Bank Fallout; Fed Raises Rates, Signals Pause

Bank Fallout

Regional bank shares rallied on Friday after the banking crisis reignited this week, sending shares sharply lower. The contagion spread to regional lenders PacWest Bancorp and First Horizon after regulators brokered a deal for JPMorgan Chase to take over First Republic on Monday.

PacWest shares have dropped about 75% this year, and fell further this week after a report on Wednesday said the lender was considering a sale. The Los Angeles-based bank distanced itself from First Republic in a statement on Thursday that said it had not experienced any unusual deposit outflows.

First Horizon shares declined about 33% on Thursday after its $13.4 billion merger with TD Bank Group was called off because of regulatory uncertainty, according to a joint press release. The breakup comes at a precarious time for regional banks. The KBW Bank Index has fallen about 26% this year. The Federal Reserve’s rapid tightening, mismanaged interest rate risks, and fast-moving uninsured deposits have triggered three of the four largest bank failures in U.S. history.

Van’s View

``Why are more mainstream regional bank stocks coming under such strong selling pressure? The answer is because markets are preying on the uncertainty on three fronts, (1) uncertainty as to how regulators are addressing vulnerable banks and funding issues, and (2) the threat introduced by your smartphone, in the form of the ability to move massive amounts of deposits with a few keystrokes and (3) the ability for stories, real or unsubstantiated, to go viral.’’

From KBRA’s Chief Strategist, Van Hesser, in his latest episode of 3 Things in Credit podcast. Read Van’s latest research report: "Regional Banks: Where Is the Firebreak?"

Jobs Report

The labor market posted another strong monthly gain, adding 253,000 jobs in April with the unemployment rate little changed at 3.4%, the Labor Department said Friday. The better-than-estimated results follow a downward revision for both February and March jobs by 149,000. The labor market continues to be resilient amid the Fed’s aggressive rate increases.

Fed Raises Rates, Signals Pause

The Fed raised interest rates another quarter percentage point on Wednesday to curb persistent inflation while signaling it may pause further hikes. In its release, the Fed omitted language used in its March statement that additional increases might be appropriate. The Fed shrugged off the recent bank failures to increase its benchmark to a range of 5%-5.25%.

FDIC Recommends Insurance Expansion for Payroll Accounts in Review

The FDIC proposed expanding deposit insurance to certain accounts such as payroll and other business payments, the regulator said in a May 1 report.

The FDIC said that raising insurance levels for specific account types, such as business payment accounts, provides the best financial stability relative to the costs. The proposed options require Congressional approval.

FDIC Chairman Martin Gruenberg directed the agency to review the current rules to identify potential reforms to prevent bank runs, following the March failures of Silicon Valley Bank and Signature Bank. The report highlighted that in 2021 the proportion of uninsured deposits―accounts above $250,000―reached its highest level since 1949. Uninsured depositor runs triggered the bank failures in March, according to the FDIC report.

Federal Reserve on Silicon Valley Bank Failure

The Fed faulted Silicon Valley’s management, the bank’s board of directors, and its own Fed supervisors for failing to prevent the bank’s collapse, the third largest in U.S. history.

The bank’s senior leadership "failed to manage basic interest rate and liquidity risk," while the Fed’s own supervisors "did not fully appreciate the extent of the vulnerabilities as Silicon Valley Bank grew in size and complexity," the Fed said in a April 28 report into the causes of the lender’s collapse.

SVB had 31 open supervisory findings at the time of its failure, including interest rate risk management issues, which is about triple the number observed at peer banks, according to the Fed report.

Michael Barr, the Fed’s Vice Chair for supervision, outlined potential regulatory changes such as requiring certain lenders to recognize unrealized losses on available-for-sale securities and strengthening liquidity rules to better reflect the risks tied to uninsured deposits.