Why bank ETFs are tanking despite regulators taking emergency steps to backstop depositors

The U.S. stock market fell Friday, with the Dow Jones Industrial Average booking its worst week since June, after the closure of Silicon Valley Bank sparked contagion fears. On Sunday, New York-based Signature Bank was closed by regulators.

The Treasury Department, Federal Reserve and Federal Deposit Insurance Corp. issued a joint statement on Sunday seeking to increase confidence in the U.S. banking system, saying depositors at Silicon Valley Bank and Signature Bank would have access to all their money. They cited “systemic risk” exceptions.

While depositors are being made whole, equity holders in banks are worried about losses, said Harin de Silva, a portfolio manager at Allspring Global Investments, in a phone interview Monday. For example, depositors at Silicon Valley Bank are “fine,” he said, but “the equity holders lost all their money.”

Read: Regional banks are seeing flight of deposits to too-big-to-fail megabanks

The Fed announced Sunday that “it will make available additional funding to eligible depository institutions to help assure banks have the ability to meet the needs of all their depositors.” The central bank said the new Bank Term Funding Program will “bolster the capacity of the banking system to safeguard deposits and ensure the ongoing provision of money and credit to the economy.”

Meanwhile, investors have expressed concern that Silicon Valley Bank’s woes stem partly from the Fed rapidly raising interest rates to tame high inflation.

“Banks, by their very nature, take short-term deposits and then they make intermediate to long-term loans,” said de Silva. “So when your short-term deposit rates are rising so quickly, the cost of funding is greater than the cost of the loan.”

See: Silicon Valley Bank is a reminder that ‘things tend to break’ when Fed hikes rates

The bond market’s yield curve has been inverted, with short-term Treasury yields trading above longer-term rates.

Treasury yields were plunging Monday, with the yield on the two-year Treasury note
TMUBMUSD02Y,
4.101%
down 41 basis points at 4.18%, according to FactSet data, at last check. Ten-year Treasury yields
TMUBMUSD10Y,
3.528%
were off 19 basis points at 3.51%.

Yields were tanking as some traders in the fed-funds-futures market began betting the Fed could pause its rate hikes at its policy meeting later this month.

Read: Traders price in nearly 1-in-3 chance Fed leaves rates unchanged on March 22

De Silva said investors are worried that problems tied to rising rates could show up at other banks, putting Fed Chair Jerome Powell in “a really awkward situation” as he continues to battle high inflation.

On Friday, the SPDR S&P Regional Banking ETF closed 4.4% lower, while the SPDR S&P Bank ETF dropped 4.2% and Invesco KBW Bank ETF fell 3.8%.

See: Bank ETFs fall amid concerns over SVB and ‘crack’ in financial system after rate hikes

The U.S. stock market opened lower Monday, but all three major benchmarks were trading up around midday. The Dow Jones Industrial Average
DJIA,
+0.49%
was up 0.5% while the S&P 500
SPX,
+0.71%
climbed 0.6% and the Nasdaq Composite
COMP,
+1.42%
rose 1.3%, FactSet data show, at last check.

As for major Wall Street banks, shares of JPMorgan Chase & Co.
JPM,
-1.03%
was down around 1%, while Bank of America Corp.
BAC,
-3.50%
fell about 3%, and Citigroup Inc.
C,
-6.29%
and Wells Fargo & Co.
WFC,
-5.08%
each sank around 6%, FactSet data show, at last check.

“We have a least preferred view on the U.S. financials sector, as while some of the selling in certain banks seems overdone, it’s hard to know when the ‘crisis of confidence’ will improve,” said Solita Marcelli, chief investment officer for the Americas at UBS Global Wealth Management, in emailed comments Monday.