Wall Street ended mixed on Monday as investors weighed in on the risk of a contagion effect from the shutdown of Silicon Valley Bank.
The Dow Jones Industrial Average finished at 31,819.14, falling by 90.50 points or 0.28 percent. The S&P 500, a tracker of the top 500 U.S. companies, closed at 3,855.76, down 5.83 points or 0.15 percent. Nasdaq was the only major index that gained on Monday, rising 49.96 points or 0.45 percent to 11,188.84.
The finance sector largely contributed to the loss during the trading session following the closure of California-based SVB. The S&P 500 banks index dropped by 6.4 percent, while the KBW regional banking index — which tracks regional banks, major national money centers and thrift institutions — was down 9.8 percent.
San Francisco's First Republic Bank, which analysts projected to follow SVB's downfall, traded 76 percent lower. Phoenix-based Western Alliance Bancorp shares plummeted 47.06 percent after being down 82.5 percent earlier in the session. Meanwhile, PacWest Bancorp, another regional bank based in Los Angeles, saw a 21.05 percent decline.
Trading was halted several times throughout the session for the three stocks mentioned above due to volatility. The Chicago Board Options Exchange (CBOE) Volatility Index, which tracks the market's expectation of volatility, rose by 14.6 percent.
Large U.S. banks also closed lower on Monday. JPMorgan Chase shares were down 1.80 percent to 131.25, despite improving in the after-hours trading. Morgan Stanley fell by 2.29 percent to 87.99, while the Bank of America lost 5.81 percent to 28.51.
Financial services firm Charles Schwab also fell 18.6 percent at one point during the session before closing 11.57 percent lower after it reported a 28 percent decline in year-over-year average margin balances in February.
Authorities abruptly shut down SVB after the startup-friendly bank experienced a bank run on Friday, in which its customers withdrew $42 billion on Thursday alone. SVB attempted to raise capital by selling its assets, but the market value fell sharply due to high interest rates.
As the 16th largest bank in the U.S., SVB's failure is expected to influence the entire banking system. The collapse was followed by the closure of New York-based Signature Bank, a crypto-friendly banking firm, on Sunday.
SVB customers, many of whom were startups, raised concerns about their ability to continue the business. Authorities — the Treasury Department, Federal Reserve and Federal Deposit Insurance Corporation (FDIC) — had devised a plan to ensure customers could access their money and contain the "spillover effect" of the shutdown.
On Monday, President Joe Biden addressed the issue, assuring the public that the U.S. banking system remains "safe." He also asserted that taxpayers did not need to shoulder losses incurred by the shutdown.
Fed's policy responsible for SVB shutdown
Analysts said the Fed's approach to tame inflation by raising interest rates aggressively in the past year contributed to the shutdown of SVB. Due to high interest rates, many of SVB's clients had issues raising capital and needed to withdraw cash from their bank accounts. SVB was not able to handle a large number of withdrawals and collapsed.
"The bank run was precipitated by the Federal Reserve's overly hawkish policy."
Jay Hatfield, Founder and CEO of Infrastructure Capital Management
Infrastructure Capital Management founder and CEO Jay Hatfield said the SVB case could shape the upcoming policy rate by the central bank.
"The bull case is that this will finally knock some sense into them (the Fed), and they will stop raising rates," Hatfield said. "The market is anticipating that they're going to have to cut (rates)."
The market now predicts interest rates to peak at 4.7 percent by May. Previously, it projected a peak federal funds rate of over 5.5 percent by September.