The unexpected seizure of two banks in three days by regulators fueled fears of a broader financial crisis and sent the stocks of more than two dozen banks into free fall on Monday, despite President Biden’s reassurances to Americans that the banking system is resilient and that the customers money was safe.
Banks of various sizes in different parts of the country — from San Francisco-based First Republic Bank to Salt Lake City-based Zions Bank — battled market turmoil as customers rushed to withdraw their deposits and investors exited the bank amid fears of further runs Shares.
In a brief televised White House statement just before US markets opened up, Mr Biden said the administration had reacted decisively to the collapse of Silicon Valley Bank and Signature Bank to protect depositors without rewarding risk-takers executives and investors .
“Americans can rest assured that our banking system is safe — your deposits are safe,” the president said. “Let me also assure you that we will not stop there; we will do what is necessary.”
Biden’s comments didn’t seem to immediately reassure investors as stocks of banks large and small closed the day lower and the KBW Banking Index, a proxy for the industry, slipped nearly 12 percent. On a day when the S&P 500 index was flat, shares in First Republic fell 60 percent and Western Alliance 45 percent.
Despite echoes of the 2008 financial crisis, when 465 banks collapsed over four years, sometimes dozens in a month, regulators and bank officials were quick to insist that the current panic was far more contained and that the banks, whose shares had shrunk, had ample funds ordered to meet their obligations.
Last week, Silvergate, a cryptocurrency-focused bank, said it was closing; Between Friday and Sunday, the government impounded Silicon Valley Bank and Signature Bank.
On Monday, the Federal Reserve announced it would conduct a review of Silicon Valley Bank’s oversight. The Federal Reserve Bank of San Francisco was responsible for overseeing the failed bank. Former Silicon Valley Bank boss Gregory Becker sat on its board until Friday.
“The events surrounding the Silicon Valley bank warrant a thorough, transparent and expeditious review by the Federal Reserve,” said Jerome H. Powell, chairman of the Federal Reserve, in a press release.
Regulators decided to close Signature Bank after it “failed to provide reliable data and created a lack of confidence in the bank’s leadership,” said Adrienne A. Harris, New York State’s superintendent of financial services.
The Sinking of the Silicon Valley Bank
One of the most prominent lenders in the world of tech startups collapsed on March 10, forcing the US government to step in.
“Everybody’s breathing heavily today, and maybe I miss it, but I think everything should settle down,” Lloyd Blankfein, who was Goldman Sachs’ chief executive officer during the 2008 financial crisis, said in an interview.
It was hard to tell if shareholders were reacting to actual weaknesses they discovered in these companies’ financials or the possibility that they would meet the same fate as Silicon Valley and Signature. There was also no apparent reason why companies as large as Charles Schwab with around $350 billion in deposits and as small as Western Alliance with $62 billion in deposits were targeted. Silicon Valley Bank had about $175 billion in deposits prior to last week, and Signature had less than $100 billion prior to its closure.
“Schwab has grown a lot, and the question is, did they make the same mistakes as SVB?” asked Robert Siegel, an associate professor at Stanford Business School.
Schwab released a statement Monday saying it was “well positioned to navigate the current environment” and calling itself “a safe haven in the storm.”
First Republic, the country’s 14th-largest bank, expected a bloodbath on Monday and said a day earlier it would hoist $70 billion if necessary from sources including the Federal Reserve and JPMorgan Chase, the country’s largest bank by assets could. Shares were still down nearly three-fifths of their value Monday — at one point touching $30, a low not seen since late 2010.
PacWest Bancorp, a Los Angeles bank that lends to small and medium-sized businesses, also tried to allay concerns about its stability, stressing Monday that it can access funds through a mix of cash, readily available securities and a loan $14 billion from the Federal Home Loan Bank of San Francisco and access to the Federal Reserve’s discount window, a lending program that provides quick liquidity.
The bank said Monday in a regulatory filing that its customers had withdrawn about $700 million in deposits late last week, leaving PacWest with $33.2 billion in deposits and $41 billion in assets US dollars remained. PacWest shares plunged nearly 60 percent before rebounding to end the day at $9.75, down 21 percent from Friday’s close.
