Watch Stocks Slide Wednesday on Renewed Fears About the Banking System | Economy – US Latest News

Bank stocks came under more pressure Wednesday as questions surrounding the fate of one of the world’s largest financial institutions, Credit Suisse, spilled over into the broader market.

The Dow Jones Industrial Average opened down nearly 600 points as the bank’s largest investor, Saudi National Bank, said it could not buy any more shares beyond the 9.88% it already owns, citing regulatory limits.

Shares of the bank, already slumping after it published its annual report on Tuesday noting “material weaknesses” in its financial controls, fell more than 20% in premarket trading. The bank is undergoing a reorganization following a series of problems, and the Saudi investment is part of that turnaround plan.

“We are regulated, we have strong capital ratios, very strong balance sheet,” Lehmann said. “We are all hands on deck. So that’s not the topic whatsoever.”

The banking industry has been under strain since late last week when Silicon Valley Bank, a major lender to the high-tech industry, collapsed following a run of depositors seeking their money. The bank had invested in long-term bonds that lost some of their value as the Federal Reserve drove up interest rates rapidly over the past year and some of its customer base feared for the safety of their money.

Signature Bank of New York, a major real estate and crypto industry lender, was also shut down on Sunday, a day when the U.S. government announced a rescue plan to assure depositors and protect the stability of the financial system. Investors in the bank were not protected and will suffer losses.

At first, the plan worked, with no follow-on runs on banks and a rebound in the shares of smaller banks that operate regionally. But the Credit Suisse news shows that fears about the health of the banks are not limited to the U.S.

Also Tuesday, major banks and financial institutions such as Bank of America and Charles Schwab reported large inflows of cash, presumably from customers of smaller banks seeking safety.

While banks are generally in much better shape than they were in 2008, when the failure of Lehman Brothers led to a global financial crisis, lack of confidence in the system would present a major problem to the world economy.

Although not directly responsible for the collapse of SVB, the rise in interest rates worldwide engineered by central banks such as the Fed has caused instability in the value of government bonds that are held by most banks. As interest rates rise, older bonds lose their relative value, although they are still good if held to maturity.

SVB got caught having to sell some of its bond portfolio before maturity, prompting a $1.8 billion loss on $21 billion worth of bonds. It was also unable to complete a stock sale that would have brought new capital into the bank amid the run on deposits.

Yields on U.S. government bonds fell early Wednesday, as investors sought safety and loaded up on them. As the price of bonds rises, the yield falls. The yield on the 10-year Treasury was near 3.5% in morning trading, down from around 4% at the beginning of the month.

Larry Fink, CEO of BlackRock, the world’s largest investment manager, said in his annual letter seen by Reuters that the financial sector faces continued risks, while adding that inflation would remain higher than expected.

“Bond markets were down 15% last year, but it still seemed, as they say in those old Western movies, ‘quiet, too quiet,’” Fink said in his letter, according to Reuters. “Something else had to give as the fastest pace of rate hikes since the 1980s exposed cracks in the financial system.”

The current crisis puts pressure on the Fed as it is set to meet next week to consider raising interest rates again. While analysts expected a hike of either 50 or 25 basis points to combat inflation that, while moderating, is still well above the central bank’s 2% annual target, some now wonder whether the Fed will pause.

“The central banks are really boxed in here. Continue to believe financial stability trumps inflation-fighting because financial instability is inherently deflationary, i.e. asset prices fall,” Kathy Jones, chief fixed income strategist, Schwab Center for Financial Research, tweeted Wednesday morning.