Plunge in regional bank stocks triggers spate of trading halts

https://www.bloomberg.com/news/live-blog/2023-03-12/svb-fallout-spreads

by cyclecount • 3 years ago

89 92 3 years ago

cs7022• 3 years ago

Everyone now knows that SVB's depositors will be bailed out by the federal government, but SVB's shareholders will not. Given that SVB's losses exceed its equity capital, it's likely that SVB shareholders will get... nothing. By implication, the common stock of all other banks in a similar situation are also worth... nothing.

nevir• 3 years ago

...and if they demonstrate less risky behavior, their stock should (hopefully) become valuable again.

nostromo• 3 years ago

SVB definitely mismanaged risk.

But I don’t think people realize that no bank could have 25% (and counting) of deposits withdrawn in a day and survive.

If they had still been allowing withdrawals on Friday that number would be much much higher.

partiallypro2• 3 years ago

Most community banks aren't in a similar situation though. This is mostly caused by panic, not reality. If people didn't panic about SVB eating a loss, even it wouldn't have likely failed. Now people are not using logic and causing panic across the board. Mostly caused by VC tech bros going around stirring up things in a hope to get a bailout. That's why the Fed/Treasury/FDIC stepped in this morning to hopefully instill confidence.

newsclues• 3 years ago

"Most community banks aren't in a similar situation though. This is mostly caused by panic, not reality." Nothing prevents panic from overriding reality at other banks.

mellosouls• 3 years ago

This is mostly caused by panic, not reality. If people didn't panic about SVB eating a loss, even it wouldn't have likely failed

That's not "reality" though. The phenomenon of people "panicking" (ie acting sensibly when their savings are at risk and getting them out while they still can) is a fundamental part of the crisis-process of any bank when it is badly managed.

Saying "well if people just ignored history and group psychology and hope nothing bad will happen and risk all their savings by doing nothing, then nothing bad will happen" just isn't remotely realistic.

JumpCrisscross• 3 years ago

people didn't panic about SVB eating a loss, even it wouldn't have likely failed

Silvergate, SVB and Signature were insolvent. This wasn't a fire sale prompting a decline in their asset values, i.e. classic illiquidity. It was their assets being worth less than their liabilities. If it were purely a liquidity issue, they could have borrowed at the Fed's discount window. (As First Republic appears to be doing.)

danielvf• 3 years ago

SVB was literally insolvent though. Not only that, but they couldn't put together a rescue stock sale - it fell through. This was not a bank run caused by panic, but a run caused by an already failed, insolvent institution.

jastanton• 3 years ago

I'm not very financially literate. How does SVB shareholders getting nothing translate to shareholders of all other banks being in the same situation?

cs7022• 3 years ago

You misread my comment: I mean all other banks that happen to be (i.e., put themselves) in the same situation.

nickvanw• 3 years ago

SVB shares are worth $0 because there was a run on the bank and the US Government did not step in to save the bank, only the depositors.

If the same thing happens to other banks - everyone withdraws, they shut down and the government steps in - the assumption is that their equity will eventually be worth $0 too. So, everyone sells at >$0.

It's not going to be all banks, though.

spywaregorilla• 3 years ago

Why would there be a run on other banks if depositors are confident they'll be protected though?

tempsy2• 3 years ago

a “run” can simply be a wake up call to wealthy people with hundreds of thousands or millions in some 0% earning checking account to funnel that money into a money market or t-bills earning 4-5%.

that would alone create some outflow even if the reason is not panic

vsareto• 3 years ago

Baseless speculation, but I wouldn't be surprised if some withdrawals are just moving money around to spread risk. High confidence, but high withdrawals?

postalrat2• 3 years ago

Whats the upside for the risk, no matter how small?

vkou2• 3 years ago

There doesn't need to be a run, a bank will be closed by FDIC if it is insolvent.

And in SVB's case, a very small amount of withdrawals was enough to trigger insolvency. (As it forced the bank to sell, and thereby mark-to-market it's long-term treasuries.)

notch898a2• 3 years ago

FDIC only has a reserve ratio of under 2%.

downrightmike• 3 years ago

Why wait for something to get given back when you can take it back right now? Dealing with insurance is always a bitch, especially if they have to pay. They'll drag it out years.

maxerickson• 3 years ago

Seems like there won't be that many banks with such large average account sizes (which is probably one component of being in a similar situation). First Republic touts their large average account sizes though.

sanderjd2• 3 years ago

But one of the new facilities announced yesterday is designed to keep that from happening to the other banks... If they have this liquidity problem due to long-term bonds, they can now turn those into cash for a year without paying interest.

monero-xmr• 3 years ago

Only need 5 banks now. All the benefits of a regional bank (“local knowledge”) can be replicated digitally. Clearly there is no loyalty on the customer side, as VCs told their portfolio companies to exit SVB immediately. Just have JPM, BoA, and pick your favorite other 3 and let’s nationalize this already. Government wants an iron grip on access to financial rails anyway so we can speed this along.

malchow• 3 years ago

You are being downvoted but there are really people who think like this.

