California bear attack

The financial sector has been, uh, thoroughly spooked by a 60-per-cent single-day slide in the shares of SVB Financial, the holding company for Silicon Valley Bank.

It’s a sea of red in the financial sector, with the worst performance among the smaller banks. There’s also a notable geographic trend.

First Republic Bank is down 17 per cent, Charles Schwab has slid 13 per cent, and Wells Fargo is off 6.2 per cent.

First Republic and Wells Fargo are, notably, based in San Francisco. Wells Fargo has its own issues, but First Republic is more vulnerable as it 1) is a small bank and 2) doubled the rate it paid on checking balances from Q3 to Q4, according to an analyst on its latest earnings call, which shows the bank may see the risk of “hot deposits”. It also looks like total deposits grew last year and in Q4.

The biggest loser in KBW’s regional banking index was the Los Angeles-based PacWest Bancorp, which took a 25-per-cent dive.

Someone may want to tell the Schwab bears that the company moved its headquarters out of San Francisco in 2019, and is now based in Westlake, Texas. Only about 17 per cent of Schwab’s client accounts were located in California at the end of 2022. More than 40 per cent of its $25.7bn in residential real-estate loans are on properties in California. But that’s compared to, uh, $7tn of client assets.

What’s even more confusing is that the global systemically important banks’ shares are getting shellacked.

Like . . . Bank of America stock is down 6.2 per cent, and JPMorgan is off 5.4 per cent? Those are giant global banks with several levels more regulation than their regional peers. Neither is based in San Francisco, or seem unusually exposed to the tech industry. Morgan Stanley, the techiest bank on Wall Street, outperformed! (It fell just 3.9 per cent.)

None of this seems especially sensible. It seems most likely that this is just about which bank stocks are most liquid on a day when shareholders all raced for the exits on what used to be a large-cap bank and dealers need to hedge.

Also, the broader risk-off move has significantly slowed the market-projected pace of Fed tightening, according to CME data. In a day.

Could be time for a deep breath. At least until the jobs report tomorrow starts a fresh scramble of Fed-policy bets.