What happened
Here we go again. Following serious drubbings on Thursday, several bank stocks are losing lots of ground again today. Shares of PacWest Bancorp (PACW), Signature Bank (SBNY), and First Republic Bank (FRCB) are down 33%, 24%, and 23%, respectively, as of as of 1:31 p.m. ET Friday, with trading of all three tickers halted at one point this morning in an effort to curb runaway selling.
Don't look for any company-specific reasons these stocks are on the defensive today, however. You won't find them.
Rather, blame the ripple effect from the meltdown of SVB Financial Group (SIVB.Q), also known as Silicon Valley Bank. This banking outfit largely serving California's technology sector is essentially collapsing after being unable to raise the $2.25 billion in capital it says it needed. The market is presuming other banks and lenders of this ilk are in similar fiscal trouble.
So what
A reckoning with a combination of rising interest rates and bad investment decisions is now taking shape.
In 2020 and 2021, Silicon Valley Bank was plugged into the then-rapid growth of the tech sector. Total deposits tripled during that two-year stretch, as did total assets. Much of this money was invested in fixed-income instruments, or bonds.
Then interest rates started rising at the same time technology companies began bumping into headwinds, souring the value of these bonds. End result? Earlier this week, SVB Financial disclosed it would be booking a loss of $1.8 billion on the sale of roughly $21 billion worth of these securities.
The intended sale of $2.25 billion worth of stock might have shored up this capital setback. But, in that few investors are interested in buying a piece of a bank that may be on the verge of a collapse -- rumors of a "run" on the bank's deposit base are swirling -- the capital-raising effort fell short. It fell so short, in fact, that as of this afternoon California's Department of Financial Protection and Innovation has officially shut down Silicon Valley Bank, tapping the Federal Deposit Insurance Corporation (FDIC) to handle its reopening and any reimbursements of customers' losses on insured deposits.
While SVB Financial Group is the only banking name currently undergoing such a regulatory takeover, investors are understandably concerned that comparable, similarly sized (and perhaps undercapitalized) banking outfits like the aforementioned First Republic, PacWest, and Signature Bank could be under a comparable degree of capitalization pressure as well. That said, shares of crypto-market-serving Signature Bank may also be down today due to its similarity to cryptocurrency banking name Silvergate Capital, which announced earlier this week it would be winding down operations.
The fallout from Silicon Valley Bank's failure is sweeping. Any banking name that even looks remotely like it is likely deep in the red today. Shares of California-based online lender SoFi Technologies -- which also helps its customers trade cryptocurrencies -- are down nearly 13% as of midday, for instance, while online lender and lending technology outfit Upstart Holdings is off by 5.3%.
Now what
It's a tricky predicament for investors interested in taking advantage of these big dips.
Most people understand that SVB Financial isn't a proxy for the entire banking sector, or even a narrow sliver of the sector, for that matter. But, at least veteran investors understand this reality won't always shield bank stocks from further weakness. As long as investors fear that other banking names might be facing similar capital problems in the near future, they'll be net sellers of these stocks. There's no way of telling when these sellers may start seeing things in a bullish light again.
That's the long way of saying now that it's started, the smart-money move here may be letting this situation run its full course before jumping in.
Nobody knows when that bottom might be made, mind you; it could happen as early as the coming week, or perhaps it's even being made today. More plausibly, though, the market won't stop being bearishly suspicious of the banking sector until it's crystal clear the regulatory takeover of Silicon Valley Bank is a one-off rooted in very unique circumstances.
And it is, by the way. Remember, most of the major U.S. banking names must now undergo regular so-called "stress tests" to ensure that what's happening to SVB Financial right now doesn't happen to the nation's biggest banking institutions. You'll just want to be patient if you're looking to take on any new positions in bank stocks in the foreseeable future, as more near-term volatility is now certainly in the cards.