Regional banks do not have a substantive underlying issue and do not deserve to die by a rotating regional bank panic.

toomuchtodo• 3 years ago

Credit unions will survive. Let banking regulators deal with the fallout of not permitting narrow banks.

“No narrow banks so we can encourage fractional reserve lending, but be responsible!” “Okay, fine, we’ll cover everything.” “Systemic risk!” “Narrow bank now pls?” “No! Fractional reserve lending responsibly!”

NikolaNovak2• 3 years ago

I'm in Canada, originally from Europe; and to simplify, I never really "understood" regional banks. I was an exchange student in Minnesota and banked with... "Bank of Fairmont". Tiny city of 11k people, and it had its own bank. Seemed horribly inefficient and weird; and then when you left your home town you were in a load of headache. Of course that was 25 years ago, but still, when I hear there are 4,000 banks in USA (not branches; separate independent banks), I cannot help but ask... why?? Until recently, USA seemed way way way behind on convenience and efficiency; and the "fintech innovations" that are happening now seem built on ridiculously sketchy framework.

Understood that small regional banks exist and it'd be senseless and disruptive to kill them off now, but if we take them as a historical artifact that we must live with, what actual advantages, in clean-sheet model, do they have, that would counter-act the poster's main point?

misssocrates• 3 years ago

If they are nationalized, wouldn't it be 1 bank with different logos?

wunderland• 3 years ago

What is the counter argument to this? If banks cannot actually fail, and can profit wildly regardless of their performance and risk aversion, aren’t they already nationalized in the worst of times? Seems only fair that the taxpayers also share the gains in the best of times.

zamnos• 3 years ago

SVB failed. If you held any shares of SIVB on Thursday, they are now worth, literally, $0.

adabyron• 3 years ago

I thought this same thing. Then Covid happened & I was trying to get a PPP loan from my bank. Nope, nothing.

A nice smaller bank not only took me out for drinks but also got my PPP loan approved in a very short period of time.

That service was significantly better than all the combined service of the larger bank over the prior years.

Something, something trade-offs.... Always trade-offs.

xapata• 3 years ago

(“local knowledge”) can be replicated digitally

I think that's one of those "citation needed" assertions. At least some explanation.

dukeofdoom• 3 years ago

What are the implications in two weeks?

xyst• 3 years ago

I see two paths:

1) dead cat bounce in bank sector (recovery)

2) continued bank failures at public regional banks and power continues to consolidate at the "too big to fail" banks

samizdis• 3 years ago

A dead cat bounce isn't a recovery, it's a bounce before the fall continues. {Edited wording for clarity.]

See https://en.wikipedia.org/wiki/Dead_cat_bounce

Analemma_• 3 years ago

Savvier investors not prone to uninformed panicking pick up a bunch of bank stocks on the cheap. Nobody else was making the dumb interest rate bets that SVB was.

tqi• 3 years ago

I hope that is the case.

I think the counter case is investors putting themselves into the shoes of a CFO at a company with >250k in cash. Why would they choose to park it at a regional bank rather than one of the big banks? Sure, FDIC made depositors whole this time, but does it have enough to continue doing that? If not, is there enough political will to push a taxpayer funded bailout through (especially this close to an election year)? And even then, how long would that take?*

*This excludes banks that are primarily dealing in consumer deposits, who I assume will be fine.

NotAnEconomis234• 3 years ago

Go for it. How do you know if this is the bottom? It's catching a falling knife.

DoingIsLearning• 3 years ago

Is there any parallelism between SVB's fall and Lehman's in 2008, in terms of contagion effects?

I am sure that there are many people in my position holding a bunch of index funds trying to figure out if this is the beginning of something bigger or just a mouse fart that will be absorbed by whoever is SVB's creditor in the near future.

MilnerRoute• 3 years ago

This was just added to the top of Bloomberg's article:

Some potentially soothing comments here from Brad McMillan, chief investment officer at Commonwealth Financial Network.

"This situation is something to keep an eye on, but it is not the start of the next financial crisis. Unlike in 2008, the government has stepped in early and stepped in hard. While we can certainly expect market turbulence — and we are seeing it this morning — the systemic effects will be limited. We are not set for a rerun of the Great Financial Crisis. This is not the end of the world."

Right this second, the S&P 500 is actually up by a very small amount.

cced• 3 years ago

This is not the end of the world.

Someone hasn't been following @Jason's Tweet fest this weekend.

Grimburger• 3 years ago

Right this second, the S&P 500 is actually up by a very small amount.

Sounds familiar: https://imgur.com/a/LA5TePE

Also ignores the OP headline, stocks can't go down if they are in a trading halt.

somenameforme• 3 years ago

The cost of doing something and being wrong is minimal.

