Regional Bank ETFs Battered as SVB Fallout Spreads

Regional banking exchange-traded funds, often seen as safe investments as their holdings rely on mortgages and small business loans, are getting clobbered today as the closures of Silicon Valley Bank and Signature Bank rattle markets.

Shares of the iShares U.S. Regional Banks ETF (IAT) and the SPDR S&P Regional Banking ETF (KRE) plummeted as the market opened before gaining back some ground. IAT lost as much as 19% at the open, and KRE dropped as much as 17%. IAT closed 14% lower at $35.43 and KRE slid 12% to $44.45.

On Friday, Santa Clara, California-based SVB was shut down in the biggest banking collapse since the 2008 financial crisis. The closure followed a hurried exit of deposits, a failed funding deal with General Atlantic and nearly $2 billion in losses from securities sales.

On Sunday, regulators closed New York-based Signature Bank as clients startled by the swift collapse of SVB withdrew more than $10 billion in deposits, CNBC reported. The closures of SVB and Signature are the second and third largest bank failures in U.S. history, respectively.

Investors had been piling into KRE as late as Friday, with the ETF recording its largest inflows this year in early March, according to etf.com data. KRE has brought in $172.2 million so far this month through March 10, etf.com data shows. Rising inflows into KRE in the beginning of March coincide with short interest on the ETF spiking, according to data cited by Bloomberg.

Silicon Valley Bank was a top holding in both ETFs, and was held in 200 exchange-traded funds. Signature Bank was held by 172 ETFs.

Analysts and government officials are in overdrive seeking to quell investor fears of a wider series of bank failures. The Treasury, the Federal Reserve and FDIC issued a joint statement Sunday stating that depositors of both banks, including those who are not insured, would be made whole. More than 80% of deposits at both banks were uninsured.

Experts pointed to idiosyncratic risks that caused the SVB bank run.

“The macro environment may be pretty challenging from a VC, private equity and IPO standpoint, but the bank’s collapse was totally avoidable,” Omar Fahmy, analyst at Third Bridge Group, said in emailed comments regarding SVB.

Others have pointed to the relative health of regional lenders, noting that banks most susceptible may be those with a less diversified pool of depositors.

“It’s important to state that we believe a majority of U.S. regional banks are in a healthy position,” Alexander Yokum of CFRA Research said in a note to clients Friday. “However, if more banks were to fail, we would expect it to be banks with less diversified deposits, large losses in securities portfolios, and/or wealthy clients.”

Even President Biden took to the podium to boost confidence, stating that the “banking system is safe” in an appearance from the White House on Monday.

On Sunday, Goldman Sachs analysts stated in a note to clients that they no longer expect the Fed to announce another rate hike in March as a result of stress on the banking sector. That’s a departure from their previous prediction of a 25 basis point increase.

Contact Shubham Saharan at [email protected]