Bank Stocks Slump After Fed Raises Rates

Financial stocks fell Wednesday after the Federal Reserve raised interest rates by an expected quarter point and signaled that it isn’t overly concerned that the collapse of several banks this month will spill over to the rest of the sector and the economy.

The KBW Nasdaq index of commercial banks and the

SPDR S&P Regional Banking ETF

KRE -3.74%

were both down about 2%. Shares of two major regional banks,

PNC Financial Services Group

PNC -3.71%

and

U.S. Bancorp,

fell a respective 2.6% and 3.7%. JPMorgan Chase & Co. and

Bank of America Corp.

BAC -2.06%

were each about 1% lower.

The broader market, by contrast, was up after the Fed rate decision.

“The banking system is sound, it’s resilient,” Fed Chair

Jerome Powell

said, adding that deposit flights had stabilized over the past week.

Many viewed the increase as a sign that the Fed is still focused on its campaign to curb inflation despite the bank turmoil. Some worried a pause would have signaled that the central bank was deeply concerned about the health of banks and the U.S. economy.

“Half a point seems like they’re ignoring it. Not having a raise at all would suggest concerns that would probably shake confidence,” said Abbott Cooper, an activist investor and founder of the bank-focused investment-management firm Driver Management. “They have a very, very narrow tightrope to walk.”

Shares of small and regional banks have been under acute pressure this month. Investors have worried that the failure of Silicon Valley Bank and Signature Bank could spread throughout the sector, bringing down other small and midsize banks as well.

Bank shares had rallied Tuesday, boosted in part by reassuring comments from Treasury Secretary

Janet Yellen,

who suggested the government could take further steps to shore up the banking system if needed.

Still, it wasn’t enough to undo recent damage. Banks including

PacWest Bancorp

PACW -11.51%

and

Western Alliance Bancorp

WAL -1.94%

have lost more than half their value this month.

First Republic

shares are down nearly 90% this month.

The Federal Deposit Insurance Corporation is doing what it was designed to do when banks like Silicon Valley and Signature Banks go under: cover insured deposits. Here’s how the FDIC works and why it was created.

PacWest shares fell 9.6% Wednesday after the Los Angeles-based bank said it borrowed billions after a steep fall in deposits. The bank, which has been in focus in part because a large amount of its deposits come from venture-related customers, said it borrowed from the Fed and the Federal Home Loan Bank and received financing from

Apollo Global Management Inc.’s

Atlas SP Partners.

Fed officials “want to assure the marketplace they’re still fighting inflation and that there’s no crisis in the banking industry,” said

Dick Bove,

an analyst at Odeon Capital Group.

“If they don’t increase interest rates, investors will believe there is a major problem,” Mr. Bove said.

Even before the recent bank failures, higher rates had started to pressure banks by pushing up the interest they have to pay depositors.

Shares of

Comerica Inc.

and

Charles Schwab Corp.

have shed more than a quarter of their value since the start of the year, while