Wall Street rattled by wave of trading halts as record falls for regional lenders

The turmoil engulfing bank stocks deepened on Monday as investors rushed to reduce exposure to the industry, triggering a cascade of trading halts as many lenders suffered record declines.

Regional banks were among the hardest hit with the KBW Regional Banking Index falling 12%, the worst intraday plunge since March 2020. The rapid sell-off comes even as the Treasury Department, Federal Reserve and Federal Deposit Insurance corp. introducing a new backstop for banks large enough to protect the entire country’s deposits.

“Most banks are solvent under normal circumstances. The problem is, almost no bank can withstand a full bank run,” said Steve Sosnick, chief strategist at Interactive Brokers LLC. “The FDIC’s action removed the idea of ​​a deposit bank run, but what we saw was an investor bank run,” he added.

  • First Republic Bank It sank 79% for a record decline, which caused many pauses for the sequence
  • Western Alliance The Bancorp lost 85%, the biggest decline ever
  • PacWest Bancorp fell 60%, hitting a record low
  • Among other regional banks that sank more than 20% on Monday and triggered the shutdown: Customers Bancorp Inc., Comerica Inc., Zions Bancorporation, East West Bancorp and Bank of Hawaii

Many large US banks are also down, with Bank of America Corp., Citigroup Inc. and Wells Fargo & Co. all fell 3% or more on Monday.

Equity investors have so far found no reason to stay to see if the customer exodus that has put some banks in the region under existential pressure will ease. Two-year Treasury yields fell as demand for safe haven assets surged.

“There is a search for the next victim and the possibility of a recession is set to increase in the coming weeks,” said Alberto Tocchio, a portfolio manager at Kairos Partners.

The relaxation was particularly brutal as investors flocked to the banks on the claim that they would benefit from aggressive tightening by the Federal Reserve that sent interest rates up to 4.5% from zero in less than a year. But while higher rates are often thought to boost interest income, the issue is complicated by 2023 in a strongly inverted yield curve which lowers the yield on longer-dated assets compared to short-term liabilities.

While inflows for many bank ETFs have come with a delay, there are signs that investors have started shedding assets in the past week. The $1.7 billion Invesco KBW Bank ETF (ticker KBWB) posted an outflow of $245 million in the latest data, its biggest exit in a year.

Retaining deposits is difficult when money market rates are as much as 50% higher than interest paid on savings accounts. And if deposits flee, banks may be forced to book what was lost only in mortgage bond paper and Treasury assets they were forced to sell.

“The market is likely to remain cautious despite regulators stepping in,” said Marija Veitmane, senior multi-asset strategist at State Street Global Markets. “It’s a tough position the Fed is in, on the one hand it has to keep hiking to arrest inflation, but it also has to protect the financial system. It feels like a lose-lose situation for the Fed and the market.

The buckling shares highlight that even after emergency measures by US regulators, including the recent backstop for banks, investors remain on edge as more attacks are possible. Overall, government actions bolstered markets, although overnight gains faltered as investors poured into fixed income investments. The latest crisis threatens the strong rally seen in US and European shares since October.

“After the liability-driven investment fund crisis in autumn 2022, we see that this is another period in which parts of the financial system were hit by the unwinding of the accommodative policy of the central bank,” said. Deutsche Bank analyst Benjamin Goy.

As U.S. regulators introduced a new backstop for banks that Federal Reserve officials say is enough to protect the nation’s deposits, the surprise announcement that New York’s Signature Bank closed reminding investors that further turmoil, at least among regional banks, is still possible. A senior US Treasury official said that some institutions have issues similar to the one that failed Silicon Valley Bank.

“We’re seeing a withdrawal of liquidity, the classic thing you would expect after a credit event like what happened at SVB,” said Haig Bathgate of Atomos Investments. “People get scared, reduce exposure to equities and move to government bonds. They wonder if anyone is in this position because these things don’t happen alone.”

Government intervention has been able to avoid deposit losses, but deposit migration to large banks may continue to put pressure on some lenders, Wells Fargo strategists including Christopher Harvey said in a note. Harvey said he was not buying the risk today and saw Tuesday’s CPI print as a wild card.

US stocks fell at the end of last week when Silicon Valley Bank suddenly collapsed in the biggest incident since the global financial crisis. The Fed’s aggressive tightening campaign has driven up interest rates, leaving some banks holding long-term bonds that have fallen in value at the same time as their financing costs have soared. Play Video

“I don’t think the system as a whole is inherently financially unstable, certainly the systemic risk is considered low,” Susannah Streeter, Hargreaves Lansdown, head of money and markets, said in an interview with Bloomberg TV. “But what I think you’re seeing is that this risk averse nature is trickling in and changing concerns about higher interest rates being raised for a long time and the effects of that .”

–With help from Joe Easton and Maxwell Zeff.

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