US banking crisis risks becoming ‘self-fulfilling prophecy’, analysts say

The crisis engulfing regional US banks risks becoming a “self-fulfilling prophecy” as investors take flight from lenders seen as increasingly risky bets, triggering even deeper losses, analysts have warned.

Shares in US banks were pummelled this week amid investor concerns that there will be more collapses, after a string of failures.

The pound hit an 11-month high against the dollar, at $1.263, on Friday as fears over prospects for the US economy and the health of US regional banks gripped markets. Gold prices rose as investors sought safe haven assets.

The crisis, which began in March with the collapse of Silicon Valley Bank, threatens to deepen as hedge funds bet that shares will fall further.

Jaret Seiberg, an analyst at the investment bank TD Cowen, said: “We believe the banks are having their GameStop-like moment, where social media is amplifying non-traditional approaches to assessing solvency.

“This creates a self-fulfilling prophecy that pressures stock prices, which then leads to more questions.”

In 2021, amateur traders on Reddit pushed up the price of “meme stocks” such as GameStop and AMC Entertainment in a deliberate offensive to burn professional short sellers who were betting against the unloved stocks.

Russ Mould, the investment director at AJ Bell, said: “Markets will always look for the weakest link and then attack it if the mood takes them.

“It can be a self-fulfilling prophecy. Shares go down, people pull their money out and the hedge funds pile in.”

The collapse of Silicon Valley Bank, followed by Signature Bank and then First Republic this week, has triggered a sell-off in regional US banking stocks, as lenders struggle to cope with the sharp rise in interest rates enacted by central banks in an attempt to tame inflation.

The banking sell-off continued on Thursday as First Horizon lost a third of its value and Western Alliance lost almost 40%, although it strenuously denied a Financial Times report that it was exploring a potential sale.

PacWest Bancorp had sought to calm markets on Wednesday and said it was in talks with several potential investors after its shares fell 60%. However, investors were not reassured, and the stock fell further on Thursday.

On Friday morning, PacWest shares rose 9% in pre-market trading, while Western Alliance gained 13% and First Horizon shares increased by 7%.

Neil Wilson of Markets.com said that regulators may consider introducing a ban on short selling to “buy time” amid the sell-off. He said: “If you are a regulator and want to signal you think the market is at fault for doing the job that you, the regulator, ought to have done, then it kind of makes sense.”

Earlier this week Jamie Dimon, the boss of JP Morgan, played down the risk of a spiralling banking crisis after the biggest bank in the US snapped up First Republic.

Mould said UK banks looked insulated from the crisis for now but added that there were lingering concerns. He said: “The UK banks are looking over their shoulder at what’s going on in the US. At the moment, the risk to UK banks looks extremely limited. The US has thousands of regional banks which are not subjected to stress tests.”

Last month it emerged that Marshall Wace, one of the world’s biggest hedge funds, had taken a £155.6m short position against NatWest, the largest disclosed short against the lender since 2012, when records began.

The fall in the dollar against the pound came after the US Federal Reserve voted to increase interest rates to a 16-year high on Wednesday, despite fears over the impact of the banking crisis and concerns that rapid rate increases would send the world’s largest economy into recession.

In the UK, the Bank of England is expected to raise interest rates next week, to 4.5%, with the markets now pricing in one additional increase before the end of the year.