What happened

To say that regional banks are having a rough start to the week would be an understatement. At 10 a.m. ET, shares of First Republic Bank (FRCB) were down by about 68% for the day -- and that's on top of last week's 33% decline.

Other regional institutions were down big as well. PacWest Bancorp (PACW) was down by 51%, Western Alliance Bancorp (WAL 0.46%) plunged by 81%, and Zions Bancorp (ZION -0.40%) fell 34%. Even some of the larger regional banks were under tremendous pressure, with Truist Financial (TFC 0.30%) and Regions Financial (RF -1.16%) down by 18% and 14%, respectively. In all, the SPDR S&P Regional Banking ETF (KRE 0.23%) was down by 14%.

So what

The short answer is that this is fallout from the collapse of Silicon Valley Bank (SIVB.Q). But it may seem odd that these bank stock declines are coming after the Federal Reserve and Treasury Department said that deposits (even uninsured deposits) at all these institutions are 100% safe and created a new funding program to ensure banks have access to the liquidity they need.

To be sure, there is some company-specific concern. For example, First Republic received additional liquidity over the weekend from the Federal Reserve and JPMorgan Chase (JPM -1.21%), creating a total unused liquidity of $70 billion. However, as in the case of SVB Financial, First Republic has a lot of assets worth significantly less than their balance sheet value, and there is fear of large losses if they are sold. Several other banks moving today are in similar situations.

The biggest fear is that banks will see a rush of withdrawals, especially when it comes to uninsured deposits -- even though the government is effectively guaranteeing all deposits now. First Republic is a bank that has many businesses and wealthy clients, and therefore it has a relatively high proportion (68%) of uninsured deposits. Clients could move their money to larger banks (like JPMorgan Chase) or choose to spread their money out to increase their insured deposit percentage. Or customers could move their assets into bonds, which they may perceive as safer places to store capital than uninsured bank deposits.

We could also be seeing some pressure because the government's efforts do absolutely nothing to bail out shareholders in SVB or other firms. So it's fair to say that there's a lot of fear that some of these bank stocks could go to zero if things go badly.

Now what

It's important to emphasize that this remains a very fluid situation. We've heard the government response to the situation, but we don't have much information on actual customer outflows from any of these banks. It's entirely possible that the FDIC could take over other vulnerable banks (there have been reports First Republic was being closely watched by the agency), or we could see some of the more vulnerable banks get acquired by healthier institutions.

For now, it would be wise to expect the volatility to continue for the near term in these banks, so it might be a good idea for investors to wait for more clarity on the situation and let the dust settle before making any moves.