The fate of regional banks was a prime focus for markets Wednesday as the Federal Reserve decided on another 0.25% increase in its benchmark interest rate while opening the door to a pause.

PacWest (PACW) and Western Alliance (WAL) fell again Wednesday after plummeting on Tuesday, as did Zions (ZION), Comerica (CMA) and Key (KEY). The S&P regional banking index (KRE) closed Wednesday down 1.8%.

The volatility follows an announcement Monday that JPMorgan Chase (JPM) purchased the bulk of First Republic (FRC), a deal that was designed to restore stability to the banking system after two months of turmoil.

One new point of pressure is being applied by short sellers who appear to be targeting lenders they perceive to be most vulnerable.

Short sellers have increased their bets against regional bank stocks by more than $440 million over the last 30 days, according to data from S3 Partners. Since Friday, short interest in PacWest rose to more than 18% of shares, making it the second most shorted regional bank stock for the same period.

PacWest and Western Alliance were also among the financial institutions, along with First Republic, that came under intense scrutiny following the March 10 and March 12 failures of Silicon Valley Bank and Signature Bank.

"Ironically, a lot of people were willing to 'buy the dip' in March; I hear less of that talk now," said Alexander Yokum, an equities analyst for CFRA Research. "Now, I hear a lot of people say, I want to watch this play out first."

Short sellers who haven't faced losses are "emboldened," he added.

The larger concern for the industry is a slow drain of deposits that is now a year in the making. Since mid April 2022, banks have lost $960 billion in deposits, or roughly 5.3%, according to Fed data. That is the largest decline since the Fed began collecting the data in 1973.

Antelopes and lions

Both PacWest and Western Alliance, like First Republic, lost a sizable amount of deposits during the first quarter as customers sought the perceived safety of larger banks or higher yields being offered by money market funds. PacWest lost 17%, Western Alliance lost 11% and First Republic lost 41%.

However, both PacWest and Western Alliance said they had gained some deposits back in April. Fed data also shows that outflows stabilized across the industry during the first three weeks in April.

"If we owned a bank right now, of course, we would be thinking about deposits," Yokum said. "But if it hasn't been a problem for the last 50 years, maybe you wouldn't have focused on it as much as you should have."