Another rough day for US regional banks

This is an audio transcript of the FT News Briefing podcast episode: ‘Another rough day for US regional banks’

Marc Filippino
Good morning from the Financial Times. Today is Friday, May 5th. And this is your FT News Briefing.

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Shares in US regional banks continued to slide on Thursday. It’s unclear what’s gonna stop the bleeding. Plus, Europe’s central bankers raised rates again and weaker sales took a big bite out of Apple’s revenues. I’m Marc Filippino and here’s the news you need to start your day.

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Investors continued to sell off shares in US regional banks yesterday. PacWest says it’s in talks with several potential partners and investors after reports came out about a potential sale. Its shares ended the day down 50 per cent. To talk more about what’s going on, I’m joined by the FT’s US banking correspondent Stephen Gandel. Hi, Stephen.

Stephen Gandel
Hi. Thanks for having me with you.

Marc Filippino
There has been instability in US regional banks all week. What’s causing the instability at lenders like PacWest?

Stephen Gandel
Well, the thing that’s disturbing is that the first problems we have were with banks that were really kind of unusual, right? Silicon Valley did almost all of its business with start-ups and venture companies. Signature had a really big crypto processing unit. These newer banks, they’re generally typical regional banks. And it seems that the market was hoping for a lot more help from the Fed or the FDIC or someone to stop this crisis that we’ve had.

Marc Filippino
But the FDIC has stepped in. I mean, in a, in a reactive way rather than a proactive way, it is stepping in to help get deals done. So these banks that are failing are taking, taken over. Why isn’t that reassuring bank investors and people who have their money deposited in banks?

Stephen Gandel
The keyword was there was bank investors. It’s the bank investors that are freaking out. We actually had statements from PacWest on the last day saying, hey, you know, our deposits aren’t leaving anymore. They’ve been pretty stable for the last month. It’s just the stock investors that are freaking out. And the reason why there’s maybe a difference here is because the, quote unquote, “rescues” we’ve had and with from the FDIC, they’ve wiped out shareholders again and again, right? In First Republic, yeah, the depositors were totally fine, but the stockholders were wiped out. And so if you’re a stockholder, you’re probably more nervous than you were just a few days ago. Even if, as a depositor, you’re less nervous.

Marc Filippino
If you’re an investor, aren’t you kind of creating a self-fulfilling prophecy?

Stephen Gandel
Yeah, of course. It’s, (Marc laughs) you know, the first person out the door is not gonna be hurt. So each individual actor might be acting in their best interests, but collectively, there’s a collective failure that, that makes things worse.

Marc Filippino
So, Stephen, this week the Fed only raised interest rates by 25 basis points. That’s a quarter of a percentage point. Why was that not enough to calm folks down?

Stephen Gandel
So I think the Fed is not doing everything it can do to stop the bank crisis, just to stop bank investors from freaking out. The Fed is still fighting its war against inflation, which is what really has caused this, this. The fact that they were selling down their bond portfolio, the fact that they were raising interest rates rather rapidly, that has, is what’s hurt these regional banks that have a lot of bonds and lost money and were funding themselves through cheap deposits that are now not cheap anymore because the Fed’s raised interest rates.

Marc Filippino
Stephen Gandel is the FT’s US banking correspondent. Thanks, Stephen.

Stephen Gandel
Thank you.

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Marc Filippino
The European Central Bank raised interest rates by 25 basis points yesterday. It’s the ECB’s seventh rate rise in a row and it looks like it won’t be the last. The FT’s Frankfurt bureau chief, Martin Arnold, says some at the ECB wanted an even tougher interest rate hike of 50 basis points.

Martin Arnold
But in the end, they were bought off through a carefully constructed compromise which entailed basically going down to 25 basis points. But at the same time committing to do more and saying, we’re not done yet, we’re not pausing, we have further ground to cover. And also, crucially, accelerating the pace that they shrink their balance sheet by reducing the amount of bonds they have.

Marc Filippino
So, Martin, the Federal Reserve is looking like it might take its foot off the gas and hit pause on raising interest rates. Do we have a sense of when the ECB is gonna do the same?

Martin Arnold
There wasn’t much of a sign or a signal on that from the ECB or its president, Christine Lagarde. Just that there’s more ground to cover and that they will be data-dependent in deciding how much further to go and how high to, to raise rates. Most economists and analysts think that they will do a couple more quarter point raises and then stop at this summer. But nobody really knows because it all depends on what happens with core inflation stripping out energy and food. So underlying inflationary pressures and are those coming down. And until they’re coming down in a sustainable way, I don’t think it’s easy for the ECB to stop raising rates. And also they want to see what happens with the way that higher interest rates are transmitted through the banking system. So do they see that loan demand continues to fall and that should have a cooling effect on inflation and that will give them more confidence to stop raising rates.

Marc Filippino
Martin Arnold is the FT’s Frankfurt bureau chief.

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Apple’s first-quarter revenues beat analyst expectations, but they also shrank for a second straight quarter. The iPhone maker said yesterday that total revenues fell about two and a half per cent year on year. And a big part of that was that people weren’t buying as many Mac computers and iPads. There was good news, though. iPhone sales rose 2 per cent and the division that deals with the App Store and reoccurring digital subscriptions rose in line with forecasts. Oh, and Apple shares jumped about 2 per cent after the bell.

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When singer songwriter Ed Sheeran came out with his hit song Thinking Out Loud.

Ed Sheeran Heart could still fall as hard at 23.

Marc Filippino
Some people heard a striking similarity to Marvin Gaye’s hit Let’s Get It On.

Marvin Gaye
Baby then. Come on. Oh, come on. Hoo. Let’s get it on.

Marc Filippino
Some of the folks behind Let’s Get It On sued for copyright infringement back in 2014. And the big question here is what is considered inspiration and what’s considered stealing? Yesterday, a jury in New York settled that matter, at least for Thinking Out Loud. It ruled that Sheeran did not infringe on the copyright of Let’s Get It On. Sheeran, I think he was joking here, that he was happy he won’t have to retire from his day job.

Ed Sheeran
So, honey, now. Take me to your loving arms

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Marc Filippino
You can read more on all of these stories at FT.com. This has been your daily FT News Briefing. Make sure you check back next week for the latest business news.

The FT News Briefing is produced by Sonja Hutson, Fiona Symon and me, Marc Filippino. Our editor is Jess Smith, we had help this week from David da Silva, Michael Lello and Gavin Kallmann. Our executive producer is Topher Forhecz. Cheryl Brumley is the FT’s global head of audio and our theme song is by Metaphor Music.

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