ZThe biggest sell-off in the banking sector in almost three years came on Wall Street on Thursday. The trigger was concern for the health of a Californian bank that needed a billion-dollar capital increase to cushion losses. This fueled concerns that rising interest rates could erode banks’ balance sheets more broadly. The latest trouble spot is the Silicon Valley Bank (SVB), which specializes in start-up lending, and is now being forced to issue over $2.25 billion in new stock to offset write-downs on its portfolio of US Treasuries and mortgage securities.
The SVB share fell by 60 percent. Just this week, crypto bank Silvergate Capital closed its doors, also due to massive deposit outflows. The KBW bank index fell by 7.7 percent in trading on Thursday, the sharpest since June 2020. The stock prices of Wall Street giants Bank of America, Wells Fargo and JPMorgan Chase also fell by at least 5 percent. Worries about the US banking system also weighed on Asian stock markets on Friday. In Japan, the Nikkei Index, which comprises 225 stocks, closed 1.7 percent lower. In China, the Shanghai stock exchange was down 1.4 percent.
Fears about problems in the US banking system are also affecting the Dax. The leading German index was 1.9 percent lower at 15,342 points on Friday morning. “I think there’s speculation that there are bigger problems within the US banking system,” said ING economist Rob Carnell in Singapore. The share prices of German financial institutions also lost significantly. Deutsche Bank shares fell 8 percent and Commerzbank 4.7 percent.
Fed sees warning sign
Silvergate’s and SVB’s troubles highlight the pitfalls that the central banks’ rate hike poses for the banking sector. Investors, not only in the USA but also in Europe and Germany, had primarily relied on the fact that rising interest rates mean growing earnings and had invested heavily in bank stocks. Now the downside of monetary tightening is becoming apparent: depositors switching banks to get more for their money, forcing banks to realize mark-to-market losses on securities.
Fed Director Michael Barr sees the turmoil surrounding crypto bank Silvergate as a warning sign for the financial sector. The US Federal Reserve’s vice chairman, with responsibility for banking supervision, said Thursday the recent shocks in cybercurrency markets made it clear that the sector could still pose a risk to traditional banks. But the effects are limited. US bank supervisors have done a number of things over the past few months to ensure that financial institutions approach the crypto sector with caution.
This also included the warning that deposits in Bitcoin & Co can be particularly susceptible to fluctuations. “These liquidity concerns are particularly acute for banks that fund a significant portion of their balance sheets with such deposits,” Barr said.