Wall Street gears up for Silicon Valley’s next bank

Investors feared the fastest interest rate increases in decades meant something in the economy could snap.

Last week it was. Now investors are wondering: what else could crack?

Silicon Valley Bank was shut down on Friday after being hit by a run on its deposits, the second-largest bank failure in US history. The fallout rocked Wall Street, heightening fears that a year of rapidly tightening financial conditions will finally hit the financial sector and beyond.

The banking meltdown, the biggest since the 2008 financial crisis, helped send the S&P 500 down 3.3% in the last two trading days of the week. Traders began to speculate on which other fast-growing banks might be affected and whether the unrest might encourage the Federal Reserve to suspend, or even halt, its year-long effort to curb inflation by raising interest rates. interest.

“I think this might be the first cockroach in the cellar,” said Fredric Russell, managing director of Fredric E. Russell Investment Management Co. in Tulsa, Okla. “Banks are thrown into a dark pool of appeasement, then they lower their quality standards.”

The crisis deepened on Sunday while also showing first glimmers of stabilization. Regulators have taken over Signature Bank, a New York lender with $110 billion in assets, marking the third banking meltdown in a week. But equity futures rose in Asian trading after the government announced measures to ease depositors’ concerns and make more funds available to the banking system.

Customers withdrew $42 billion in deposits from Silicon Valley Bank on Thursday, according to the California Department of Financial Protection and Innovation, resulting in a negative cash balance of $958 million. As of Wednesday, a public company filing had shown $169 billion in deposits and about $180 billion in cash available to stem potential outflows.

Banks, especially the larger ones, are much better capitalized than they were before the 2008 financial crisis. Still, some investors fear that the current problems hitting a few regional banks will affect the entire sector.

Adding to the stress, a major cryptocurrency fell sharply over the weekend after it was revealed that its operator, Circle Internet Financial Ltd., tied up $3.3 billion in Silicon Valley Bank.

USD Coin fell below 87 cents on Saturday morning, according to data from CoinDesk. The virtual currency, known as a stablecoin, is designed to trade at $1. Its decline echoes a pivotal moment in the 2008 financial crisis, when a money market fund widely seen as a cash equivalent “failed” following the bankruptcy of Lehman Brothers.

The Federal Deposit Insurance Corp. insures depositors up to $250,000 cash in a bank. Depositors with more than that at Silicon Valley Bank will receive escrow certificates for their uninsured balances, the FDIC said, meaning they might not get all their money out soon.

“The big question is whether the FDIC and the Fed are making uninsured depositors whole or at least nearly whole,” said Bob Elliott, co-founder and chief investment officer of the asset manager. Unlimited. “If SVB Financial’s resolution is not well managed, there is a systemic risk that uninsured depositors will flee smaller banks.”

Regulators closed Silicon Valley Bank on Friday after a run on its deposits.


Photo:

Jeff Chiu/Associated Press

At the end of last year, Silicon Valley Bank had about $151 billion in uninsured deposits, according to the annual report of SVB Financial Group, its parent company. Bank of the First Republic,

FRC -14.84%

another large regional bank, had about $120 billion, and Signature Bank SBNY -22.87%

had about $80 billion in uninsured deposits.

The failure of Silicon Valley Bank affected not only its depositors and investors, but also its customers. Companies funded by Silicon Valley Bank for years now seem more risky. Sunrun Home Solar Installer Stocks Inc.,

for example, fell 12% on Friday. The Roku streaming platform Inc.

YEAR -0.88%

said about $487 million of his $1.9 billion in cash was at SVB on Friday. Roku said in a filing that he didn’t know how much he could recover.

Payroll company Rippling was unable to complete some payroll cycles on Friday, its chief executive, Parker Conrad, said on Twitter. The company transferred its business to JPMorgan Chase & Co., Mr. Conrad said.

There are major differences between the current strains in the banking sector and the financial crisis more than a decade ago.

