Why PacWest Bancorp’s stock price fell by more than 50% yesterday?

5 May 2023 , 02:18 PM

PacWest Bancorp’s stock price, at Nasdaq, fell by 50.62% in a single day, yesterday.  The stock closed the day at a price of $3.17. PacWest is a regional bank in US. In March it saw deposit withdrawals of $6.8 billion in just 10 days between March 9^th and March 20^th. It had then said that it did not need to raise additional capital to cover the deposit outflows. Yesterday, it said that it is considering sale of its assets in an effort to raise capital. This indicated that the crisis at the bank has worsened. Many are expecting that PacWest is the next US bank that is going to fall soon. Three have already fallen in the past few days.

A large portion of deposits of PacWest comes from venture capital funds. These funds have withdrawn their deposits from banks in recent months. Some of these withdrawals happened because investors in these venture capital funds withdrew their money back. Another reason is that due to successive interest rate hikes by US central banks, money market funds there are offering much higher interest rate than the rates being offered on bank deposits. The increase in interest rates by the central bank gets more quickly reflected in money market funds than in bank deposits. A number of customers withdrew their money from bank deposits and put them in money market funds. 

Increase in interest rates has also lowered the value of many of the assets of PacWest. For a bank, its main asset is the loans that it has given. A large part of the loans on the books of PacWest are those that were given when the interest rates were low. Many of these loans are fixed rate loans. Interest rate on them cannot be increased when the Federal Reserve increases interest rates. Now that the interest rate levels are much higher, the value of these lower interest rate loans have gone down. The bank will find difficulty in selling them for raising the needed capital.