Shares of regional banks posted big gains on Tuesday as they regained their footing after huge losses in the previous session, but volatility continued in the sector following the demise of Silicon Valley Bank, Signature Bank and Silvergate Capital in the past week.
While the rise in some cases is eye-popping, most stocks have yet to recover fully from losses in the past few days. Most stocks are trading well below their levels from a week ago, even with Tuesday’s gains.
The advances grew slimmer as the session progressed, but many bank stocks ended with gains of 10%-plus.
Among exchange-traded funds in the financial sector, the KBW Nasdaq Bank Index BKX, +3.19% ended the day with a rise of 3.2% as it fell back from a 5.3% rise earlier in the session. The SPDR S&P Regional Banking ETF KRE, +2.09% and the Financial Select Sector SPDR ETF XLF, +2.02% each rose about 2%.
Some positive developments may have also encouraged buying.
The Ken Griffin-controlled hedge fund Citadel Advisors LLC disclosed that it has acquired a 5.3% stake in Western Alliance Bancorp WAL, +14.36%, according to a 13G filing with the Securities and Exchange Commission.
Citadel said it now owns 5.78 million Western Alliance shares, up from 1.31 million as of the end of 2022.
Western Alliance’s stock rose by 14.4%, after its 47% loss from the previous session.
Also Read: What went wrong at SVB? Ex-FDIC chair and other banking experts break it down.
While the failure of Signature Bank, Silicon Valley Bank and Silvergate have upended the financial sector in the past week, the 2023 banking crisis appears to be causing less of a shock than past blowups, a longtime banking executive said.
The U.S. government quickly rolled out the new Bank Term Funding Program to shore up unsecured deposits as Signature Bank collapsed over the weekend just days after Silicon Valley Bank, a unit of SVB Financial SIVB, , shut down after a rush of withdrawals.
In the post Dodd-Frank world of greater regulation and higher capital requirements, bank failures remain relatively fresh in people’s memory and come as less of a shock nowadays, observers said.
Also read: Silicon Valley Bank collapse under investigation by Justice Department and SEC: report
Bill Isaac, who chaired the Federal Deposit Insurance Corp. from 1981 to 1985 and served as chair of Fifth Third Bancorp FITB, 0.53% from 2010 to 2014, said Silicon Valley Bank kept a risky loan portfolio by focusing on startups.
“There was a concentration of risk in the same types of loans,” Isaac told MarketWatch. “They weren’t funded like other banks — they were funded by larger uninsured deposits. When hot money gets nervous, it runs.”
Isaac said the failure of Silicon Valley Bank mirrored the demise of Continental Illinois — which was the largest bank failure in the U.S. since the Great Depression when it happend in 1984 — because both banks held a concentration of high-risk deposits.
“We’re more used to this kind of thing compared to Continental Illinois, and we know we can handle it,” Isaac said.
Professor Jill E. Fisch at the University of Pennsylvania Carey Law School said bank runs are not unfamiliar to markets, but uncertainty remains over whether the three failures in the past week will continue to roil the banking system.
“These failures were caused by a combination of asset holdings and the economic environment,” Fisch said.
Social media most likely played a role in accelerating runs on the three banks by depositors, she said, noting that weakness in bank stocks on Monday amounted to a “typical strong market reaction” as bad news reverberated on social media.
However, it remains to be seen if the fears kindled by investors are borne out, she said.
“We will always see bank failures, but it’s too early to say if the system is broken,” Fisch said. “We won’t know for a while.”
Also read: First Republic and Western Alliance pace big rebound in regional-bank stocks after huge losses
An executive at a publicly traded bank who did not want to be named said the steep losses by bank stocks in recent sessions were “dramatically too severe” but that stocks won’t recover until a market bottom is established.
The selloff came even though many lenders have a much more diverse customer base and loan portfolio than the doomed banks, with ample consumer deposits, which are considered much safer than the deposits from startups held by Silicon Valley Bank.
