The Washington PostDemocracy Dies in Darkness

Fear dominates markets despite Wall Street rescue for First Republic

President Biden sought more authority to go after executives at failed banks, as Silicon Valley Bank’s parent company filed for Chapter 11 bankruptcy

A trader works at the post where First Republic Bank stock is traded on the floor of the New York Stock Exchange. (Brendan Mcdermid/Reuters)
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A week after Silicon Valley Bank failed, the stock market showed continuing fears Friday that the banking industry’s turmoil might not be settled even after massive interventions by governments and Wall Street institutions.

Major stock indexes slid Friday — and California’s troubled First Republic Bank declined sharply, falling by more than 30 percent despite a new $30 billion lifeline from big Wall Street firms. Shares in U.S. regional banks such as PacWest Bancorp and KeyCorp also fell by more than the markets overall did, while Switzerland’s troubled Credit Suisse continued to decline. Silicon Valley Bank’s parent company, meanwhile, filed for Chapter 11 bankruptcy on Friday.

But experts said the financial system did appear to be on firm ground, and the swinging stock prices might simply represent traders reacting to short-term news, not new signs of crisis. More volatility might lie ahead: The Federal Reserve will meet next week and will announce on Wednesday whether it’s raising interest rates again, as officials try to balance their struggle to control inflation against the stresses rapid rate hikes are placing on banks.

President Biden again endorsed the overall banking system’s stability on Friday, but also called for accountability “for those responsible for this mess.” He stressed again that Americans should feel confident that their deposits are safe. The White House said it’s asking Congress to strengthen the Federal Deposit Insurance Corporation’s ability to claw back compensation — including gains from sales of stock — from executives at failed banks, to fine those executives and to ban them from working in the industry.

“No one is above the law,” Biden said in a statement. “Congress must act to impose tougher penalties for senior bank executives whose mismanagement contributed to their institutions failing.”

The bipartisan leadership of the House Financial Services Committee announced Friday evening that the panel would hold the first of “multiple” hearings on SVB’s failure.

The banking sector has undergone a solid week of whiplash.

The tumult began with a bank run on SVB last Friday, followed by a federal intervention over the weekend to guarantee the bank’s deposits. Regulators also closed New York-based Signature Bank and moved to guarantee its deposits. Tensions then shifted to Europe, where Credit Suisse stock plummeted on Wednesday after the 167-year-old giant bank disclosed problems related to its financial reporting, prompting Switzerland’s central bank to offer up to $54 billion in emergency loans. That intervention, along with Thursday’s rescue effort for First Republic, appeared to calm some fears — but Friday trading shows that jitters remain.

Investors clearly don’t believe First Republic is out of danger. The bank’s decline on the New York Stock Exchange reversed a late Thursday rally after the nation’s biggest banks, in coordination with federal officials, announced they would deposit billions in First Republic in an effort to restore confidence. The slide came after the beleaguered bank disclosed additional information about its finances and suspended dividend payments to shareholders.

After Silicon Valley Bank collapse, Washington asks: Is it to blame?

Stock-price gyrations like those now roiling the banking sector are often driven by short-term traders and not sober analysis of the underlying company’s health, said Aaron Klein, a Brookings Institution economist and a former Treasury Department official who helped craft financial-sector reform after the 2008 crash.

“The broad American banking system is safe,” Klein said.

“The provisions put in place after the ’08 crisis made the system safer,” he added. “While public confidence has been shaken, people should appreciate that we have a more stable system and that this is not a repeat of 2008.”

Signs of stress coursing through the system were evident in data published Thursday showing a big spike in emergency bank borrowing from the Federal Reserve. Borrowing from the Fed’s discount window, known as the lender of last resort, reached $152.85 billion as of March 15, exceeding the previous record of $111 billion, according to Mark Zandi, chief economist of Moody’s Analytics.

The previous record came during the 2008 financial crisis that precipitated the Great Recession.

“In typical times, there is little to no borrowing from the discount window,” he said.

Banks tapped an additional $12 billion in loans from a separate Fed program announced this week.

First Republic made up a significant portion of that borrowing. On Thursday, the bank disclosed that its borrowing from the Fed from March 10 to March 15 varied from $20 billion to $109 billion. It said it had borrowed another $10 billion from the Federal Home Loan Bank — the lender of second-to-last resort — since March 9.

On Friday, bank analysts at Wedbush Securities downgraded the bank’s stock. A possible distressed sale of First Republic to a larger entity, as reported by Bloomberg, would probably benefit the banking system as a whole but could be a bad deal for First Republic shareholders, Wedbush argued.

Zandi, the Moody’s Analytics economist, said the banking stock sell-off indicates that investors — not depositors — are most vulnerable in the current environment. Federal pledges to backstop depositors leave them on solid ground, he said. If another bank fails, it’s the shareholders that “might get dinged,” he said. And investor certainty that banks will prove to be profitable investments in the coming months has dropped.

“There is just generally an ‘I don’t want to be invested in banks’ sentiment,” he said.

The new SVB bankruptcy proceedings involve only the bank’s parent company, SVB Financial Group. The bankruptcy does not include SVB Capital, a venture capital private credit entity, or SVB Securities, a broker-dealer under its own management. And, at present, Silicon Valley Bridge Bank, the bank created in the wake of the federal takeover, is operating independently and isn’t part of the proceedings.

“The Chapter 11 process will allow SVB Financial Group to preserve value as it evaluates strategic alternatives for its prized businesses and assets, especially SVB Capital and SVB Securities,” said William Kosturos, chief restructuring officer for SVB Financial Group.