Federal Reserve Chairman Jerome Powell said Wednesday that the U.S. banking system is “sound and resilient.” He made the case that the demise of First Republic Bank marked the end of the crisis that began in March when Silicon Valley Bank and Signature Bank failed.
“There were three large banks, really from the very beginning, that were at the heart of the stress that we saw in early March — the severe period of stress. Those have now all been resolved, and all the depositors have been protected,” Powell told reporters.
But just a few days after First Republic Bank collapsed — marking the biggest bank failure since the 2008 financial crisis — another lender is at risk of going under.
PacWest Bancorp saw its shares nosedive more than 50 percent after Bloomberg News reported that the regional lender was considering a potential sale. Several other regional bank stocks plummeted on Wednesday after taking a beating the day before.
Experts have connected higher interest rates to banks’ struggles. Lenders loaded up on typically safe Treasury bonds during the pandemic, but the value of those assets fell when rates went up.
That prompted wealthy clients with uninsured deposits at the banks to move their money to bigger institutions viewed as safer. Banks’ unrealized losses on bonds and other securities make it difficult for them to raise money to cover deposit outflows.
As more banks fail, the sector will increasingly pull back on lending to reduce risk, hurting economic growth.
“We have credit conditions tightening, not just in the normal way, but perhaps a little bit more due to what’s happening, and we have to factor all of that in,” Powell said Wednesday.
Read more about the Fed’s interest rate hike here
