Global trading desks were rattled by a selloff in regional banks as anxiety mounted over the next financial crisis, driving traders to bet on Federal Reserve interest-rate cuts.
The financial industry experienced another round of trading halts, with Western Alliance Bancorp and PacWest Bancorp being hit particularly hard, with losses of over 60% for each stock.
The rout also impacted other lenders, including First Horizon Corp, which dropped over 30% after its merger with Toronto-Dominion Bank was called off.
Additionally, an investigation into Goldman Sachs Group Inc.’s role in Silicon Valley Bank’s deal also weighed on sentiment.
All 21 shares in the KBW Bank Index, including financial heavyweights such as JPMorgan Chase & Co. and Bank of America Corp., suffered losses, while the $2.5 billion SPDR S&P Regional Banking exchange-traded fund was on track for its lowest level since October 2020.
The banking downturn hindered the wider market, with the S&P 500 initially paring losses due to gains in some significant tech names, but still headed towards its fourth straight decline.
Furthermore, the Cboe Volatility Index (VIX), commonly known as Wall Street’s fear gauge, spiked to reach the key 20 mark, which is in contrast to the market’s April stability, with the measure sitting below 16 only last week.
The situation demonstrates how investor confidence remains fragile, despite Federal Reserve Chair Jerome Powell’s reassurances on Wednesday that authorities were closer to containing the crisis.
Smaller lenders, in particular, are under pressure after a year of rate hikes that significantly impacted the value of their bond holdings, driving unrealized losses to an estimated $1.84 trillion.
“The acute phase of bank turmoil may not be over, and policymakers need urgently to recognize that,” said Krishna Guha, vice chairman at Evercore ISI.
“The problem is that their financial stability policy options are limited.”