165 billion dollars in value erased from American banks’ stocks. Yellen claims the banking system is ‘healthy’

The six largest banks on Wall Street have lost nearly 165 billion dollars in market capitalization, or 13 percent of their combined value, primarily due to concerns about the financial viability of Credit Suisse and the consequences of the largest bank failure in the U.S. since 2008, reported the Financial Times.

Shares of Citigroup and Morgan Stanley experienced the largest sell-off on Wednesday, while Bank of America (BoA) shares fell to their lowest level in over two years. Investors say that three banks, along with Goldman Sachs, JPMorgan Chase, and Wells Fargo, are affected by forecasts of reduced profits.

A sort of repetition of 2011.

Investors do not believe that the largest U.S. lenders will face the same fate as Silicon Valley Bank (SVB), which was forced to sell a portfolio of securities at a loss of two billion dollars after clients withdrew their money. Indeed, larger banks are experiencing an influx of deposits as clients seek safety due to fears for the health of smaller regional players.

However, this has not protected them from a significant sell-off due to fears that they will have to pay higher rates to savers, which will hurt profits, while also facing the possibility of stricter regulations following recent turmoil and increasing delays in loan repayments if the U.S. falls into recession.

– It is reasonable to expect that regulatory rules will change and that the profile of banks will change if they are required to hold more liquidity and more capital. All of this will increase costs and reduce profitability, said one major investor in financial stocks to FT.

Investors are also reducing the value they attribute to the assets of the largest banks in the country. In early 2022, the KBW index, which tracks 22 large banks, traded at an average multiple of 1.5 times book value. That value fell below one last week for the first time since 2020.

Banks with large trading branches also suffered on Wednesday due to their potential exposure to Credit Suisse, after investors erased nearly a quarter of the shares of the Swiss creditor.

– This is a kind of repetition of the European financial crisis of 2011, where suddenly people are asking who is exposed to the other side, said Oppenheimer analyst Chris Kotowski, referring to the debt crisis in the Eurozone 12 years ago that shook confidence in the banking system.

The American banking system remains ‘healthy’

Treasury Secretary Janet Yellen told a Senate committee that the American banking system is ‘healthy’ and defended the Biden administration’s actions to rescue depositors in two failed banks and prevent a broader financial contagion.

Members of the Senate financial committee criticized Yellen regarding the aggressive intervention of American regulators and officials on Sunday to guarantee all deposits in the failed banks SVB and Signature Bank and establish a new Federal Reserve facility to provide liquidity to other banks, FT reports.

– I can assure committee members that our banking system is healthy and that Americans can be confident that their deposits will be there when they need them, Yellen said in her opening statement.

– This week’s actions demonstrate our firm commitment to ensuring that our financial system remains strong and that depositors’ savings remain safe, she added.

Yellen was asked several times during the hearing about the reasons and causes of the problems at SVB.

– There was a bank run, she replied, explaining that there was a ‘mass withdrawal of deposits’ which led to ‘liquidity problems’.

She added that she understands that SVB had to ‘sell assets it expected to hold to maturity’, but they lost ‘market value’ in light of recent interest rate increases. Although U.S. government stocks stabilized markets earlier in the week, turmoil at the Swiss bank Credit Suisse further unsettled investors.