Regional banks criticized amid fears of broader financial crisis (2023)

The unexpected seizure of two banks in three days by regulators fueled fears of a broader financial crisis and sent shares of more than two dozen banks tumbling on Monday, despite President Biden's assurances to Americans that the banking system is resilient and the banks' money is safe customers 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 abandoned banks. amid fears of new bullfights in Comparte.

In a brief televised statement by the White House just before the US markets opened, Biden said the administration had responded decisively to the collapse of Silicon Valley Bank and Signature Bank to protect depositors without rewarding executives and investors who They took risks. .

"Americans can be sure that our banking system is safe, their deposits are safe," the president said. “Let me also assure you that we will not stop there; We will do whatever it takes."

Biden's comments did not appear to immediately reassure investors, as shares of banks large and small ended the day lower and the KBW Bank Index, an industry gauge, fell nearly 12%. On a day when the S&P 500 stock index ended unchanged, First Republic shares fell 60% and Western Alliance shares fell 45%.

Despite the echoes of the 2008 financial crisis, when 465 banks collapsed in four years, sometimes dozens in a month, regulators and bank officials were quick to insist that the current panic was much more contained and that banks whose shares plummeted had insufficient funds to meet. obligations

Last week, Silvergate, a cryptocurrency-focused bank, said it was closing 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 prudential review of Silicon Valley Bank. The Federal Reserve Bank of San Francisco, on whose board former Silicon Valley Bank CEO Gregory Becker remained on the board until Friday, was responsible for overseeing the failing bank.

"Events involving the Bank of Silicon Valley require a thorough, transparent and prompt review by the Federal Reserve," Federal Reserve Chairman Jerome H. Powell said in a statement.

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 superintendent of financial services.

"Everyone is breathing hard today, and maybe I miss it, but I think everything should calm down," Lloyd Blankfein, who was chief executive of Goldman Sachs during the 2008 financial crisis, said in an interview.

It was hard to tell if shareholders were reacting to the real vulnerabilities they were finding in the finances of these companies, or to the possibility that they would meet the same fate as Silicon Valley and Signature. Nor was there any obvious reason why companies as large as Charles Schwab, with some $350 billion in deposits, and as small as Western Alliance, with $62 billion in deposits, should be targeted. Silicon Valley Bank had about $175 billion in deposits before last week, and Signature had less than $100 billion before it closed.

"Schwab has grown a lot, and the question is, did they make the same mistakes as SVB?" asked Robert Siegel, a professor at Stanford Business School.

Schwab issued a statement Monday saying it was "well positioned to navigate the current environment" and called itself "a safe haven in a storm."

PacWest Bancorp, a Los Angeles bank that makes loans to small and medium-sized businesses, also tried to allay concerns about its stability, stressing Monday that it has access to funds through a mix of cash, readily available securities and a line bank of $14 billion. credit from the Federal Home Loan Bank of San Francisco and access to the Federal Reserve Discount Window, a loan program that provides quick liquidity.

The bank said in a regulatory filing Monday that its clients withdrew about $700 million in deposits at the end of last week, leaving PacWest with $33.2 billion in deposits and $41 billion in assets. PacWest shares fell nearly 60 percent before recovering to end the day at $9.75, down 21 percent from Friday's close.

"Investors in bank shares don't like uncertainty, and there's a lot of it right now," said Jason Goldberg, an analyst at Barclays. "They should be concerned that a lack of confidence in the stock market will lead to a lack of confidence among depositors."

While a bank's share price isn't directly related to the strength of its balance sheet, Goldberg says, investors and depositors often use market performance as an indicator of financial health. Therefore, a loss of depositor confidence can mean a wave of withdrawals that can drag a bank into the abyss.

"We expect all the regional banks to get through the day, helped by this new Fed setup," Goldberg said, referring to her.the central bank emergency programTo offer banks cheap one-year loans with collateral, "a cool head will prevail tomorrow."

Regional banks, and even some banks with a national presence, lack the prominence of banking giants like JPMorgan Chase and Bank of America. However, they play an important role in supporting local businesses across the country, such as law firms, real estate developers, veterinary offices, retail stores, and restaurants. Many banks also offer private banking and wealth management services, serving as the primary bank for individual savers.

Zions, a Salt Lake City bank whose shares plunged Monday, was a key lender as the Small Business Administration launched its 2020 Paycheck Protection Program to help local businesses struggling to survive during the pandemic. .

Smaller banks are particularly vulnerable to financial panics, including institutions that target specific customer groups. The collapse of Silicon Valley Bank on Friday, followed by the closure of Signature Bank by the federal government on Sunday, made that clear.

Silicon Valley primarily catered to the tech startup community, and Signature Bank was a major lender to New York's real estate and legal industries. Even if their problems did not pose widespread systemic risk, the two banks were central enough to sectors whose bank management would be extremely destabilizing, said Tyler Gellasch, president of the Healthy Markets Association, an advocate of greater transparency in financial markets.

"If Signature happened in a vacuum, we probably won't see that regulatory action," Gellasch said. "On all coasts we have bank failures that are exclusively concentrated in very wealthy sectors, very connected."

It didn't help that Signature Bank was also making a big bet on cryptocurrency deposits, an area many big banks feared or were prevented from doing by strict regulations. When the crypto bubble burst, the value of client deposits plummeted into the billions, leaving Signature on dangerous ground.

At several banks, depositors, particularly those with business accounts worth more than $250,000, also feared losing too much of their money, since the Federal Deposit Insurance Corporation guarantees deposits of up to $250,000. On Sunday, the F.D.I.C. He said all Silicon Valley Bank and Signature Bank customers with deposits of more than $250,000 would be repossessed.

Jamie Dupree, a San Francisco lawyer with seven-figure accounts in the First Republic, said she spent hours consulting with her banker about how to proceed. Although Dupree was reluctant to contribute to the panic, she felt that she had no choice but to transfer some of her money to a larger institution.

"Personally, I didn't want to be part of a race, but I also didn't want to be financially vulnerable," said Dupree, who moved some of his money.

When Will York, 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 instead of Wells Fargo, where he had been a customer for decades. The larger banks had little interest in the $1.1 million loan he needed, paltry by his standards but huge by his.

"The person from PacWest came up and talked to me like I wasn't an idiot," York, 36, said. Better yet, the bank put together a financing package that was a combination of its own money and a federal loan guaranteed by Small Business Administration used to cover the full cost of the 3,200-square-foot building that Mr. York closed in late 2021. .

"Owning a building was my goal even before I opened my store," he said. "I absolutely couldn't have done it without PacWest."

Matthew Goldstein, Peter Baker, and Joe Rennison contributed to this report.