“The super-regional banks have more traditional models, with a much more granular deposit base,” the executive said. “People are taking a cold look at banks’ book value per share.”
The big selloff on Monday reflected efforts by investors to revalue the assets held by banks, such as long-dated securities, the executive said. Silicon Valley Bank ran into problems when it was forced to sell long-dated securities at a loss and needed to raise cash to cover withdrawals from its clients.
While the federal government’s new bank backstop effort, the Bank Term Funding Program, will protect uninsured deposits if another bank fails, it’s widely seen as a last resort for banks, the executive said.
Any bank that uses the program may face questions about its overall financial health that could potentially affect its reputation, the executive said. It also remains to be seen how the market will value government-backed debt to cover deposit withdrawals.
Investors will no doubt keep a close watch on first-quarter bank results to check the status of spot deposits in the past week, as well as total deposits and funding flows, the executive said.
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Konstantin Shulga, CEO and co-founder of financial technology startup Finery Markets, said in a statement that businesses should consider diversifying their banking and payment relationships, especially if they’re involved in digital-asset markets.
Blake Harris, managing partner of Blake Harris Law, said in a statement he expects to see “a wave of litigation throughout the banking industry and there’s no clear end in sight for who will be held accountable — from bank officers to investors, customers and more.”
Daniela Hathorn, a senior market analyst at Capital.com, said the bank failure may give the Federal Reserve a reason to shift its monetary policy away from hiking interest rates.
“The fragility of the banking system and the fact that interest rates have affected lenders in the U.S. economy have really come to bear with the collapse of SVB and Signature Bank,” Hathorn said in a statement. “This may be the turning point for the central bank to start reversing or moderating monetary policy.”
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Meanwhile, moves by the federal government to backstop uninsured bank deposits seemed to finally sink in.
KBW analysts said banks with larger holdings of uninsured despots were a target in the selloff.
Uncertainties persist in the sector around fears of uninsured deposits, increased bank regulations and the effectiveness of the new backstop program by the Fed for banks, KBW said Tuesday.
“Investors are becoming more cautious about the banking sector’s earnings/profitability outlook on the other side of [Monday’s] stress, which could have negative implications for valuation,” KBW said.
Also read: What went wrong at SVB? Ex-FDIC chair and other banking experts break it down.
Meanwhile, Moody’s Investors Service on Tuesday downgraded the U.S. banking system to negative from stable. The rating agency said the move reflects “the rapid deterioration in the operating environment” following deposit runs and failures of Silicon Valley Bank, Signature Bank and Silvergate Bank.
Moody’s also put put six regional banks under review for a potential downgrade, although the rating agency gave credit to First Republic Bank’s “official sector borrowing capacity” and its strong franchise in private banking and private wealth management for high-net-worth individuals.
First Republic Bank FRC, +26.98% closed trading with a gain of 27.8% after losing nearly 62% of its value on Monday. The stock is still trading at less than half its roughly $ 114 value a week ago.
PacWest Bancorp PACW, +33.85% rose about 34% after retreating by 21% in regular trades on Monday.
Comerica Inc. CMA, +3.99% rose by 4% after a 28% retreat on Monday.
Customers Bancorp Inc. CUBI, +3.79% CUBI, +3.79% rose 3.8% after dropping 24% in the previous session.
Metropolitan Bank Holding Corp. MCB, +38.98% jumped by 39% after a nearly 44% drop on Monday.
KeyCorp. KEY, +6.94% rose 6.9% after dropping by 27%, while PNC Financial Services Group Inc. PNC, +0.36% rose 0.4% after losing 5.2% in the previous session. Citizens Financial Group Inc. CFG, +4.08% rose by 4.1% after dropping 11% on Monday. Regions Financial Corp. RF, +0.58% rose by 0.6%. East West Bancorp EWBC, +10.73% rose 10.7%.
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