Financial regulators in the US are coming under increasing pressure to intervene and defuse the crisis after the renewed turbulence at regional banks. After the fall in the share price of PacWest Bancorp in recent days, Western Alliance is another institution that now wants to explore strategic options with investors.

Wall Street executives and bank analysts called on regulators to quickly secure more protection for bank deposits and also consider further steps. From their point of view, only courageous intervention can stop the crisis from getting out of hand.

Safety net needed

"Investors are clearly continuing to focus on the remaining players, who are considered the weakest," says banking analyst Erika Najarian of the major Swiss bank UBS. In order to stop the cascade before further collapses occur, it may be time for the Treasury Department and the US Federal Reserve to take action and create a kind of safety net, she wrote in a study.

Shares of PacWest plunged more than 40 percent at times on Thursday after the financial institution said it was exploring strategic options. At times, Western Alliance's share price had even plummeted by around 60 percent. The bank denied a media report about a possible sale, saying there were no unusual deposit outflows. The bank is adequately equipped with liquidity.

Activist investor Nelson Peltz called in the Financial Times for deposit insurance to be expanded. In doing so, he blew the same horn as major investor Bill Ackman. The failure of regulators to expand the safeguarding system has "hammered more nails into the coffin," he tweeted.

Call for higher deposit insurance

Peter Orszag, head of financial consulting at Lazard, called for guarantees to be given for uninsured deposits for a period of six months. This would create trust. Bank customers could thus be discouraged from withdrawing funds from accounts of small and medium-sized banks.

The U.S. Treasury said on Thursday that it would continue to "closely monitor" stock market developments. However, the banking system has considerable liquidity and deposit flows are stable. The U.S. Federal Deposit Insurance (FDIC) did not respond to a request for comment.

Infectiousness

The banking quake began in March, when customers began to massively withdraw funds from regional banks Silicon Valley Bank (SVB) and Signature Bank. When California's SVB collapsed, customers had previously temporarily cleared $42 billion in funds from their accounts in just five hours. It was the biggest collapse of a bank since the 2008 global financial crisis.

The New York-based Signature Bank collapsed two days after the SVB. In the wake of the turbulence, savers brought funds to safety in larger US banks. In order to prevent contagion, regulators took immediate measures to compensate all customers at the two crisis banks. The Fed provided additional liquidity support to institutions.

Recent calming of the market

The financial markets had recently calmed down somewhat in April. But last weekend, the California-based First Republic, the third bank, finally went to its knees. This time, regulators hoped that an emergency sale to major bank JPMorgan would end the banking quake. But the nervousness of investors was only reinforced. On Monday, the FDIC unveiled possible reforms, including raising the current deposit protection cap from the current $250,000 per bank per person. However, such a reform would require the approval of the US Congress.

"Congress doesn't seem willing to exercise that option at this stage," said Carl Riccadonna, chief economist at BNP Paribas. So if there is no change in FDIC coverage limits, there is a risk that the structural headwinds will continue. Big banks and private equity firms had refused to offer institutions capital injections without government backing because they wanted to avoid possible losses.

In the view of Ed Mills, an analyst at investment bank Raymond James, regulators may also consider other options. They could, for example, signal that shareholders of the banks could be protected. Additional aid from the US Federal Reserve is also conceivable. But Mills is skeptical. He does not believe that the authorities will intervene "until the situation deteriorates significantly."