March 20, 2023

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The state of the stock market amid the banking crisis

Stocks fell on Friday, suggesting that investors have little confidence that the banking crisis has run its course despite moves to shore up ailing lenders with tens of billions of dollars in injections.

Several bank stocks have resumed their stunning decline, erasing Thursday’s gains that provided a brief moment of calm during a turbulent week. First Republic, the beleaguered regional lender, lost a third of its already plummeting value on Friday alone. The S&P 500 stock index fell about 1.1 percent – the worst trading day of the week.

President Biden asked Congress on Friday to give financial regulators sweeping new powers to punish CEOs of failed lenders. The day before, data showed that banks in the United States borrowed record amounts from the Federal Reserve this week to meet short-term needs, another sign of acute stresses in the financial system.

The crisis began last week when customers of a Silicon Valley bank began asking for deposits because they were worried about losses the lender was taking on some investments. The run for deposits was too much, and the regulators took over the SVB.

Shares of a second bank, Signature in New York, fell days later, providing the backdrop for a week of volatile trading that undermined confidence in the banking sector and raised concerns about the effects on the economy.

“Sentiment remains weak, and the investor position remains conservative,” said Mark Hackett, head of investment research at insurance company Nationwide. However, investors should be aware that this is not a repeat of the financial crisis. It is disruptive to the industry and painful to a select group of banks and institutions, but the comparison to the financial crisis is premature.”

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However, investors are beginning to worry about the long-term effects of the financial turmoil, analysts said. Even if smaller banks remain solvent, a downturn in lending activity, if it comes as the economy comes under stress, could have broader effects, making cash less available to businesses when they need it most. It also means less new business for the banks themselves, after a period in which some large deposits were lost.

“The solvency concerns haven’t completely gone away,” said Michael Wong, an analyst at Morningstar. “But even if you resolve the bank run concerns, if a bank loses a significant amount of its deposits and they don’t come back, that bank has basically lost a significant amount of its earning potential.”

First Republic shares fell more than 30 percent on Friday. Other regional banks were also under pressure, with PacWest and Western Alliance both down between 15 and 20 percent. Credit Suisse, the Swiss bank that received a multibillion-dollar bailout on Thursday, also lost ground in European trade.

The KBW Bank Index, which tracks the performance of 24 US banks, fell more than 5 percent and lost more than 20 percent of its value this year, against slight gains in the broader market during that period.

On Thursday, First Republic, whose share price has collapsed this month, announced a $30 billion rescue package funded by the largest banks in the United States. The bank also suspended dividend payments and said it would take measures to reduce its debt.

JPMorgan Chase, Bank of America, Citigroup and Wells Fargo have agreed to place $5 billion in uninsured deposits with First Republic. Wall Street mainstays Goldman Sachs and Morgan Stanley each contributed $2.5 billion each, and five regional banks added $1 billion each.

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Banks, who are usually fierce competitors, issued a joint deal statement Explaining their move: “The major American banks stand united with all banks in support of our economy and everyone around us.”

Deputy Treasury Secretary Wali Ademo said on CNBC on Friday that US officials see deposit levels stable at small and medium-sized banks, and in some cases rising modestly.

“It was really down to the way we dissolved the two failed institutions,” he said, referring to the government takeover of Silicon Valley Bank, an obscure lender to the tech world, and small Signature Bank.

But analysts at UBS wrote on Friday that investors are likely to see bailing out the First Republic as a short-term solution and that banking stocks “will not stabilize until the market feels as if there is a long-term solution” to the First Republic’s problems. (Deposits granted to First Republic from other banks are uninsured and have an initial term of 120 days.)

Mr. Biden’s plea for the legislation would expand the regulator powers held by the Federal Deposit Insurance Corporation, which has controlled Silicon Valley Bank and Signature. The proposal would allow the agency to recover compensation from failed bank executives, as well as bar them from taking other jobs in the financial industry.

Other signs of anxiety persisted. Data released by the Federal Reserve on Thursday showed that banks Standard amounts borrowed of emergency funds from the central bank in recent days, taking advantage of both existing facilities and a new liquidity support program that was announced after the takeover of Silicon Valley Bank and Signature.

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“This has given me more conviction in my negative outlook, but I don’t think the world is collapsing,” said Seema Shah, chief global investment analyst at Principal Global Investors.

Shah added that the events of the past week may have advanced the timeline in which the economy slips into recession. “The concern is what else will be discovered? What else is out there?” She said.

Contribute to the preparation of reports Alan RapportAnd Keith BradshareAnd Rob Copeland And Lauren Hirsch.