Fed chief says banking system is ‘sound and resilient’ after failures

Federal Reserve Chairman Jerome Powell said Wednesday that the financial system is “sound and resilient” following the biggest bank collapse since 2008.

“There were three large banks from the very beginning that were at the heart of the stress we saw in early March. Those have all been resolved, and all the depositors have been protected,” Powell told reporters, referring to Silicon Valley Bank, Signature Bank and First Republic Bank.

The Fed on Wednesday raised interest rates by 0.25 percentage points despite fears that rate hikes are threatening regional banks and boosting the odds of a recession.

The decision came less than a week after federal regulators seized First Republic and sold it to JPMorgan Chase after what became the nation’s second-biggest bank failure.

Powell said that the Fed can tighten borrowing costs in its effort to bring down inflation while also providing support to troubled banks. The Fed will track tightening credit conditions and availability of bank loans when considering rate changes, Powell said.

Regional bank stocks were routed Tuesday before recovering some of the losses Wednesday. 

Los Angeles-based PacWest Bancorp’s stock fell 73 percent since early March. Phoenix-based Western Alliance is down 57 percent, Salt Lake City’s Zions Bank is down 49 percent and Dallas-based Comerica is down 43 percent. 

Banks loaded up on long-term Treasury bonds during the pandemic that lost value when interest rates shot up, saddling them with hefty unrealized losses. Higher rates also force banks to pay additional interest to compete for deposits.

If too many depositors pull their money over fears that a regional lender is insolvent, banks might have to sell those securities at a huge loss, further weakening their balance sheet.

Silicon Valley Bank’s massive unrealized losses sparked a lightning-fast bank run in early March. More than 90 percent of its deposits were uninsured, prompting fears from clients that they would lose everything.  

Federal regulators sought to bolster confidence in regional banks — which have a relatively high percentage of uninsured deposits — by protecting all uninsured deposits at the shuttered Silicon Valley Bank, Signature Bank and First Republic Bank. 

“Deposit outflows from banks have been muted in recent weeks after massive outflows in early March,” Preston Caldwell, chief U.S. economist at Morningstar Research, said in a note. 

The Federal Deposit Insurance Corporation this week suggested potential reforms to the $250,000 deposit insurance limit to bolster confidence, including raising the cap, eliminating the limit or raising the cap specifically for business accounts that pay workers’ salaries. Congress would need to approve changes. 

Small and midsize banks are also sitting on trillions of dollars in commercial real estate mortgages that have largely lost value due to the growth of remote work. Experts warn banks could suffer from a wave of defaults within the next year.

Updated at 3:18 p.m.