The unexpected seizure of two banks in three days by regulators intensified fears of a broader financial crisis, sending the stocks of more than two dozen banks into free fall on Monday, even as President Biden reassured Americans that the banking system was resilient and that 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 — found themselves battling market turmoil as customers rushed to withdraw their deposits and investors, worried about more runs, dumped bank stocks.
In a brief televised statement from the White House shortly before the U.S. markets opened, Mr. Biden said that the government was responding decisively to the collapse of Silicon Valley Bank and Signature Bank in ways that would protect depositors without rewarding risk-taking 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 we will not stop at this; we’ll do whatever is needed.”
Mr. Biden’s comments didn’t immediately appear to assuage investors, as shares of banks large and small closed the day in the red, with the KBW Bank Index, a proxy for the industry, down nearly 12 percent. On a day when the S&P 500 stock index ended up flat, shares of First Republic tumbled 60 percent and Western Alliance slumped 45 percent.
Despite the echoes of the 2008 financial crisis, when 465 banks failed within four years, sometimes dozens in a month, regulators and banking officials were quick to insist that the current panic is far more contained, and that the banks whose stocks tanked had enough funds to meet their obligations.
Last week, Silvergate, a cryptocurrency focused bank, said it would shut down; between Friday and Sunday, the government seized Silicon Valley Bank and Signature Bank.
On Monday, the Federal Reserve announced that it would conduct a review of Silicon Valley Bank’s oversight. The Federal Reserve Bank of San Francisco, on whose board the former chief executive of Silicon Valley Bank, Gregory Becker sat until Friday, was responsible for supervising the failed bank.
“The events surrounding Silicon Valley Bank demand a thorough, transparent and swift review by the Federal Reserve,” Jerome H. Powell, chairman of the Federal Reserve, said in a release.
Regulators decided to shut down 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 Downfall of Silicon Valley Bank
One of the most prominent lenders in the world of technology start-ups collapsed on March 10, forcing the U.S. government to step in.
“Everyone is breathing hard today, and maybe I’m missing it, but I think everything should settle down,” Lloyd Blankfein, who was the chief executive of Goldman Sachs during the 2008 financial crisis, said in an interview.
It was hard to tell whether shareholders were reacting to actual vulnerabilities they spotted in the financials of those companies, or to the possibility that they would meet the same fate as Silicon Valley and Signature. Neither was there an obvious reason for why companies as large as Charles Schwab, with roughly $350 billion in deposits, and as small as Western Alliance, with $62 billion in deposits, got caught in the cross hairs. Silicon Valley Bank had roughly $175 billion in deposits before last week, and Signature had under $100 billion before it was shut down.
“Schwab has gotten a lot bigger, and the question is: Did they make the same mistakes SVB did?” asked Robert Siegel, a business school lecturer at Stanford.
Schwab released a statement Monday saying it was “well positioned to navigate the current environment,” and called itself “a safe port in a storm.”
Anticipating a blood bath on Monday, First Republic, the nation’s 14th largest bank, said a day earlier that it could grab $70 billion if needed from sources including the Federal Reserve and JPMorgan Chase, the nation’s largest bank by assets. Its shares still lost nearly three-fifths of their value on Monday — at one point touching $30, a low they had not touched since the end of 2010.
PacWest Bancorp, a Los Angeles bank that lends to small and medium-sized businesses, also sought to quell concerns about its stability, emphasizing on Monday that it had access to $14 billion in funds through a mix of cash, easily sellable securities, a credit line from the Federal Home Loan Bank of San Francisco and access to the Federal Reserve’s discount window, a borrowing program that provides fast liquidity.
The bank said in a regulatory filing on Monday that its customers had withdrawn some $700 million in deposits as of late last week, leaving PacWest with $33.2 billion in deposits and $41 billion in assets. Shares of PacWest plunged nearly 60 percent before recovering to end the day at $9.75, down 21 percent from Friday’s closing.
