Shares in First Republic Bank fell 13 percent at 9:52 a.m. in New York, following last week's record 72 percent retreat. The lender was downgraded by S&P Global Ratings for a second time on Sunday after being cut to junk just days ago, even after the bank received $30 billion from 11 U.S. banks to stave off a collapse.

"This is going to be pretty bumpy going forward," Mohamed El-Erian, chief economic adviser at Allianz SE and a Bloomberg Opinion columnist, said in an interview with Bloomberg Television. "People are doing something that probably is not rational but is totally understandable—they're moving deposits. That dynamic isn't going to stop overnight; neither are the losses that are being incurred."

Depositors have been fleeing regional lenders following the collapse of SVB Financial Group's Silicon Valley Bank, after it failed to raise capital amid huge losses on its debt investments. In one day alone, depositors attempted to pull $42 billion. The bank collapsed into receivership the next day, and the Federal Deposit Insurance Corp. (FDIC) sought a sale.

On Sunday, Bloomberg News reported the FDIC was moving toward a breakup solution for the lender after a second auction failed to line up a buyer. Bids are now due Friday for the bridge bank—a sign that the fast resolution regulators were pushing for isn't imminent.

The pain quickly had spread to other regional banks, prompting their shares to tumble. Moody's Investors Service placed six regional banks on review for downgrade and cut the outlook for the entire U.S. banking system to negative, from stable, citing the runs on deposits.

The deal—the brainchild of U.S. Treasury Secretary Janet Yellen and backed by JPMorgan Chase & Co. CEO Jamie Dimon—failed to quell investor concerns about its financial health.

"The biggest open question is First Republic, which suffered a run after being somewhat unfairly linked to Silicon Valley Bank and Signature Bank," said Todd Baker, a senior fellow at Columbia University's Richard Paul Richman Center for Business, Law, and Public Policy. "I am expecting a private capital infusion or an M&A [merger and acquisition] deal soon there, so that the bank can hold onto primary banking relationships with its core base of wealthy individuals and their businesses."

The future of one troubled regional bank was resolved late Sunday: The FDIC announced that a subsidiary of New York Community Bancorp agreed to acquire key elements of New York-based Signature Bank, which was closed by state financial regulators a week ago and placed in FDIC receivership. New York Community Bancorp's Flagstar Bank will acquire "substantially all deposits and certain loan portfolios" from Signature, the FDIC said. Signature's 40 branches will operate as Flagstar locations as of Monday.

Taking a page from the last financial crisis, the FDIC negotiated to get equity appreciation rights in New York Community Bancorp common stock, which the agency said could ultimately be worth as much as $300 million.

To assuage customers, U.S. regulators unveiled extraordinary measures earlier this month, vowing to fully pay out uninsured deposits in the failed banks.

A coalition of midsize U.S. banks asked federal regulators to extend FDIC insurance to all deposits for the next two years, arguing the guarantee was needed to avoid a wider run on the banks and to stabilize the sector. On Sunday, Senator Elizabeth Warren, a longtime Wall Street critic, also said more U.S. deposits should be covered by federal insurance.

The path to any across-the-board increase runs through a bitterly divided Congress. In contrast to Warren's enthusiasm, key lawmakers like House Financial Services Committee Chairman Patrick McHenry have sounded a far more cautious tone. There's also mounting political pressure from small, community-focused lenders whose clients' deposits are often under $250,000.

Others argue that increasing the deposit insurance limit could help shore up confidence. "It's more a crisis of confidence triggered by one or two banks, and that confidence just needs to be restored," said Lawrence Baxter, a professor at Duke University School of Law.

The FDIC invoked what's called a systemic-risk exception to insure the uninsured depositors at Silicon Valley Bank, which accounted for more than 90 percent of its deposits—as well as at Signature Bank.

Also Sunday, the Federal Reserve and five other central banks announced coordinated action to boost liquidity in U.S. dollar swap arrangements, the latest effort by policymakers to ease growing strains in the global financial system.

"Nobody wants to be systemic when it comes time for regulation, and everybody wants to be systemic when it comes time for bailouts," said Aaron Klein, senior fellow at the Brookings Institution and formerly a deputy assistant secretary at the Treasury Department. "It's difficult to know what the limits of the law are when, in times of crisis, the boundaries are tested."

The crisis has drawn Berkshire Hathaway Inc.'s Buffett into the fray. The investor—who has a long history of helping ailing lenders—has been in touch with senior officials in President Joe Biden's administration in recent days as the regional banking crisis unfolded. The conversations have centered around Buffett possibly investing in the U.S. regional banking sector in some way, but the billionaire has also given advice and guidance more broadly about the current turmoil.

Complicating the issue is a two-day Fed meeting starting Tuesday during which Chair Jerome Powell and his colleagues will discuss the strength of U.S. banks and the potential for a recession looming overhead. The Fed's next move will be closely watched, as recent bank failures are stirring memories of the 2008 financial crisis. Expectations have largely been shifting between the Fed delivering another quarter-point interest-rate hike or taking a pause in its yearlong effort to raise rates and reduce inflation. As developments are changing rapidly, rate-hike expectations could shift yet again before Wednesday.

"This is a more difficult meeting," said Derek Tang, an economist at LH Meyer/Monetary Policy Analytics, a Washington policy-analysis firm. "He doesn't have two weeks to form a consensus. The consensus is a moving target."

—With assistance from Ben Bain, Craig Torres, Silla Brush, Paige Smith, Allyson Versprille & Marion Dakers.

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