In his remarks, Federal Reserve Chairman Jerome Powell called the US banking system “sound and resilient” while essentially saying Silicon Valley Bank’s collapse was company specific more than overarching conditions that challenge financial instructions as a whole.
Powell said, “At a basic level, Silicon Valley Bank management failed badly. They grew the bank very quickly, they exposed the bank to significant liquidity risk and interest rate risk, they didn’t hedge that risk.” (1)
Despite considering pausing rates (why do that if banks don’t need time to heal?), the Fed raised interest rates by 0.25 basis points citing hotter than expected inflation. Indexes sunk on the news; like the old Wall Street adage says, buy the hype, sell the news.
And it doesn’t look as if investors agreed with Powell’s comments regarding the soundness of banks, specifically regional banks. SPDR S&P Regional Banking ETF (KRE) fell 5.59% on the day. KRE seeks to provide investment results that, before fees and expenses, correspond generally to the total return performance of the S&P® Regional Banks Select Industry Index. Silicon Valley and Signature Bank were part of the index.
Despite Powell’s reassurance, KRE is trading dangerously close to making a new 52-week low. The ETF closed trading at $43.45, which is less than a few bucks ahead of its low of $41.92. Investors watching KRE for clues on what’s next for regional banks have clear upper and lower boundaries to watch now.
It would likely be seen as a positive for the industry if KRE closed above $46, even more so above $48, and a negative if the ETF slips and closes below $42. SPDR S&P Regional Banking ETF might also be worth watching to get a sense of the Fed’s next move.
If KRE breaks down and suffers another steep leg lower, odds are troubles are not limited to poor management. Powell and company could be forced to reverse direction and possibly lower rates to relieve pressure on smaller bank’s balance sheets.
If KRE recovers, it would likely give the Fed breathing room to continue increasing rates to stem the tide of “unexpected” higher prices.
1 – https://thehill.com/business/economy/3912693-powell-says-banking-system-is-sound-following-svb-collapse/