Rout in bank stocks deepens despite emergency measures

First Republic shares were down 64% after earlier falling as much as 78%. The bank said Sunday that it had shored up its finances with additional funding from the Federal Reserve and JPMorgan Chase.

The selling marked the sector’s steepest retreat in three years, reflecting deepening investor concern about the health of the industry following three bank failures in the past week.

The KBW Nasdaq index of commercial banks dropped 11%, with large lenders such as Comerica Inc. and Zions Bancorp declining more than 20%. The SPDR S&P Regional Banking ETF fell 6.4%. Large banks such as JPMorgan also declined, though their pullbacks generally were less severe.

The retreat shows the extent to which investors continue to back away from banks with large amounts of uninsured deposits. Deposit flight was at the center of the collapse this past week of SVB Financial Corp., the parent of Silicon Valley Bank, and Signature Bank. Comerica said 64% of its deposits at the end of last year were uninsured and Zions 53%, filings show.

The Federal Reserve and the Biden administration took emergency steps Sunday to try to reassure Americans about the health of the financial system, but there were signs that investors remained concerned both about individual banks and about the likely economic impact of the tumult.

“When you think about banking, it’s really the circulatory system of our economy,” said Jack Ablin, founding partner and chief investment officer at Cresset Capital. “So anytime you get failures of this size, there are certainly valid concerns that are raised.”

The declines deepened a sharp selloff from Friday, when banks closed out their worst week in nearly three years.

On Monday, Western Alliance Bancorp shares sank as much as 84%, PacWest Bancorp dropped by 29% and Charles Schwab slid 11%. They were among a number of firms whose shares were temporarily halted for volatility shortly after the open.

The bank failures have raised questions about banks’ funding and their exposure to businesses that investors judge unlikely to prosper with rising interest rates. Bank regulators have stepped in to say that depositors at the failed banks will be made whole. Some investors contend Signature and Silvergate were more vulnerable because they focused in part on crypto, while Silicon Valley catered mostly to startup companies with large deposits.

But the failures culminated in liquidity crunches that have drawn attention to the long-term bonds that some banks bought in the pandemic-driven deposit surge. Those are proving problematic because a sharp rise in interest rates as part of the Fed’s effort to fight inflation means that longer-term bonds bearing lower interest rates can’t be sold without recognizing a loss that can hit capital.

“There is a lack of confidence in parts of the system right now,” said Jason Goldberg, an analyst at Barclays.

Not everyone was unnerved. Outside a First Republic branch in Midtown Manhattan on Monday morning, there was no sign that people were lining up to pull out money. The branch was letting people in a few minutes before the normal 9 a.m. opening time.

Onlookers, some heading to jobs in finance, stopped to look in through the windows, where a large number of employees were waiting for people to walk in.

One customer who declined to be identified went in to confirm that his account was a joint account, meaning it was eligible for up to $500,000 in Federal Deposit Insurance Corporation insurance. He didn’t move his money out. A few minutes after confirming in person, he received an email confirmation.

“If you can’t trust the FDIC, it’s a banana republic,” he said.

Write to Gina Heeb at gina.heeb@wsj.com, Ben Eisen at ben.eisen@wsj.com and Telis Demos at Telis.Demos@wsj.com