The day began with President Biden in the White House seeking to allay fears of a banking crisis before leaving Washington for a swing in California.
“Americans can be sure that the banking system is safe. Your deposits will be there when you need them,” the president said in a mid-morning address from the Roosevelt Room.
In Silicon Valley, relieved customers lined up outside SVB branches to withdraw funds they feared they would lose. Bank depositors in Menlo Park said they waited up to two hours to get their cash in cashier’s checks. The only evidence from the new owners of the bankrupt bank was a press release from the Federal Deposit Insurance Corp. recorded on the door.
On Wall Street, banking stocks were ravaged, with regional institutions the hardest hit. First Republic Bank, another mid-sized bank, saw its share price fall nearly 80% before ending the day down 62%. The plunge came despite news that the bank had strengthened its balance sheet with a capital injection from JPMorgan Chase.
Even some of the biggest and best protected banks in the country have been avoided. Citigroup shares lost more than 7% while Wells Fargo fell 6%. Broader equity markets were flat.
“Salaries are respected in Silicon Valley. There are no massive releases that we can see. So I think that means it was reasonably successful,” former Treasury Secretary Lawrence Summers said. “But the financial system has taken a hit and, while the ER doctors have done a good job, the patient is not in full health.”
While the market reaction has been remarkable, falling stock prices pose no immediate threat to banks. As long as depositor withdrawals remain at normal levels, healthy banks can continue to operate even if their stock prices turn, said Karen Petrou, managing partner of Federal Financial Analytics, a Washington advisory firm. The health of banks is determined by the amount of capital they hold in reserve to absorb losses and the adequacy of their available assets to meet depositor withdrawals.
“Banks don’t live or die by stock price,” she said.
Yet the appearance of cracks in the country’s regional banks caused an extraordinary turnaround in financial conditions that sparked a rapid shift in investor expectations for Fed actions on interest rates.
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Less than a week ago, Fed Chairman Jerome H. Powell told Congress that interest rates may need to rise higher than the central bank had expected to get inflation under control. Wall Street analysts expected the Fed to raise rates by up to half a percentage point at its next meeting on March 22 and warned that the Fed’s benchmark lending rate could reach 6%. compared to the current target of 4.5% to 4.75%.
Now, 40% of investors expect the Fed to leave rates unchanged and start cutting them by mid-summer, according to the CME tool FedWatch, which is based on futures prices.
The government is expected to release the next reading of the consumer price index on Tuesday. If inflation remains stubbornly high, the Fed will be caught between its anti-inflation mandate and its need to maintain financial stability.
Goldman Sachs said late Sunday that it expects the Fed to pause its one-year rate hike campaign. “Fed officials are likely to prioritize financial stability for now, seeing it as the immediate problem and high inflation as a medium-term issue,” the firm’s economists said in a research note. .
Evidence that investors were increasingly skeptical of the Fed’s ability to continue raising rates could also be seen in the rush to buy government securities. Investors bought so many two-year Treasury securities that the yield plunged below 4% on Monday from more than 5% last Wednesday – the biggest three-day drop since the stock market crash of 1987.
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The remarkable intervention by authorities on Sunday to protect the banking system followed days of growing fears that problems at SVB, the preferred bank of tech entrepreneurs and venture capitalists, could spread to other institutions.
Deciding that the bankruptcy of SVB and a troubled second lender, Signature Bank of New York, posed a “systemic risk” to the financial plumbing of the economy, federal authorities closed both banks, guaranteed their deposits in over the $250,000 statutory limit and fired their management teams.
At the same time, the Fed established a new lending program to allow any other bank to obtain unlimited loans by pledging assets such as Treasury securities. The effort is designed to address issues that many banks have faced, following the Fed’s interest rate hikes and their own investment choices.
Unlike its normal bank loans, the Fed will make loans for up to a year and value the pledged securities at their original value rather than their depressed market price.
At the end of last year, banks had $620 billion in unrealized losses on these securities, which saw their value erode as the Fed raised interest rates.
The intention of the authorities was to eliminate any doubt as to the safety of depositors’ funds. But several regional banks, including Pacific Western Bank in California and Zions Bank in Utah, remain the focus of scrutiny and speculation. Investors fear some banks share SVB’s reliance on a narrow depositor base and assets that have lost value in the past year of rising interest rates.
The First Republic said on Sunday it had more than $70 billion in cash, following its recent injection of JPMorgan. In a joint statement, bank chairman Jim Herbert and chief executive Mike Roffler said, “First Republic’s capital and liquidity positions are very strong, and its capital remains well above the regulatory threshold for well-capitalized banks.
In January, the company announced strong financial results with $1.7 billion in profit on revenue of $5.9 billion.
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On Capitol Hill, the administration’s action won the support of the Republican chairman of the House Financial Services Committee. The Fed and FDIC “took the right approach, and they used their powers appropriately,” Rep. Patrick T. McHenry (RN.C.) said in an interview. “I think we have a financial system that is equipped to deal with this, and I hope the actions of the FDIC and the Fed will calm this current storm.”
On Monday, the plan also received qualified endorsement from S&P Global Ratings, which called the Fed’s move “robust” and said it should “reduce the chances of unmanageable deposit outflows spreading widely.”
But the rating agency warned that it remained unclear how depositors would react.
“The jury is still out,” said Marc Chandler, chief market strategist at Bannockburn Global Forex in New York. “I don’t know if that stops the race.”
In the computer chat rooms of Wall Street, traders debate the need for the government to do more. If other banks experience deposit runs, the government may need to explicitly guarantee all uninsured deposits in the banking system, some said, according to Chandler.
In 2008, the FDIC did just that as part of its Temporary Account Guarantee Program, a measure that remained in effect until 2012.
The administration’s approach has not appeased all lawmakers.
In the days leading up to his intervention, the U.S. government received an offer to buy struggling Silicon Valley Bank, according to Sen. Bill Hagerty (R-Tenn.), a member of the House Banking Committee who said he had learned of the matter during an FDIC Briefing on Monday afternoon.
Hagerty said he did not know the bidder. But he said ‘obviously they turned down the offer hoping to get something better later’.
The FDIC declined to comment on the situation.
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The Wall Street Journal, citing people familiar with the matter, reported on Monday that regulators plan to make a second attempt to find a buyer for SVB.
Other lawmakers separately said they had lobbied the government in recent days for information about the auction, though regulators have remained tight-lipped.
“What we should have seen was a properly managed auction process. Instead, what they did was hijack the systemic risk exception,” Hagerty said, noting that the burden could fall on local banks, which in some cases are taxpayers, and may owe more fees.
While officials reiterated that the financial system remained solid, some banking sector veterans were reasonably confident that it would weather the storm.
“Things are going to be bumpy for a few days,” said Bert Ely, a banking consultant. “Then – assuming there are no further disturbances – things will calm down.”
Lisa Bonos and Rachel Lerman contributed to this report.