These Regional Banks’ Stocks Are Falling As Contagion Fears Loom Following SVB Collapse

Topline

Some of the country’s biggest regional banks, led by First Republic Bank, are deep in the red Friday morning, as fears linger among investors that the sudden failure of Silicon Valley Bank and Signature Bank last week could spark widespread turmoil in the banking sector, and as lawmakers are split on how to avoid contagion.

Key Facts

Key Background

Economists’ fears of widespread banking turmoil began to mount last week, when California-based Silicon Valley Bank abruptly collapsed. The bank, which catered to tech companies like Roku and Circle, had announced two days earlier it lost nearly $2 billion in the sale of $21 billion in securities as it attempted to grab cash—after its depositors withdrew massive amounts of money following multiple interest rate hikes by the Federal Reserve. The Federal Deposit Insurance Corporation announced plans on Sunday to make all of the bank’s depositors whole, even if they had deposited more than the FDIC’s guaranteed threshold of $250,000. That same day, New York’s state regulator announced it had taken possession of Signature Bank, after customers withdrew their deposits in a bank run, and as its shares plummeted nearly 25% to $70 Friday in the bank’s worst day ever on Wall Street. The collapse sparked fears among economists that more regional banks could be in trouble, causing regional banks’ stocks to fall throughout the week, while the country’s 10 biggest banks lost more than $185 billion in market value between last Wednesday and Monday. Fearing continued losses, 11 of the country’s biggest banks, including Bank of America, Citigroup, JPMorgan Chase and Wells Fargo—pledged Thursday to provide $5 billion each in uninsured deposits to First Republic, writing in a statement: “Regional, midsize and small banks are critical to the health and functioning of our financial system.”

Chief Critic

Some investors, however, harshly criticized the $30 billion rescue plan for First Republic, arguing it instills a “false sense of confidence” in the market and deepens the risk of contagion. In a scathing tweet, billionaire Bill Ackman, the head of major hedge fund Pershing Square, argued the banks would risk spreading First Republic’s “default risk” to bigger banks by providing uninsured deposits, saying he is “extremely concerned” about contagion “spiraling out of control and causing severe economic damage.” In a joint statement, Treasury Secretary Janet Yellen and Federal Reserve Chair Jerome Powell called the massive cash infusion a “most welcome” show of support.

Contra

First Republic’s stocks had bounced back Thursday afternoon after banks proposed the $30 billion rescue plan, climbing 10% by market close to $34.35. The California bank’s stocks had plummeted nearly 36% Thursday morning to $19.80, following reports company officials were considering a sale and after the bank received two credit downgrades.

Tangent

In response to the collapse of SVB and Signature Bank—the second- and third-largest in U.S. history—Sen. Elizabeth Warren (D-Mass.) and Rep. Katie Porter (D-Calif.) proposed a bill Wednesday seeking to reintroduce regulations on small and medium-sized banks initially implemented in the 2010 Dodd-Frank Act in response to the 2008 Great Recession. But the bill, which would create restrictions including regular stress tests that had been eliminated in 2018, faces steep opposition from Congressional Republicans, including Sen. Tim Scott (R-S.C.), who argued increased regulation wouldn’t prevent banks from relying on the federal government to “swoop in after taking excessive risks.”

What To Watch For

The Federal Reserve will have an opportunity to raise interest rates when it meets again next Tuesday and Wednesday. Fed Chair Jerome Powell had told the Senate Banking Committee last week, before the collapse of SVB and Signature Bank, that the central bank could introduce a “higher” interest rate hike, though analysts at Goldman Sachs predict the recent developments in the banking system could persuade the Fed against raising rates.

Further Reading

Billionaire Ackman ‘Extremely Concerned’ $30 Billion Bank Rescue Plan Risks Financial Contagion Spiraling Out Of Control (Forbes)

What Happened To Signature Bank? The Latest Bank Failure Marks Third Largest In History (Forbes)

What To Know About Silicon Valley Bank’s Collapse—The Biggest Bank Failure Since 2008 (Forbes)

First Republic Stock Crashes But Bounces Back As Big Banks Unveil $30 Billion Rescue Plan (Forbes)