Shares of several regional banks plunged on Monday morning, raising fears that the fallout from Silicon Valley Bank’s failure is far from over.
SVB’s Friday collapse, which was followed by the failure of cryptocurrency lender Signature Bank over the weekend, is rattling other smaller regional banks while major firms appear to be doing alright for the time being. The federal government has stepped in to assure deposits at the two failed institutions will be able to receive all of their funds above the Federal Deposit Insurance Corporation’s $250,000 cap, calming the markets some.
Nevertheless, stocks for certain regional banks were plummeting on Monday morning after markets opened, raising fears of a spreading contagion in the banking system.
Shares of San Francisco-based First Republic Bank plunged by more than 73% after opening. Western Alliance Bancorp was down by some 65%. PacWest Bancorp was off by 36%, and Zions Bancorp was down by more than 20%. KeyCorp shed about a quarter of its value since markets opened.
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First Republic announced on Sunday, ahead of markets opening, that it has about $70 billion in unused liquidity and that the company has "diversified its financial position through access to additional liquidity from the Federal Reserve Bank and JPMorgan Chase & Co."
“First Republic’s capital and liquidity positions are very strong, and its capital remains well above the regulatory threshold for well-capitalized banks,” bank founder Jim Herbert and CEO Mike Roffler said. “As we have done since 1985, we operate with an emphasis on safety and stability at all times, while maintaining a well-diversified deposit base. First Republic continues to fund loans, process transactions and fully serve the needs of clients by delivering exceptional service.”
While some smaller regional banks were getting crushed on Monday, the big banks were treading water.
Wells Fargo fell by more than 4%, Citigroup fell 4.9%, Bank of America was down more than 2.5%, Goldman Sachs was off by 1.2%, and shares of JPMorgan fell by less than 1%.
Meanwhile, stocks of Charles Schwab were down about 8.7% on Monday. That firm emphasized in a statement that the vast majority of the bank’s deposits are already insured by the FDIC.
“Collectively, more than 80% of client cash held at Schwab Bank is insured dollar-for-dollar by the FDIC. According to S&P Global Market Intelligence, that percentage is among the highest of the top 100 U.S. banks. As a comparison, the banks in the news the last few days have between 2% and 20% of their deposits insured,” said Co-Chairmen Charles Schwab and Walt Bettinger.
The situation in the banking sector is also affecting expectations for how the Fed will act to drive down inflation and is raising the odds of a recession.
A week ago, a big number of investors were betting that the central bank would conduct a half-percentage-point increase at its semiannual meeting next week. Now some are expecting the Fed to pause its rate increases completely for fear of further damaging the economy.
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Before SVB’s collapse, investors were pegging the odds of a 0.5-point hike at the Fed's meeting this month at about 31%, according to CME Group’s FedWatch tool, which calculates the probability using futures contract prices for rates in the short-term market targeted by the Fed.
By Monday morning, investors saw no possibility of such a large rate hike and a 25% chance of no rate hike at all.