Regional bank stocks plunge as regulators (and big banks) rush to limit contagion

Banking’s no good, very bad week… Global bank stocks were on a roller coaster last week after the collapse of Silicon Valley Bank, which serviced about half of America’s venture-backed tech companies. A high-level recap of the second-largest bank failure in US history: when interest rates were ultralow, SVB invested most of its deposits into US Treasury bonds with long durations (think: 10+ years) to earn slightly higher interest. But when interest rates soared, the value of SVB’s old bonds plunged by $15B and its tight-knit VC customers all tried to pull their money out at once (spoiler: it couldn’t meet their requests).

Not-so-balanced sheets… Swiftly rising interest rates have led to two main problems for banks that failed to properly factor in this risk: (1) the value of their assets (think: bonds, loans, investments) fell as rates rose, and (2) customers withdrew more idle cash from their accounts in favor of higher-interest investments. After SVB’s fall, regional banks’ financial stability has come under scrutiny as traders and depositors look to identify banks with similar balance-sheet risks. Think: a high rate of uninsured deposits (accounts over the FDIC-insured $250K) and bonds with a long time to maturity. First Republic had the third-highest rate of uninsured deposits among US banks, after SVB and Signature Bank. Now it’s in the spotlight.

• Initially: After the collapse of SVB and Signature, regulators announced an emergency backstop to ensure that depositors at both banks had access to all their funds. But…
• Monday: First Republic stock sank a record 60%+, even after assuring depositors that it had $70B in liquidity thanks to backing from JPMorgan and the Fed.
• Thursday: 11 big banks pledged to inject $30B into First Republic, boosting the stock. But by Friday the rebound lost steam, with First Republic shares falling another 33%.
• Meanwhile: Credit Suisse secured a $54B lifeline from the Swiss National Bank, and on Sunday UBS agreed to buy its struggling rival for $3.2B.

Panic can be a self-fulfilling prophecy… which is why governments are taking extraordinary measures to contain the damage. Treasury Secretary Janet Yellen said the US banking system “remains sound,” and President Biden pledged to do “whatever needed” to ensure America's banking-system confidence. Last week 68% of US consumers said they still had a fair amount of confidence in banks. Still, Yellen said that the government would not refund uninsured deposits for every single bank that fails (only those that would pose a systemic risk if they failed). Most Americans don’t have over $250K in individual bank accounts anyway, but many companies do.