by The day began with President Biden trying to calm fears of a banking crisis at the White House before leaving Washington to swing in California.
“Americans can be confident that the banking system is safe. Your deposits are there when you need them,” the President said in a morning speech from the Roosevelt Room.
In Silicon Valley, relieved customers lined up in front of SVB branches to withdraw money they feared would be lost. Depositors at the bank’s Menlo Park location said they waited up to two hours to receive their money in cashier’s checks. The only evidence of the failed bank’s new owners was a press release from the Federal Deposit Insurance Corp. taped to the door.
On Wall Street, banking stocks have been ravaged, with regional institutions being hit the hardest. First Republic Bank, another mid-tier bank, fell nearly 80 percent before ending the day down 62 percent. The plunge came despite news that the bank had bolstered its balance sheet with a capital injection from JPMorgan Chase.
Even some of the country’s largest and best-protected banks have been shunned. Citigroup shares lost more than 7 percent while Wells Fargo lost 6 percent. Broader equity markets were flat.
“Payroll is done in Silicon Valley. There are no massive drains that we can see. I think that means it’s been somewhat successful,” said Lawrence Summers, a former Treasury Secretary. “But the financial system was in shock and although the emergency physicians did a good job, the patient is not fully recovered.”
Although the market reaction has been remarkable, falling stock prices pose no immediate threat to banks. As long as depositor payouts remain at usual levels, healthy banks can continue to operate even if their stock prices fluctuate, said Karen Petrou, managing partner of Federal Financial Analytics , a consulting firm in Washington. A bank’s health is determined by the amount of capital they hold in reserve to absorb losses and the adequacy of their available assets to cover depositor withdrawals.
“Banks don’t live or die based on stock price,” she said.
Nonetheless, the emergence of cracks in the country’s regional banks has caused an extraordinary reversal in financial conditions that has prompted a rapid shift in investor expectations regarding the Fed’s rate action.
Less than a week ago, Fed Chair Jerome H. Powell told Congress that interest rates may need to rise higher than the central bank had expected to bring inflation under control. Wall Street analysts expected the Fed to hike rates by as much as half a percentage point at its next meeting on March 22, and warned that the Fed’s benchmark interest rate could rise by up to 4.5 percent from its current target 6 percent to 4.75 percent.
Now 40 percent of investors expect the Fed to leave rates untouched and start cutting by midsummer, according to CME tool FedWatch, based on futures prices.
The government is expected to release the next 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 it expects the Fed to halt its year-long campaign of rate hikes. “Fed officials are likely to prioritize financial stability for now, viewing it as an immediate concern and high inflation as a medium-term concern,” the firm’s economists said in a research note.
The rush to buy government bonds also showed that investors were increasingly skeptical that the Fed would be able to raise rates further. Investors bought so many two-year government bonds that yields fell below 4 percent on Monday from more than 5 percent last Wednesday — the sharpest three-day drop since the 1987 market crash.
The authorities’ notable intervention on Sunday to protect the banking system followed days of growing concerns that problems at SVB, the bank of choice for tech entrepreneurs and venture capitalists, were spreading to other institutions.
Federal officials decided that the collapse of SVB and a second troubled lender, Signature Bank of New York, posed a “systemic risk” to the economy’s financial assets, closed both banks, guaranteed their deposits beyond the legal limit of $250,000, and fired them their management teams.
At the same time, the Fed instituted a new lending program that allows any other bank to obtain unlimited credit by pledging assets such as government bonds as collateral. The effort is designed to address issues many banks have faced as a result of the Fed’s rate hikes and their own investment decisions.
Unlike its normal bank lending, the Fed extends loans for up to a year and values the pledged securities at their original value rather than their low market price.
Banks had $620 billion in unrealized losses late last year on such securities, whose values eroded as the Fed hiked interest rates.
The intention of the authorities was to dispel any doubts about the safety of depositors’ funds. But several regional banks, including California’s Pacific Western Bank and Utah’s Zions Bank, remain the focus of scrutiny and speculation. Investors fear some banks could share SVB’s reliance on a narrow depositor base and assets that have depreciated over the past year as interest rates have risen.
First Republic said Sunday it had more than $70 billion in cash following its recent infusion from JPMorgan. In a joint statement, the bank’s chairman, Jim Herbert, and chief executive, Mike Roffler, said, “First Republic’s capital and liquidity position is very strong, and its capital remains well above the regulatory threshold for well-capitalized banks.”
In January, the company reported strong financial results, with earnings of $1.7 billion on sales of $5.9 billion.
On Capitol Hill, the government’s action won the support of the Republican chairman of the House Financial Services Committee. The Fed and FDIC “have taken the right approach and used their powers appropriately,” Rep. Patrick T. McHenry (RN.C.) said in an interview. “I think we have a financial system that’s ready for that, and I hope that action by the FDIC and the Fed will calm this current storm.”
On Monday, the plan also received qualifying endorsement from S&P Global Ratings, which called the Fed’s initiative “robust” and said it should “reduce the likelihood of uncontrollable deposit outflows becoming widespread.”
However, the rating agency warned that it remained unclear how depositors would react.
“The court is still out,” said Marc Chandler, chief market strategist at Bannockburn Global Forex in New York. “I don’t know if it stops the run.”
In Wall Street computer chat rooms, traders debate the need for government to do more. If more banks suffer deposit runs, Chandler says the government may have to specifically guarantee all uninsured deposits in the banking system, some said.
In 2008, the FDIC did just that under its Temporary Account Guarantee program, a measure that remained in effect through 2012.
The government’s approach did not reassure all lawmakers.
In the days leading up to its intervention, the U.S. government received an offer to buy the embattled Silicon Valley bank, according to Senator Bill Hagerty (R-Tenn.), a member of the chamber’s banking committee, who said he was on one of the issues learn FDIC briefing on Monday afternoon.
Hagerty said he did not know the bidder. But he said that “they obviously turned down the offer, hoping to get something better later.”
The FDIC declined to comment on the situation.
The Wall Street Journal reported Monday, citing people familiar with the matter, that regulators are planning a second attempt to find a buyer for SVB.
Other lawmakers said separately they have been asking the government for information about the auction in recent days, although regulators have remained silent.
“What we should have seen is a properly conducted auction process. Instead, they hijacked 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.
As officials reiterated that the financial system remained healthy, some banking industry veterans were reasonably confident of weathering the storm.
“It gets bumpy for a few days,” says Bert Ely, bank advisor. “Then – assuming there are no new disturbances – the situation will calm down.”
Lisa Bonos and Rachel Lerman contributed to this report.
