Suffering a severe drop of 51% on Friday morning, exchange operators halted trading of First Republic Bank (NYSE:FRC). After a cool-off period, trading resumed, with FRC stock moving “up” to a loss of 12% for the day. However, broader jitters catapulted by the implosion of SVB Financial (NASDAQ:SIVB) quickly pressured the banking sector. At the moment, FRC finds itself down about 11%.
Breaking news today centered on California regulators shutting down SVB. According to Reuters, the event marks the largest bank failure since the financial crisis more than a decade ago. Further, the regulators appointed the Federal Deposit Insurance Corporation (FDIC) as receiver, which will dispose of SVB’s assets.
Per the news agency, “[t]he main office and all branches of Silicon Valley Bank will reopen on March 13 and all insured depositors will have full access to their insured deposits no later than Monday morning.” Still, the development rattled stakeholders of FRC stock and similar financial institutions. Below are three other factors to consider.
Experts Urge Calm on FRC Stock and Non-SVB Entities
Although the collapse of a major financial enterprise implies underlying economic concerns, Wall Street experts have been quick to point out SVB’s distinct situation. According to CNBC, the beleaguered firm focused on high-risk technology startups. Therefore, the headwinds of higher interest rates and dwindling venture capital severely pressured the bank.
“The funding pressures facing SIVB are highly idiosyncratic and should not be viewed as a read-across to other regional banks,” Morgan Stanley analysts led by Manan Gosalia remarked in a research note. “That said, we have always believed that SIVB has more than enough liquidity to fund deposit outflows related to venture capital client cash burn.”
Still, CNBC notes that other banks with large bond portfolios “could face similar issues if they were forced to sell those bonds before maturity in order to raise funds. Treasurys have fallen in value the last 12 months as the Federal Reserve hiked rates eight times.” Thus, investors must remain vigilant with FRC stock.
Higher Rates Pose a Worrying Conundrum
Earlier this week, Federal Reserve Chair Jerome Powell opened the door for higher and quicker benchmark interest rate hikes. Although 2023 started off auspiciously due to encouraging data on the reduced acceleration of rising consumer prices, more recent reports indicated that inflation stood stubbornly elevated. With more dollars chasing after fewer goods, the Fed may need to get more aggressive with its monetary tightening.
Unfortunately, as another Reuters article pointed out, the era of easy cash came to an end. Further, the news agency remarked that its impact “is only just starting to felt by world markets yet to see the end of the sharpest interest rate hiking cycle in decades.”
As Reuters implies, it may not be so much about the SVB fiasco that pressured FRC stock and its ilk. Rather, it’s that risks are rising to the forefront. For SVB specifically, it attempted to seek funds “to offset a hit on a $21 billion bond portfolio, a result of surging rates, as customers withdrew deposits.”
Unfortunately, this narrative of attempts to de-risk could easily impact other financial firms; hence, the volatility in FRC stock.
Risk On, Risk Off
With the sharp downturn in the banking sector also applying a heavy hit on the broader stock market, risk-on asset classes may struggle badly. Specifically, cryptocurrencies may become a massive red flag. Earlier this year, cryptos boomed as then-encouraging inflation data bolstered sentiment. Sadly, this may end up being a head fake.
At the moment, the total market capitalization of all cryptos fell below the critical $1 trillion level to $931 billion. Unless some substantively good news enters the financial ecosystem, investors should read the fine print on not only speculative ventures but also institutions that may be exposed to these asset classes.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.