Two Banks’ Stumbles Underscore Larger Dilemmas for the Industry

The prospect of a recession has cooled investor sentiments favoring financials.

Bank stocks are hardly investors’ darlings nowadays, given economic heebie-jeebies, and things only got worse Thursday, as the sector suffered a rout propelled by Silvergate Capital’s flame-out and fresh evidence of weakness at SVB Financial.

This duo are hardly giants on the order of JPMorgan Chase. Still, their troubles stem from deflation of the bullishness that once buoyed financial stocks. Cryptocurrency and startups, in particular, ain’t what they used to be.

The recently announced liquidation of Silvergate, by itself, could be dismissed as a one-off—as it is devoted to funding cryptocurrency companies. Once popular, crypto has taken a pounding, with Bitcoin losing more than half its value over the past 12 months. That hurt, big time. Silvergate was so into crypto that it accepted the cyber currency as deposits. The bank’s stock tumbled 42% Thursday.

The difficulties of SVB and its subsidiary, Silicon Valley Bank, a more prominent member of the banking scene, proved to be a double whammy for bank equities. As of year-end 2022, SVB was ranked as the U.S.’s 16th largest bank by assets. On Thursday, its shares sank 60%, even more than the crypto lender’s.

The problem: SVB focuses on loans to tech start-ups, amid vanished enthusiasm for technology over the past year. Shrinking deposits from start-ups have harmed its financial strength. The company on Wednesday disclosed a large loss and a plan to raise $2.25 billion in fresh capital by selling new shares, a sign of weakness that spooked Wall Street.

Bank stocks as a whole have endured performance woes, albeit not as drastic as those of Silvergate and SVB. The S&P Banks Select Industry Index, which tracks most U.S. lenders, dropped more than 7% Thursday, the latest in a 19% slide over the past 12 months, which have been very volatile for financial equities.

The Federal Reserve’s campaign to raise interest rates, which began last year, has been a plus for banks. But the prospect of a recession has weighed on them, because borrowers get scarce as the economy plunges. To prepare for bad times, banks have swelled their reserves. Downside: Higher reserves can sap earnings.

The industry’s asset leader, JPM, which reported strong profits for last year’s final quarter, on Thursday saw its stock lose more than 5%.