“Bank stock investors don’t like uncertainty, and there’s a lot of that right now,” said Jason Goldberg, an analyst at Barclays. “You have to be concerned that the lack of stock market confidence leads to a lack of depositor confidence.”
Even if a bank’s stock price is not directly correlated to the strength of its balance sheet, Mr. Goldberg said, investors and depositors often end up using market performance as an indicator of financial health. So a loss of depositor confidence could mean a rush of withdrawals, which could drag down a bank.
“Hopefully, all the regionals get through the day, aided by this new Fed facility,” Mr. Goldberg said, referring to the central bank’s emergency program offering banks favorable one-year loans in return for collateral, “and tomorrow, cooler heads prevail.”
Regional banks — and even some banks with a national presence — lack the name recognition of banking Goliaths like JPMorgan Chase and Bank of America. Yet, they play a vital role in supporting local businesses nationwide, like law firms, real estate developers, veterinarians’ offices, retail shops and restaurants. Many banks also provide wealth management and private banking services, and they serve as the primary bank for individual savers.
Zions, a Salt Lake City bank whose stock plummeted on Monday, was a large loan provider when the Small Business Administration started its Paycheck Protection Program in 2020 to help local businesses struggling to survive during the pandemic.
On Monday afternoon, executives of Zions held a private briefing for analysts to assuage concerns that they could be the next to fall. The bank turned down their requests to provide a formal update on whether depositors were pulling their cash, according to a bank executive who was not authorized to speak publicly.
Smaller banks are especially vulnerable to financial panic, including those institutions that focus on certain groups of customers. The collapse of Silicon Valley Bank on Friday, followed by the federal government’s closure of Signature Bank on Sunday, highlighted that.
Silicon Valley catered mainly to the technology start-up community, and Signature Bank was a big lender to New York’s legal and real estate industries. So even if their troubles didn’t pose a widespread systemic risk, the two banks were central enough to those industries that bank runs would be extremely destabilizing, said Tyler Gellasch, president of Healthy Markets Association, an advocate for greater transparency in financial markets.
“If Signature happened in a vacuum, we probably don’t see this regulatory action,” Mr. Gellasch said. “On each coast, we have bank failures that are uniquely focused on very wealthy and very connected industries.”
It didn’t help that Signature Bank also made a big play for cryptocurrency deposits — an area that many big banks were wary of entering, or prevented from doing so by stringent regulation. When the crypto bubble burst, the value of billions of dollars of customer deposits fell, leaving Signature on perilous ground.
At various banks, depositors — especially those with business accounts that hold more than $250,000 — were also concerned that they would lose much of their money because the Federal Deposit Insurance Corporation insures deposits of up to $250,000. On Sunday, the F.D.I.C. said that all customers of Silicon Valley Bank and Signature Bank with deposits above $250,000 would be made whole.
Jamie Dupree, a San Francisco lawyer with accounts in the seven-figure range at First Republic, said she spent hours consulting with her banker there about how to proceed. Though Ms. Dupree was loath to contribute to panic, she felt she had no choice but to transfer some of her money to a larger institution.
“Personally, I did not want to be part of a run, but I also didn’t want to be economically vulnerable,” said Ms. Dupree, who moved part of her money.
Midsize banks like First Republic and PacWest sit between the handful of household-name banks with assets of $1 trillion or more, and tiny community banks that serve neighborhood businesses and customers. They play a crucial role in supplying businesses of a certain size with loans to grow.
When Will York, the owner of Thunder Road Guitars PDX in Portland, Ore., wanted to buy a building for his growing guitar shop, his sales agent steered him toward regional 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.
“The person from PacWest came in and spoke to me like I wasn’t an idiot,” Mr. York, 36, said. Even better, the bank put together a financing package, using a combination of its own money and a government loan backed by the Small Business Administration, to cover the entire cost of the 3,200-square-foot building Mr. York closed on in late 2021.
“Owning a building has been a goal of mine since even before I opened my store,” he said. “I absolutely could not have done it without PacWest.”
Matthew Goldstein Peter Baker and Joe Rennison contributed to this report.
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