“Investors in bank stocks don’t like uncertainty, and there’s a lot of that right now,” said Jason Goldberg, an analyst at Barclays. “You have to worry that the lack of confidence in stock markets will translate into a lack of confidence in depositors.”
Although a bank’s stock price isn’t directly correlated to the strength of its balance sheet, Mr. Goldberg said investors and depositors often use market performance as an indicator of financial health. So, a loss of depositor confidence could lead to a rush of withdrawals that could bring a bank to its knees.
“Hopefully all Regionals get through the day, helped by this new Fed facility,” Mr. Goldberg said, referring to the central bank’s contingency program that offers banks cheap one-year loans against collateral, “and cooler heads tomorrow.”
Regional banks — and even some banks with a national presence — lack the prominence of banking goliaths like JPMorgan Chase and Bank of America. Still, they play an important role in supporting local businesses across the country, such as law firms, real estate developers, veterinary services, retail stores, and restaurants. Many banks also offer wealth management and private banking services, and serve as the primary bank for individual savers.
Zions, a Salt Lake City bank whose shares plummeted Monday, was a big lender when the Small Business Administration launched its 2020 Paycheck Protection Program to help local businesses struggling to survive during the pandemic.
On Monday afternoon, Zions executives held a private briefing for analysts to address concerns that they could be the next to fall. According to a bank executive who was not authorized to speak publicly, the bank declined its request to provide a formal update on whether depositors withdrew their money.
Smaller banks are particularly vulnerable to financial panics, including those institutions that focus on specific customer groups. The collapse of Silicon Valley Bank on Friday, followed by the federal government’s shutdown of Signature Bank on Sunday, made this clear.
Silicon Valley catered primarily to the tech start-up community, and Signature Bank was a major lender to New York’s legal and real estate industries. Even if their troubles didn’t pose widespread systemic risk, the two banks were so central to those industries that bank runs would be extremely destabilizing, said Tyler Gellasch, president of the Healthy Markets Association, an advocate of greater transparency in financial markets.
“If Signature took place in a vacuum, we probably won’t see this official action,” said Mr. Gellasch. “On every coast we have bank failures that are exclusively concentrated in very wealthy and very connected industries.”
It didn’t help that Signature Bank was also making a big play for cryptocurrency deposits — an area many big banks have been reluctant to enter or have been prevented from doing so by strict regulations. When the crypto bubble burst, customer deposits plummeted in value by billions, putting Signature on dangerous ground.
At various banks, depositors – particularly those with business accounts larger than $250,000 – also feared they would lose much of their money as the Federal Deposit Insurance Corporation insures deposits up to $250,000. On Sunday, the FDIC said all Silicon Valley Bank and Signature Bank customers with deposits over $250,000 would be recovered.
Jamie Dupree, a San Francisco attorney with seven-figure accounts at First Republic, said she spent hours conferring with her banker there on how to proceed. Though reluctant to contribute to the panic, Ms Dupree felt she had no choice but to wire some of her money to a larger institution.
“I personally didn’t want to be part of a run, but I didn’t want to be economically vulnerable either,” said Ms Dupree, who moved some of her money.
Mid-sized banks like First Republic and PacWest sit between a handful of big-name banks with assets of $1 trillion or more and tiny community banks that serve businesses and customers in the neighborhood. They play a crucial role in providing growth credit to companies of a certain size.
When Will York, the owner of Thunder Road Guitars PDX in Portland, Oregon, wanted to buy a building for his growing guitar business, his sales representative referred him to local lenders rather than Wells Fargo, where he had been a customer for decades. Bigger banks had little interest in the $1.1 million loan he needed – puny by their standards but enormous by his.
“PacWest’s person came in and talked to me like I wasn’t an idiot,” said Mr. York, 36. Better yet, the bank put together a funding package that was a combination of its own money and one from the Small Business Administration secured government loans to cover the full cost of the 3,200-square-foot building that Mr. York closed in late 2021.
“Owning a building was a goal of mine even before I opened my shop,” he said. “I absolutely couldn’t have done it without PacWest.”
Matthew Goldstein, Peter Baker, and Joe Rennison contributed to this report.