The cost of doing nothing and being wrong is high.

jerf• 3 years ago

Sadly, that's not true. There's a menu of options right now and they all have steep costs and large potential benefits. There is no simple, easy, correct answer they can simply choose without any risk. That door closed a long time ago.

(If you want to predict which of the things they will do, I would suggest paying attention to who bears the costs and who gets the benefits. The various choices differ most in that area. This is not entirely determinative, but it's been a pretty good guide for most of my lifetime.)

trts• 3 years ago

If other big or small banks were also holding long-term, illiquid assets that have rapidly declined in value along with the increase in Fed rate increases, then they have the same problem.

SBV bought 10-year term mortgage backed securities to earn yield on their cash holdings. When the risk-free interest rate started to exceed the yield on these assets, the MBS value declined. As a result SBV became insolvent.

Either it was an isolated, stupid move by a big bank who expected that interest rates would not rise, or they didn't care because of moral hazard.

chatmasta• 3 years ago

You can see some comparative data in this thread [0] (the author is also worth a follow). It looks like SVB was mostly an outlier but there are a few other banks with possibly similar issues.

My understanding is that the FED also announced they will loan money to banks that need to cover a shortfall due to haircuts to bond values caused by rate hikes, but that's just according to a tweet [1] from Thomas Massie an hour ago. I don't know the details of that arrangement.

[0] https://twitter.com/GRDecter/status/1634208659407351812

[1] https://twitter.com/RepThomasMassie/status/16353162211084492...

sanderjd2• 3 years ago

They had the same problem, until last night. Now they can use those long-duration bonds to get a free loan from the Fed for a year.

dragonwriter2• 3 years ago

If other big or small banks were also holding long-term, illiquid assets that have rapidly declined in value along with the increase in Fed rate increases, then they have the same problem.

Except the Fed announced a liquidity loan program for banks in such situations based on the par value of the assets, which prevents them from having to firsale them at reduced value, take the markdown, and risk insolvency.

kortilla2• 3 years ago

The collapse of Lehman wasn’t contagious. Everyone already had the same disease. The situations aren’t similar because everyone was fucked before Legman’s collapse.

SVB wouldn’t have collapsed if people didn’t lose faith and start withdrawing. Lehman collapsed without withdrawals.

NotAnEconomis234• 3 years ago

What the Fed isn't doing is assure the greater market that the fundamentals of why the banks failed will be fixed. The Fed screwed up by raising interest rates too quickly. Don't just assuring depositors that their money is safe, assure everyone that the money in their 401ks (which invest in banks) is also safe. Publicly come out and pause interest rates. Admit that there is a strong possibility of lowering interest rates in the short to medium term future. There are massive ripple effects of moving cash, and retirement accounts. The Fed MUST get off their high horse, admit they made mistakes, and be transparent about getting help from industry experts. Without eating humble pie, the Fed will capsize the economy.

mwerd2• 3 years ago

Let's hope not, that would be a disaster. Inflation is far more pernicious than regional bank instability. The fed is acting appropriately in response to a spendthrift Congress, and in the process, stressing the system. There's not a good alternative, especially from the Fed's seat. I'm not trying to make it a political argument, but you're really pointing the finger in the wrong direction. The fed has two mandates when it comes to monetary policy - price and employment stability. That price stability is about market wide inflation, not bank stocks. Banks come and go. If you expect the Fed to prioritize something other than those two mandates, I do believe you're kidding yourself. Rate hikes will continue until the labor market or the inflation data indicate they should stop.

postalrat2• 3 years ago

Are you predicting the feds will continue to raise rates in the next couple months?

albatross13• 3 years ago

https://fred.stlouisfed.org/series/M2SL

Lol.

NotAnEconomis234• 3 years ago

Employment is a lagging indicator. Waiting until bank failures cause employment to crater is too little, too late.

I agree that many of the bank stocks are probably over valued. They're not going to rebound quickly.

The Fed can't control inflation. They can try to influence demand of goods and services by controlling interest rates, QE, etc. They cannot make up for the commodities supply deficiencies cause my Russia/Ukraine conflict. (Reduced supply of grains, oil, metals, etc.) Reduced supply also increases inflation.

We just had a run on the deposits of several banks. Next is a run on the stocks for the banks. (Financial institutions make up 7% of GDP) There are many institutions and retail investors who just received a message from Yellen and Powell that their investments are not safe. Even the big banks are falling. Migrating deposits to large banks will not stop the run on financial equities. It is already having a cascading effect on the broader market.

denton-scratch• 3 years ago

The Fed screwed up by raising interest rates too quickly.

Surely the screw-up was reducing interest to 0% in the first place?

Once you do that, going back to any positive interest rate is an increase of infinity%.

NotAnEconomis234• 3 years ago

Agreed. Transitory inflation, lol.

ck2• 3 years ago

$42 BILLION withdrawn in 10 hours.

Imagine if that happened at multiple banks.

We really need to re-visit "too big to fail".

Plunge in regional bank stocks triggers spate of trading halts

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