 after the takeover by his bank of what remained of First Republic after the bankruptcy, the third of an American bank in a month. This convinced on Monday, but it worked less well on Tuesday, May 2.

>> To read also: US bank First Republic Bank acquired by JP Morgan

The banking sector suffered again on Wall Street. Especially the regional banks. The index that concerns them lost more than 5%, but some of them took more hits with losses sometimes exceeding 20%.

It’s a bit like the market looking for the next bank likely to fall. Added to this is the expectation of the decision of the Federal Reserve on rates this Wednesday, May 3. It will intervene in this climate. Its rate hike policy has already led more or less directly to three bankruptcies of banking institutions that have failed to adapt.

The goal of the US Central Bank (Fed) is to control prices. And inflation, even if it is slowing down, is still there. The markets are therefore nervously awaiting his decision. Add to that the threat of a possible US default in less than a month, and that’s a lot of uncertainty. Which is exactly what investors hate.

>> To read also: Regional bank failures: US regulators act of contrition

■ US regional banks in distress

Tuesday, May 2, their values ​​fell on the stock market: the regional bank PacWest plunged by more than 27.8% and Western Alliance founded by 15.1%.

For Nicolas Véron, economist at Peterson Institute for International Economics (PIIE) in Washington, despite the takeover of First Republic by JPMorgan supposed to ease the banking crisis, the sector is once again worried: “ It’s a takeover that cost the deposit guarantee authority, the Federal Deposit Insurance Corporation, a lot of money, so that’s rather bad news. That is to say, it was a bank that was in fact much less solvent than could be expected at the time it went into resolution. Secondly, at the time of the takeover, Jamie Dimon, the boss of JPMorgan who took over the First Republic, made remarks that raised concerns in the markets, that there might be other smaller banks with problems. And then, I believe, there is also the impact of the report that was released last Friday by the Federal Reserve, the US central bank, which emphasized the extent of the failure in oversight of the sector banking by the federal authorities, which is creating widespread concern throughout the American banking system. And so, if we take all these elements combined, unfortunately, we see that they do not translate into confidence building. »