Wall Street Braces for the Next Silicon Valley Bank - WSJ

Shares of regional banks tumble amid concern that SVB’s collapse is only the beginning

March 12, 2023 5:31 am ET

Investors were worried that the fastest interest-rate increases in decades meant that something in the economy might break.

Last week, it did. Now, investors are asking: What else might crack? 

On Friday, Silicon Valley Bank was shut down after getting hit by a run on its deposits, the second-largest bank failure in U.S. history. The fallout...

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Investors were worried that the fastest interest-rate increases in decades meant that something in the economy might break.

Last week, it did. Now, investors are asking: What else might crack? 

On Friday, Silicon Valley Bank was shut down after getting hit by a run on its deposits, the second-largest bank failure in U.S. history. The fallout has jolted Wall Street, heightening fears that a year of rapidly tightening financial conditions is finally hitting home for the financial sector and beyond.

The bank collapse, the largest since the 2008 financial crisis, helped send the S&P 500 down 3.3% over the final two trading days of the week. Traders began to speculate about what other fast-growing banks might be hurt and whether the troubles might encourage the Federal Reserve to pause, or even halt, its yearlong effort to slow inflation by raising interest rates.

“I think this could be the first cockroach in the cellar,” said Fredric Russell, chief executive of Fredric E. Russell Investment Management Co. in Tulsa, Okla. “Banks get thrown into the dark pool of complacency, and then they lower their quality standards.”

On Thursday, clients pulled $42 billion in deposits from Silicon Valley Bank, according to the California Department of Financial Protection and Innovation, leading to a negative cash balance of $958 million. On Wednesday, a public filing from the company had shown $169 billion in deposits and roughly $180 billion of available liquidity to stem potential outflows.

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Banks, especially the largest, are much better capitalized than they were heading into the 2008 financial crisis. Still, some investors worry that the problems now slamming a few regional banks could affect the whole industry.

Adding to the stress, a major cryptocurrency declined sharply over the weekend following the disclosure that its operator, Circle Internet Financial Ltd., had $3.3 billion tied up in Silicon Valley Bank.

USD Coin fell below 87 cents on Saturday morning, according to data from CoinDesk. The virtual currency, known as a stablecoin, is designed to trade at $1. Its decline echoes a crucial point in the 2008 financial crisis when a money-market fund widely treated as cash-equivalent “broke the buck” in the wake of the failure of Lehman Brothers.

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The Federal Deposit Insurance Corp. insures depositors with up to $250,000 in cash at a bank. Depositors with more than that at Silicon Valley Bank will get receivership certificates for their uninsured balances, the FDIC said, meaning they might not get all of their money out soon.

“The big question is whether the FDIC and Fed make the uninsured depositors whole—or at least close to whole,” said Bob Elliott, co-founder and chief investment officer of the asset manager Unlimited. “If the resolution of SVB Financial isn’t handled well, there’s a systemic risk that uninsured depositors will flee small banks.”

As of the end of last year, Silicon Valley Bank had an estimated $151 billion in uninsured deposits, according to the annual report of SVB Financial Group, its parent company. First Republic Bank , another major regional bank, had roughly $120 billion, and Signature Bank had around $80 billion of uninsured deposits.

Silicon Valley Bank’s failure hit not just its depositors and investors but also its customers. The businesses financed by Silicon Valley Bank for years now look riskier. Shares of the home-solar installer Sunrun Inc., for example, fell 12% on Friday. The streaming platform Roku Inc. said about $487 million of its $1.9 billion in cash was at SVB as of Friday. Roku said in a filing that it doesn’t know how much it will be able to recover.

The payroll company Rippling was unable to complete some payroll runs on Friday, its chief executive, Parker Conrad, said on Twitter. The company has shifted its business to

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JPMorgan Chase

There are major differences between the current stress in the banking sector and the financial crisis of more than a decade ago.

Silicon Valley Bank ran into trouble in part by investing heavily in government bonds and agency-backed mortgage securities, which have declined in value as the Fed has raised interest rates.

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Those bonds, however, are essentially guaranteed to be paid back in full at maturity, making them worlds apart from the complex credit instruments tied to riskier mortgages that helped fell financial institutions in the late 2000s.

Far from shunning Treasurys on Friday, investors flocked to them, betting that the problems in the banking sector could slow economic growth and eventually lead to lower interest rates. The yield on the 10-year U.S. Treasury note, which falls when the price rises, logged its third-largest single-day decline of the past decade, according to Tradeweb.

The Silicon Valley Bank crisis interrupted investors’ preoccupation with the Fed’s yearlong struggle to control surging inflation. Last week started with investors firmly focused on Fed rate increases and Fed Chair Jerome Powell’s testimony to Congress, which began Tuesday. Then, late Wednesday, the crypto-focused bank Silvergate Capital Corp. said it would voluntarily shut down, and Silicon Valley Bank said it needed to raise emergency cash.

Investors quickly grew concerned that other banks might be prone to similar, speedy downfalls. The KBW Nasdaq Bank Index fell 16% for the week, its worst performance since the onset of Covid-19 in March 2020.

In the tumult, the worst-hit banks have been those with overextended loan books tied to riskier assets such as real-estate mortgages, or sensitive customer bases prone to pulling out cash. Investors fear that the Fed’s tightening will continue to bruise the real-estate sector, while long-dated bond books suffer most from rate increases. 

Trading in several bank stocks, including First Republic, Signature, Western Alliance Bancorp and PacWest Bancorp , was briefly halted Friday.

Signature’s 23% loss on Friday was its worst day on record, and Signature and First Republic clocked their worst weeks on record, according to Dow Jones Market Data. Citizens Financial Group Inc., Comerica Inc., Fifth Third Bancorp , Zions Bancorp and Charles Schwab Corp. each shed more than 15% last week.

The Fed has been focused on controlling inflation, but the events of last week led officials to think about another of the central bank’s core mandates: financial stability. As of Thursday, weeks of hot economic data had suggested that the Fed might raise rates by 0.5 percentage point at its meeting later this month and continue to tighten policy until 2024. On Friday, traders revised wagers to bet on a lower peak for interest rates and a rate cut later this year.

Some investors were surprised by how quickly SVB swung from seeking additional funding on Wednesday to out-and-out failure by Friday.

“This kind of shocked me,” said Buzzy Geduld, chief executive of the hedge fund Cougar Capital. “I would have guessed they would have been able to raise the money that they apparently needed, but obviously, when they looked under the hood, it was a lot worse than anyone anticipated.”

Still, Mr. Geduld said the SVB fallout hasn’t considerably altered his view of the banking sector, because SVB’s difficulties sprang from its specific exposure to startups and venture capital.

“We still like the regional banks,” he said.

One rattling aspect of SVB’s collapse was that many analysts didn’t see it coming. Of 22 analysts covering the company, the average price target was around $262 a share, according to FactSet.

The stock closed Thursday at $106.04 before regulators took the reins Friday morning.

—Sam Goldfarb contributed to this article.

Write to Eric Wallerstein at eric.wallerstein@wsj.com, Matt Grossman at matt.grossman@wsj.com and Gregory Zuckerman at Gregory.Zuckerman@wsj.com

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