The latest slide for the shares of midsize banks is causing concern on Wall Street that the deposit flight seen during the first quarter could be rekindled. Regional bank stocks have fallen sharply this week after the failure and sale of First Republic Bank, with the SPDR S & P Regional Banking ETF (KRE) tumbling 8.9% in just two days, on Monday and Tuesday. KRE 5D mountain Regional bank stocks have fallen after First Republic's failure. The slump came even though First Republic seemed to be the last outlier in terms of massive deposit outflows during the first quarter. JPMorgan Chase CEO Jamie Dimon said that " this part of the crisis is over " after his bank, the country's largest, bought the regional lender out of receivership. Many other regional banks had reported smaller deposit declines during the first quarter and that customers were starting to come back. However, even if the immediate concerns have been put to rest, the falling bank stocks could create a new round of issues, according to Evercore ISI. Analyst John Pancari wrote in a note to clients Tuesday evening that the stress in the equity market could spook customers whose deposits have become harder for banks to retain, saying "self-fulfilling prophecy is a risk." "While we are confident in liquidity and capital levels at the banks post 1Q, we cannot ignore the risk that market pressures on bank stock valuations could feed a self-fulfilling prophecy. Specifically, while deposits had stabilized at our regional banks as of April, the word of sharp drops in bank stocks could drive depositor unease in itself, thereby potentially restoking the deposit fire," Pancari said. One potential reason the stocks are falling this week is expected regulatory changes after this crisis, which could hurt the long-term profitability outlook for midsize banks that previously received a lighter touch from regulators. Pancari did not say that another deposit crisis appeared imminent. "The majority of our regionals have more than ample liquidity to cover uninsured deposits. ... [R]egional banks' troubles are earnings issues for most, rather than liquidity issues," Pancari said. He added "select regionals appear oversold," highlighting Fifth Third Bancorp as one of Evercore ISI's favorite midsize banks. — CNBC's Michael Bloom contributed to this story.
