Washington’s bank rescue fails to erase all doubts

Washington’s banking rescue had a rocky start Monday on Wall Street, as the government’s response to the collapse of Silicon Valley Bank failed to quell doubts about the health of some midsize banks and left investors debating whether the Federal Reserve would be forced to change course in its fight against inflation.

The day began with President Biden at the White House seeking to calm fears of a banking crisis before leaving Washington for a California swing.

“Americans can have confidence that the banking system is safe. Your deposits will be there when you need them,” the president said in midmorning remarks from the Roosevelt Room.

In Silicon Valley, relieved customers lined up outside SVB branches to withdraw funds they had feared would be lost. Depositors at the bank’s Menlo Park location said they waited up to two hours to get their money in cashier’s checks. The only evidence of the failed bank’s new owners was a Federal Deposit Insurance Corp. news release taped to the door.

On Wall Street, bank stocks were ravaged, with regional institutions hit hardest. First Republic Bank, another midsize bank, saw its share price fall nearly 80 percent before ending the day down 62 percent. The plunge came despite word that the bank had shored up its balance sheet with a capital infusion from JPMorgan Chase.

Even some of the nation’s largest and best-protected banks were shunned. Shares of Citigroup lost more than 7 percent while Wells Fargo fell 6 percent. Broader stock markets were flat.

“Payrolls are being met in Silicon Valley. There aren’t massive outflows that we can see. So I think that means it has been reasonably successful,” said Lawrence Summers, a former treasury secretary. “But the financial system suffered a shock and, while the emergency room physicians have done a good job, the patient is not back to full health.”

While the market response was noteworthy, falling stock prices pose no immediate threat to the banks. So long as depositor withdrawals remain at customary levels, healthy banks can continue to operate even as their share prices gyrate, said Karen Petrou, managing partner of Federal Financial Analytics, a Washington consultancy. Bank health is determined by the amount of capital they hold in reserve to absorb losses and the adequacy of their available assets to meet any depositor withdrawals.

“Banks don’t live or die based on what the stock price is,” she said.

Still, the appearance of cracks in the nation’s regional banks has caused an extraordinary turnabout in financial conditions that has triggered a swift change in investor expectations of Fed interest rate actions.

The Fed’s fight against inflation just got downgraded

Less than one week ago, Fed Chair Jerome H. Powell told Congress that interest rates might need to go higher than the central bank had expected to bring inflation under control. Wall Street analysts expected the Fed to raise rates by up to half a percentage point at its next meeting March 22 and warned that the Fed’s benchmark lending rate could go as high as 6 percent from the current target of 4.5 percent to 4.75 percent.

Now, 40 percent of investors expect the Fed to leave rates untouched and to start cutting them by midsummer, according to the CME FedWatch tool, which is based on futures prices.

The government is scheduled to release the next consumer price index reading Tuesday. If inflation remains stubbornly high, the Fed will be caught between its anti-inflation mandate and its need to maintain financial stability.

Goldman Sachs late Sunday said it expects the Fed to pause its year-long campaign of rate increases. “Fed officials are likely to prioritize financial stability for now, viewing it as the immediate problem and high inflation as a medium-term problem,” the firm’s economists said in a research note.

Evidence that investors were increasingly skeptical that the Fed will be able to continue raising rates also could be seen in the rush to buy government securities. Investors bought so many two-year Treasury securities that the yield plunged below 4 percent on Monday from more than 5 percent last Wednesday — the sharpest three-day plummet since the 1987 market crash.

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