Silicon Valley Bank struggled in part by investing heavily in government bonds and agency-backed mortgage-backed securities, which fell in value when the Fed raised interest rates.

SHARE YOUR THOUGHTS

What is your outlook on banking stocks in light of the SVB crash in particular and rising rates in general? Join the conversation below.

However, these bonds are essentially guaranteed to be repaid in full at maturity, which distinguishes them from the complex credit instruments linked to riskier mortgages that contributed to the downfall of financial institutions in the late 2000s.

Far from fleeing Treasuries on Friday, investors flocked to them, betting that problems in the banking sector could slow economic growth and possibly lead to lower interest rates. The yield on the 10-year U.S. Treasury note, which falls when the price rises, posted its third biggest single-day drop in the past decade, according to Tradeweb.

The Silicon Valley Bank crisis interrupted investors’ preoccupation with the Fed’s year-long struggle to control soaring inflation. Last week started with investors firmly focused on Fed rate hikes and Fed Chairman Jerome Powell’s testimony before Congress, which began on Tuesday. Then, late Wednesday, crypto-focused bank Silvergate Capital Corp.

said it would voluntarily close and Silicon Valley Bank said it needed to raise emergency funds.

Investors quickly grew concerned that other banks could be subject to similar, rapid falls. The KBW Nasdaq Bank index fell 16% over the week, its worst performance since the start of Covid-19 in March 2020.

In the tumult, the banks most affected are those with overloaded loan portfolios linked to riskier assets such as mortgages or sensitive customers inclined to withdraw money. Investors fear that Fed tightening will continue to hurt the real estate sector, while long-term bond portfolios will suffer the most from rate hikes.

First Republic Bank was among the regional banks whose shares fell following the collapse of SVB.


Photo:

Eric Thayer/Bloomberg News

Traded several bank stocks, including First Republic, Signature, Western Alliance Bancorp and PacWest Bancorp,

was briefly interrupted on Friday.

Signature’s 23% loss on Friday was its worst day on record, and Signature and First Republic had their worst weeks on record, according to Dow Jones Market Data. Citizens Financial Group Inc.,

Comedy Inc.,

Fifth Third Bancorp,

Zions Bancorp and Charles Schwab Corp.

each lost more than 15% in the past week.

First Republic’s chief executive and executive chairman emailed customers on Sunday. “We want to take a moment to strengthen the security and stability of the First Republic,” the note said, adding that the lender’s capital and liquidity positions remained strong.

The Fed has been focused on controlling inflation, but the events of the past week have officials thinking about another of the central bank’s core mandates: financial stability. On Thursday, weeks of hot economic data had suggested the Fed could raise rates by 0.5 percentage points at its meeting later this month and continue to tighten policy through 2024. On Friday, traders said revised their bets to bet on a lower spike for interest rates. and a rate cut later this year.

Some investors were surprised by how quickly SVB went from seeking additional funding on Wednesday to complete failure on Friday.

“I was a bit shocked by that,” said Buzzy Geduld, managing director of hedge fund Cougar Capital. “I would have guessed they could have raised the money they apparently needed, but obviously when they looked under the hood it was much worse than expected.”

Still, Geduld said the SVB fallout did not significantly change his view of the banking industry, as SVB’s difficulties stemmed from its specific exposure to startups and venture capital.

“We always like regional banks,” he said.

One of the most troubling aspects of SVB’s collapse was that many analysts didn’t see it coming. Of 22 analysts covering the company, the average price target was around $262 per share, according to FactSet.

The stock closed Thursday at $106.04 before regulators took the reins on Friday morning.

Write to Eric Wallerstein at eric.wallerstein@wsj.com, Matt Grossman at matt.grossman@wsj.com and Gregory Zuckerman at Gregory.Zuckerman@wsj.com

Copyright ©2022 Dow Jones & Company, Inc. All rights reserved. 87990cbe856818d5eddac44c7b1cdeb8

Leave a Comment