In what could bring back the memories of the 2008 Lehman Brothers fall for the global stock markets, trading in a number of regional US banks was halted on Friday amid a massive sell-off. Some of the affected regional US banks are First Republic, Signature Bank, PacWest Bancorp and Western Alliance Bancorp.
Share price of First Republic declined nearly 50 percent, while PacWest Bancorp and Western Alliance Bancorp lost over 30 percent each. The stock price of Signature Bank fell about 25 percent. However, among the major banks, JPMorgan gained 1 per cent, while Citigroup and Morgan Stanley were down about 1.5 percent each. Bank of America and Wells Fargo were down nearly 2 per cent each.
The mayhem in the US’ regional banking sector has started at the beginning of the week.
Panic engulfed the markets on Tuesday when KeyCorp, which sells retail and commercial loans through subsidiaries, warned of elevated risks due to tightening US interest rates and lowered its full year guidance. This was followed by crypto focused bank Silvergate announcing liquidation due to the collapse of crypto exchange FTX in the US. The final straw that sent the global stock markets into a tailspin was the fall of Silicon Valley Bank (SVB). SVB’s share price crashed nearly 60 percent on Thursday.
Like Lehman in 2008, SVB announced a sudden fund raising after suffering a $1.8 billion loss on its bond portfolio post the liquidation of its entire securities portfolio.
In 2008, before the US Federal Reserve agreed to cut interest rates and launched its historic liquidity programme, Lehman Brothers on September 10, 2008 had to advance its trading statement amid growing fears that the investment bank would fail to raise much-needed capital to shore up its finances. SVB’s shares met with similar fate on Thursday.
Having seen Lehman shares fall by 45 percent on September 9, 2008, Wall Street was pushed into a state of high anxiety. Lehman got a double blow when the Korea Development Bank said that it had halted talks over taking a stake in the investment bank. The breakdown of the talks with the State-owned South Korean bank was a blow to Lehman’s options for raising fresh financing back then. In the case of SVB now, maverick investor and Tesla’s founder Elon Musk has expressed his interest to buy the bank.
Similar to SVB’s losses on bond portfolios, Lehman was facing billions of dollars in losses from ill-judged gambles on the mortgage market with the investment bank becoming a victim of the credit crunch. The bank had hoped to secure an investor ahead of its third-quarter results.
Stock market analysts say the crash in share prices of regional banks may force the Federal Reserve halt interest rate hikes.
“The failure of SVB is being used as an excuse to short several regional banks, but the underlying logic may be only the fear of liquidity for the bonds they hold. Not all banks have concentrated portfolios like SVB. The odds are that the FED will make some announcements to offer open liquidity support for highly rated bonds to avert a liquidity crisis and the panic could be over. The bigger risk is that the FEDs oversight may be questioned. The governor was warned in last week’s senate hearings that if its policies are likely to lead to big job losses then maybe we need a new governor. Will the banking crisis become the reason for a change in leadership at the FED?” said Rohit Srivastava, chief strategist at Indiacharts, which maps the global assets and all the US benchmarks.
The Federal Reserve’s high interest rate regime is considered a key catalyst for the fall of SVB, crypto, private equity and start-up ecosystem in the US. High interest rates have resulted in bank’s like SVB earn less on its US treasury and bond portfolio while paying higher on the deposits it held. Amid the likely impact of the problems in US banking sector on the country’s job market, the Fed Chief Jerome Powell was reprimanded last week in a US Senate briefing. It is likely that the US Fed would halt its interest rate hikes next week, analysts said.