PacWest and First Horizon plummet 40% as banking-industry nerves spur speculation of further consolidation

• Regional bank stocks plummeted again on Thursday as fears of another collapse rise and after the Fed continued with its interest rate hikes.
• Shares of PacWest Bancorp plunged about 40% after the struggling bank said it is weighing strategic options.
• First Horizon stock fell about 40% after canceling a planned merger with TD Bank.

The crisis in the regional banking sector was on full display yet again on Thursday, with PacWest Bancorp and First Horizon both plunging about 40%.

The SPDR S&P Regional Banking ETF fell 4% on Thursday and traded at its lowest levels since the COVID-19 pandemic in early 2020.

The latest massive sell-off in regional banks was sparked by PacWest telling its investors that it is weighing strategic options after it abandoned a previous effort to raise fresh capital.

The California-based lender has been considerably weakened since the collapse of two of rivals, Silicon Valley Bank in March and First Republic Bank earlier this week. Shares of PacWest have plunged 85% from the level they were trading at before the downfall of Silicon Valley Bank.

The earlier collapses set off a run on deposits held at several regional lenders, and a sharp outflow could force some banks to sell long-dated loans and other securities at a big loss.

But a recent update from PacWest showed that its deposit base actually increased in recent months. Still, that doesn't seem to be enough to stem the current crisis hitting the company. According to a Bloomberg report, potential options being weighed by PacWest include a breakup or an outright sale to a larger bank.

But any sale would likely require the larger bank to book a big loss on its underwater bond securities, according to the report, and that could mean there are few buyers interested in the bank unless it first goes into FDIC receivership.

Not helping matters is the fact that the Federal Reserve moved forward with its 10th consecutive interest rate hike on Wednesday, increasing the federal funds rate to above 5% for the first time in 16 years.

Meanwhile, First Horizon stock plunged on Thursday after its planned merger with TD Bank was called off by both companies. While the uncertain banking environment likely played a role in the cancellation of the $13.4 billion merger deal, what also was at issue was the lack of clarity from regulators that had threatened the deal.

Sources familiar with the matter told CNBC's David Faber that First Horizon was never made aware of what exact regulatory matters were at issue with the Canadian bank buying the Tennessee-based bank, and that lack of clarity led to an uncertain timeline with no assurance that a deal would ever have been able to be completed.

"While today's announcement is unfortunate and unexpected, First Horizon will continue on its growth path operating from a position of strength and stability," CEO Bryan Jordan said.