May 2 (Reuters) - Shares of major U.S. regional banks plunged on Tuesday as the demise of First Republic Bank (FRC.N) triggered investor concern about the financial health of other mid-sized lenders.
JPMorgan Chase (JPM.N) agreed on Monday to acquire a majority of First Republic's assets in a $10.6 billion deal, after regulators seized the lender, which became the largest U.S. bank failure since the 2008 financial crisis.
Traders are concerned that the latest turmoil, which began with the failures of Silicon Valley Bank and Signature Bank in March, could spread to other regional banks.
The KBW Regional Banking Index (.KRX) was down 5.2%, hitting its lowest since December 2020.
"If a 'confidence crisis' can happen to First Republic, it can happen to any bank in this country," said Jake Dollarhide, chief executive officer of Longbow Asset Management.
"This is potentially a big deal, which hopefully won't materialize to anything significant."
Los Angeles-based PacWest Bancorp (PACW.O) tumbled by more than 35%, while Phoenix, Arizona-based lender Western Alliance Bank (WAL.N) and Cleveland, Ohio-based KeyCorp (KEY.N) sank nearly 20% and 10%, respectively.
Comerica (CMA.N), a Dallas, Texas-based bank, was down 11%, while Valley National Bankcorp (VLY.O), which owns Valley National Bank in Wayne, New Jersey, was 6% lower after shedding more than 20% on Monday.
"Historically, once you see a resolution of one institution, the market tends to go after who they view as the next weakest link," said Goldman Sachs regional banks analyst Ryan Nash.
JPMorgan Chase's deal for First Republic's assets has extinguished risks of a contagion, some analysts said. But others noted the deal makes the biggest U.S. bank even bigger, raising the risk of a heightened "too-big-to-fail" problem that regulators have been trying to solve for years.
"While we think this deal underscores all of JPM's key strengths, we can't help but try to read into what it means if our biggest bank is the government's first line of defense," analysts at Evercore ISI wrote in a note.
The U.S. Federal Reserve is expected to comment on the regional bank crisis at the end of its Federal Open Markets Committee meeting on Wednesday, with markets expecting a 25-basis point hike at the meeting.
"The message the market is sending today is the Fed needs to come out with the press conference and pause tomorrow otherwise you're going to see continued turmoil in the banking system," said Thomas Hayes, chairman at Great Hill Capital.
