Wall Street stocks are plunging after one bank turns and another falters

The sudden closure of Silvergate Capital Corp and the hasty fundraising of SVB Financial Group sent US bank stocks plunging and got tongues wagging across the industry: could this be the start of a bigger problem?

The issue at both of California’s once high-flying lenders was an unusually fickle base of depositors, who quickly withdrew money. But beneath it lies a crack that’s reaching across finance: Rising interest rates have flooded banks with low-interest bonds that can’t be sold in a hurry without loss. So if too many customers tap into their deposits at once, it risks a vicious cycle.

In the world of investing, people are asking “Who’s next?” said Jens Nordvig, founder of market analytics and data intelligence companies Exante Data and Market Reader. “I’m getting a lot of questions about this from my customers.”

Indeed, amid deposit withdrawals at SVB, its chief executive on Thursday urged customers to “remain calm”.

The immediate risk may not be existential for many banks, according to analysts, but it could still be painful. Instead of facing a huge squeeze on deposits, banks will be forced to compete hard for savers by offering them higher interest payments. Due to this, the earning of the banks on lending will decrease, there will be a decrease in the earning.

Small and medium-sized banks, where funding is typically less diversified, may come under particular pressure, forcing them to sell more stock and dilute existing investors.

awesome kicking

“Silicon Valley banks are just the tip of the iceberg,” said Christopher Whelan, president of Whelan Global Advisors, a financial advisory firm. “I’m not worried about the big guys, but a lot of the little guys are going to take terrible kicks,” he said. “Many of them will have to raise equity.”

Every bank tracking major US firms in the S&P 500 financial index took the benchmark down 4.1% on Thursday – its worst day since mid-2020. Santa Clara-based SVB fell 60%, while First Republic Bank in San Francisco fell 17%.

Another S&P index tracking mid-sized financials dropped 4.7%. Beverly Hills-based PacWest Bancorp was the worst performer, down 25%.

Ironically, many equity investors piled into financial stocks to avoid the Federal Reserve’s interest rate hike, betting it would pave the way for lenders to earn more. This week has been a shocker for them.

“Rising deposit costs is old news, we’ve seen that pressure,” said Chris Marinac, an analyst at Janney Montgomery Scott. But suddenly “the market has really focused on this as an obvious surprise with the capital raise from Silicon Valley Bank.”

SVB announced the offering of stock as its customers – firms backed by venture capital – withdrew deposits after they put through their funds. The lender liquidated substantially all available-for-sale securities in its portfolio and updated its forecast for the year to include a sharp decline in net interest income.

Hours after CEO Greg Baker urged clients to “remain calm” on a conference call Thursday, news broke that several prominent venture capital firm portfolio companies, including Peter Thiel’s Founders Fund, have been advised to withdraw money as a precaution. were giving

The problem at Silvergate was a run on deposits that began last year, when customers – cryptocurrency ventures – withdrew cash to weather the collapse of the FTX digital-asset exchange. The firm on Wednesday announced plans to cease operations and liquidate, following losses from the rapidly selling securities.

US bank stocks also came under pressure this week after KeyCorp warned about mounting pressure to reward savers. The regional lender cut its forecast for net interest income growth in the current fiscal year from 6% to 1% to 4%, down from 6% to 9% due to a “competitive pricing environment”. Its stock fell 7% on Thursday.

‘more isolated’

Regulators talk openly about spending less time whittling down the balance sheets of smaller banks, giving them room to innovate, with some dabbling in fintech platforms or cryptocurrencies.

Officials have instead devoted much of their time and attention to ensuring the stability of large “systemically important” banks such as JPMorgan Chase & Co and Bank of America Corp since the 2008 financial crisis.

He has forced the biggest lenders to set aside vast amounts of capital – sometimes over the loud complaints of bankers – so that at such moments his health is beyond reproach. In contrast, smaller lenders have been handled with a “very light-touch approach,” Michael Barr, the Fed’s vice chairman for supervision, said during a speech on Thursday.

“There are obviously larger institutions that are exposed to these risks as well, but the risks are a very small portion of their balance sheets,” he said. “So even though they experience similar deposit outflows, they are more insulated.”