Bank Stocks Rally on Speculation Fed Will Pause Rate Hikes to Shore up Sector

U.S. stocks rallied Tuesday, led by a rebound in regional banks, on speculation the Federal Reserve would pause its planned series of rate hikes and reports that private equity investors were interested in the loan books of failed Silicon Valley Bank.

PacWest Bancorp (PACW) rose 52% and Western Alliance Bancorp (WAL) gained 50%, leading the sector higher and almost reversing yesterday's losses. The First Trust NASDAQ ABA Community Bank ETF gained 5.4% while the MicroSectors U.S. Big Banks Index rose 11.3%.

Inflation Data Leads to Rate Speculation

Investment analysts at Goldman Sachs now expect the Fed to cancel an expected 50bps rate hike at its March 22 meeting, due to "recent stress in the banking system." Japanese bank Nomura went further, calling for a 25 basis point cut and an end to the Fed's quantitative tightening. The bank fears that deposit flight may not slow as soon as expected and "the lagged impact of past rate hikes could now materialize in a draconian way."

U.S. January inflation data, which came in at 6% year-over-year, the slowest pace in 18 months, showed the Fed is making progress in its efforts to slow price growth. Though still well above the Fed's target of 2%, that may be enough to justify slowing or even reversing Fed rate increases.

Meantime, the Financial Times reported that "several" private equity firms were interested in SVB, with Bloomberg naming Apollo, Blackstone, and KKR as being interested in "parts of SVB."

While concern has eased about the broader banking sector, at least for the moment, turmoil surrounding SVB, and questions about who is to blame for its collapse, have just begun. Fed Chairman Jerome Powell called for a "thorough, transparent, and swift review." Fed Vice Chairman for Supervision Michael Barr will lead the review, with the results to be released by May 1.

Warren Calls for Powell's Recusal From Investigation

U.S. Senator Elizabeth Warren called on Powell to recuse himself from any investigation, saying his actions "directly contributed to these bank failures."

"For the Fed’s inquiry to have credibility, Powell must recuse himself from this internal review," she tweeted. SVB was the highest-paying publicly traded bank in 2018, according to Bloomberg, with employees getting average annual salaries of $250,683.

SVB executives have seen the first lawsuits lodged against them as federal investigations also get underway. Suits have been filed against SVB, with CEO Greg Becker and CFO Daniel Beck the subject of a potential class action filed on Monday. Shareholders accuse the defendants of violating federal securities laws, failing to make appropriate disclosures, and making false or misleading statements.

Banks, especially smaller institutions, are likely to remain under tightened scrutiny. Western Alliance, with a $4 billion market value, was added to Moody's watchlist of six banks being reviewed for a downgrade. The rating company downgraded to junk the debt of Signature Bank, which was closed by regulators, citing “extremely volatile funding conditions," for the entire sector.