The fate of regional banks was a prime focus for markets Wednesday as investors awaited a decision from the Federal Reserve about the direction of interest rates.

PacWest (PACW) and Western Alliance (WAL) rose Wednesday after plummeting on Tuesday. PacWest was up more than 6%, while Western Alliance was up more than 4% in early afternoon trading. Other regional banks that dropped Tuesday were also higher ahead of the Fed’s decision, including Zions (ZION), Comerica (CMA) and Key (KEY).

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.

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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.”

Several big bank executives tried to argue Monday that concerns about the regional banking system should lessen with the seizure and sale of First Republic, including JPMorgan CEO Jamie Dimon: “This part of the crisis is over,” he said.

But Dick Bove, financial strategist with Odeon Capital Group, said the short sellers who made a tidy profit betting against First Republic and Silicon Valley Bank are going to keep looking for new targets.

“The antelopes are being prowled by the lions here and the lions are going to find other ones to attack and bring down,” Dick Bove, financial strategist with Odeon Capital Group, told Yahoo Finance Monday, predicting other banks would still fail.

Wells Fargo (WFC) CEO Charlie Scharf said Tuesday at a Milken Institute conference in California that “unfortunately, there will be a lot of volatility and turmoil” among regional banks. But “the majority of the banks that we look at are still extremely strong.”

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